Section 72 Policy - Potential Pitfalls??

T

Talkinghead

Registered User
Messages
11
Dear All,

I raised a recent query in the Money Makeover thread, link here: https://www.askaboutmoney.com/threads/advice-for-couple-in-their-50s-with-disposable-income.233031/

A Section 72 Policy seems to be a good avenue to explore and the details of the plan seem fairly straightforward. However, like all things, the devil is in the detail. Can anyone offer advice/opinion on what I should look out for/pitfalls when executing a Section 72 Policy

Basically, my circumstances are that assuming I live to at at least 65 (I’m 54 now) and then my wife and I pop our clogs after that, our estate could potentially be worth around €2m. Split equally between our 3 kids, could result in them each having to pay c.€100k in tax on their inheritance.

Based on initial back of a fag packet calculation, for a €330k policy, this will cost me €515 per month (my wife and I are non-smokers).

Many Thanks.
 
If your children have spouse's and kids, leave them some of your money too, out of your children's portion. that way they can use their thresholds too and reduce their tax liability.

I presume you aren't talking about talking out a S72 policy until age 65? They have to be whole of life policies and you can get them at a fixed price. Be careful about inflation linked policies. While your assets may appreciate in value, the cost of the policy may become very expensive over time. There is nothing wrong with a level policy that does not increase in value and your children maybe having a small tax liability.

Discuss it with your (adult) children too. What in effect you are doing is spending some of their future inheritance now to cover an even bigger bill in the future. At €515 a month, you would have to live for another 50 years for the cost of the cover to exceed the payout. Makes perfect sense.

The biggest downfall for you is it another cost of €515 a month that has to be met.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Sorry but in my book it would be absolute madness to pay so much to mitigate a liability that may never even arise, unless you have a specific and compelling reason to do so on foot of impeccable professional advice.

Who knows if inheritance tax will remain at current levels or even exist in 30-40 years time?
 
T McGibney said:
Sorry but in my book it would be absolute madness to pay so much to mitigate a liability that may never even arise,
Click to expand...
The whole point of insurance is to cover multiple, unknowable future states of the world!
T McGibney said:
Who knows if inheritance tax will remain at current levels or even exist in 30-40 years time?
Click to expand...
See previous point.

My own view is that a tax bill is likely to remain for an inflation-adjusted estate of €2m.

If there is some kind of radical policy change before then the OP can simply cancel his insurance.
 
Thank you both for your input.
@ Steve, yes it will be a while of life policy; using 65 was just an example.

@tmcg, yes, who knows what will happen, and it reminds me of the old saying, “if you want to give God a laugh, make some plans”.

On the flip side, if as you say Inheritance tax changes or doesn’t even exist, I am told that the value of the policy goes to offset my children’s CAT liability and if there is more left over, the excess amount would just be added to their inheritance and be taxed in the normal way.

Nobody knows what the future may bring but on balance looking at the world through my eyes, there is some merit is planning for the rainy day. I’ll never see the benefit of the policy but my kids might thank me.
 
I'm with Tommy on this. OP and wife are very likely not using up annual small gift exemption ( 2 donors x 3 kids is €18k per annum before adding another 6k for each kids partner and more again for grandkids).

Pay the €515/month into an investment that belongs to the kids. You can stop, start, increase or decrease. If you stop, the investment is not lost. There will be no CAT on the investment or on its growth- which is a big factor over the sort of time frame likely to be involved.
 
Have you considered all that you can do to pass on your wealth before death? Most of us hope to live a long and healthy life and I would be of the mind to support your kids when they need it, not when you are 80+ and they are well established in life. Can you release some of your wealth for this, eg downsize to a smaller house to release some cash?

There are exemptions like support in education until 25 (maybe fund an expensive post grad that will lead them to greater income, get them nice student digs, support them so they don't have to work part time and can concentrate 100% on studies), hosting their wedding to allow them to save for a house deposit, annual gift of 3k etc.


Also consider your own elder care and set aside funds for this so that your children don't need to pay. And spend money on staying healthy so that you are around longer and have lots of energy for grandchildren if and when they come.

I suspect you will get a lot more joy out of seeing them enjoy the results of your hard work than you will a monthly DD for a section 72 policy.

And if the kids who inherit a good portion of 2m have to pay some tax on their lucky inheritance, they sell the assets or pay out of inherited cash.
 
Even without the inherent tax break, I think I’d prefer to invest the €515 per month and give them the resulting value rather than take out an expensive insurance policy that I’m lumbered with forever.
 
Section 72 policies are popular in the UK as over there, gift tax does not exist but a gift turns into a taxable inheritance if the donor dies within 7 years of the date of the gift.

In that context, they make eminent sense for such a finite period but I doubt they were ever designed to operate for periods of up to half a lifetime.
 
MOB said:
I'm with Tommy on this. OP and wife are very likely not using up annual small gift exemption ( 2 donors x 3 kids is €18k per annum before adding another 6k for each kids partner and more again for grandkids).

Pay the €515/month into an investment that belongs to the kids. You can stop, start, increase or decrease. If you stop, the investment is not lost. There will be no CAT on the investment or on its growth- which is a big factor over the sort of time frame likely to be involved.
Click to expand...
Hi MOB

Could you educate me on what kind of investment you are talking about, e.g., one that belongs to my kids and will not be subject to CAT? As an aside, my wife and I have started to make use of the small gift exemption to our kids (I didn’t know I could do this until a poster advised me of this on the other thread I mentioned in my OP).
 
I imagine they just mean availing of the small gift allowance as you say you are doing.

3k from you and your wife to each child - is 18k per year.

If your kids have partners you could double that to 36k.

Each grandchild could be another 6k. Assuming just 1 per child that would be another 18k for 54k total per year.
 
You must log in or register to reply here.
Back
Top