Key Post What happens an ARF when a person dies

Brendan Burgess

Brendan Burgess

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This has come up a few times and I want to understand the rules and the correct strategy in drafting a will.

If the ARF is left to the spouse
There is no tax on the transfer to the spouse but the spouse gets the ARF and not cash.
As they draw down the ARF, they pay income tax in the normal way.

If the ARF is left to a child aged 21 or over
They pay 30% income tax on it. No CAT.

If the ARF is left to a child under 21
It is subject to CAT only.
So if the amount is less than €350k , the child will pay no tax.

If it goes to anyone else
The estate will pay income tax on it at the deceased tax rate at the time of death. (I presume that this means that it is added to their income for the tax year and taxed accordingly.) So if it's a large ARF it will be taxed at 50% - Income Tax, PRSI and USC

The recipient will be subject to CAT at the normal rates.

Example for a person already paying 40% tax.
Size of ARF€100,000
Less income tax€50,000
Amount paid to beneficiary€50,000
CAT€11,000€50k - €16,250 @33%
Net value€39,000
 
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If the above is correct, then this would be the correct order...

1) Leave up to €335,000 to any child under 21
2) Leave enough of it to your spouse to use up their 20% tax band
3) If your spouse has income taxable at the top rate, then leave the ARF to your children aged 21 or over, as they will pay tax at 30% instead of your spouse paying it at 40% + USC (?)
4) If you have no children, leave it to your spouse

Try to avoid leaving it to an unrelated party.
 
I think I'd be looking to leave it to spouse, and then they can leave to children in their will?
 
Excellent point, so is this correct

1) Leave up to €335,000 to any child under 21
2) Leave it to your spouse
3) When they die, they leave it to your children and it will be taxed at 30% in their hands
 
Hi Red

On reflection...

If your spouse already has an income taxed at the higher rate of tax and USC, it might be better to leave the ARF now to the children.

Your spouse will have to draw down 5% a year from the ARF and it will be taxed at 45% or thereabouts.

Of course, if your spouse is not adequately provided for, then leave them the ARF.

Brendan
 
Brendan Burgess said:
Your spouse will have to draw down 5% a year from the ARF and it will be taxed at 45% or thereabouts.

Brendan
Click to expand...

No it won't (under current tax regime)

What about the €18,000 income tax exemption (over 65)? + PRSI not applicable if spouse has reached State pension age.
 
RedOnion said:
I think you missed the 'if', unless I'm missing something?
Click to expand...

Indeed, I did. Thanks.

It would still want to be a fairly substantial income for someone >65 to be hitting 40+%. Sometimes we forget that the tax credit system in employment is different to the regime in post 65 retirement.
 
If State pension age is now 67, does that mean for two years prior, when spouse might have no income, it would be even more beneficial tax wise to have the ARF for those two years then.

Can you split the ARF between spouse and children.
 
Brendan Burgess said:
the correct strategy in drafting a will
Click to expand...

Since your OP is about a will. I could be completely wrong here, and I welcome correction, but I think the will doesn't matter in tax treatment.

It's up to the pension trustees to decided how ARF should be distributed, and it's how it's distributed, not willed, that determines the taxation.

So in my example, if I willed it 100% to my wife. Then I croaked it, and my wife had enough income that I hadn't planned for, she together with the trustees could decide to distribute the ARF differently. The mechanics of pensions confuse me, but the tax legislation doesn't require it to have been willed.
 
There are no Trustees involved in an ARF. It's a personal asset. So the ARF owner decides how the asset is to be treated in a will.
If a spouse "steps into the shoes" of the deceased and takes over the ARF then any drawdown is taxed as income in the normal way.
 
Conan said:
If a spouse "steps into the shoes" of the deceased and takes over the ARF
Click to expand...

Great way of explaining it. I will put that in the opening post.

I presume that only the spouse (or civil partner) can step into the shoes in this way.

Brendan
 
Great post, Brendan

One technical (rather than planning) query - what happens in relation to the SFT limit upon a spouse stepping into the shoes of his/her beloved?

[Say, deceased spouse had an ARF of €2m upon death and there was €1m in the surviving spouse's own ARF?]
 
When you say spouse in opening post, does this imply married spouse only?
 
What happens to illiquid assets owned by the ARF?

For example an ARF that is comprised of part cash and say property assets or a fund or whatever...

If the ARF is passed in its entirety to a spouse or sole child then are the ARF contents left intact?

If the ARF is passed to more than one party how are the assets dealt with?
 
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