Children and Inheritance

In this article, Michelle Cronin, Family Law Solicitor looks at the tax implications for children, adopted children, stepchildren and foster children receiving inheritances or gifts from their parents, stepparents or foster parents.

As a solicitor in the area of Family Law, I often encounter people who are of the view that they do not need a will as they have nothing to leave, but forget to take into account their pension, their life policy or perhaps bank accounts before even considering the house and car. Others may believe that the intestacy rules are fine but perhaps are not as familiar with those rules as they should be.

There are many places to start with making a will and the first thing to do is to speak with a solicitor who can help you draft the document.

Death and Taxes

There are two certainties in life as they say, death and taxes. A well-constructed will cannot prevent the former but it can help minimise the latter.

The current rate of Capital Acquisitions Tax (CAT) is 33%. CAT applies to gifts and inheritances.

• Children are entitled to the ‘A’ threshold and can each inherit up to €335,000 from their parents and anything over that is taxed at 33%.
• Siblings, grandchildren, parents, grandparents, nieces, nephews are entitled to the ‘B’ threshold and can each inherit up to €32,500 before the 33% tax rate is applicable.
• “Strangers in blood” i.e., friends etc. are entitled to the ‘C’ threshold and can inherit up to €16,250 before the 33% tax rate is applicable.

These thresholds and tax rates are adjusted by the government usually in the annual budget. The current thresholds apply to gifts or inheritances received since 9th October 2019. This is the highest the thresholds have been since the recession.
All the thresholds are cumulative – i.e. €335,000 is the cumulative threshold in respect of both parents – i.e. it is not €335,000 per parent, and any financial assistance or gifts given prior to death is included.

Anyone can receive up to €3,000 per calendar year from another person without incurring a CAT liability.

Adopted Children, Stepchildren and Foster Children

Children, stepchildren and adopted children are entitled to the highest CAT threshold, category A.

Section 2 of the Capital Acquisitions Tax Consolidation Act, 2003 also includes stepchildren in the definition of child. Therefore, stepchildren are entitled to the ‘A’ threshold and pay tax of 33% on anything over €335,000. The fact that this is cumulative is particularly relevant if the stepchild inherits from their parents and their stepparents or receives financial assistance from them during their lifetime.
This is also relevant in the instance of adopted children. If they also inherit from their birth parents, they are entitled to the ‘A’ threshold in respect of that inheritance also and again this is cumulative, and it is added to anything received from their adoptive parents.

Foster Children

There is a sometimes a misunderstanding that to avail of the ‘A’ threshold the foster child would have to be adopted. This is not in fact the case. Foster children can be entitled to the ‘A’ threshold pursuant to Schedule 2 Part 1, Paragraph 9 of the Capital Acquisitions Tax Consolidation Act, 2003.

Even in informal or private arrangements, a child who has lived with the testator (author of the will) for a total of five years before the age of 18, and who was under the care of and maintained by the testator during that period and where two independent witnesses confirm this, that child may be entitled to the ‘A’ threshold.

A Right to Inherit?

Under the Succession Act, 1965 parents are not obliged to leave a particular portion of their estate to any of their children. However, a failure to make “proper provision” for one or more of their children may give rise to those children bringing an application against the estate under Section 117 of the Succession Act,1965.

Children in this context include adopted children of the deceased but not stepchildren or foster children.

Therefore, while a stepparent or foster parent may leave some of their estate to their stepchildren or foster children and they can avail of the highest CAT threshold, there is no mechanism by which stepchildren or foster children can seek for provision to be made for them from their stepparent’s or foster parent’s estate.

Similarly, if a stepparent or foster parent passes away without leaving a will (therefore intestate), their stepchildren and foster children will not inherit any portion of their estate.

The same applies in respect of adopted children and their birth parents. If an adopted child receives an inheritance from their birth parent, they are entitled to the ‘A’ threshold for CAT purposes but do not have the right to seek provision from the estate of their birth parent. They do have that right in respect of their adopted parents.

If you have any questions relating to this article, please contact Michelle Cronin, Family Law Solicitor, Comyn Kelleher Tobin.

Please note that this is a general article and anyone with any specific queries should seek professional legal and tax advice.