Unmarried parents create tax headaches for each other’s children

As we are not married and I have left his three children a lump sum of money, will they have to pay big inheritance tax?

If we marry in the future, will his three children come under the threshold of the tax inheritance bracket of €335,000.00, even though we were not married at the time of making our wills or will we have to make new ones?

Ms S.M.

Society and the nature of relationships is constantly evolving. Many people no longer choose to be bound by traditional family unit structures – notably by getting married. But such decisions can come at a cost.

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Inheritance is one of a number of areas where traditional family relationships receive preferable treatment.

Where a couple marries – or has committed to each other under a formalised civil partnership – the children become stepchildren in the eyes of the law and they will therefore benefit from the category A threshold when it comes to inheritance.

That sets down that they can receive up to €335,000 in total from parents – including step-parents – over the course of their lives. This figure is not set in stone and does change from time to time, according to political policy priority and budgetary financial head space.

Regardless, it is considerably more valuable to those benefiting from an inheritance than either of the other thresholds – B, which relates to linear blood relatives and C, which covers all other relationships. The lifetime thresholds here are €32,500 and €16,250 respectively at the moment.

A couple cohabiting will not be treated in the same way as a married or legally recognised family.

That’s not to say you cannot leave anything to them; of course you can, but they will not benefit from the same tax free threshold. In fact, they will be treated as “strangers in blood” – i.e. subject to the lowest category C threshold.

Anything they receive over €16,250 from you will be taxed at 33 per cent. If they have already received an inheritance from anyone other than a parent, a grandparent, aunt or uncle by blood line, or a sibling, that will also feed into that €16,250 threshold, lowering or eliminating any tax free benefit they would derive form your bequest.

So will marrying benefit your partner’s children when you leave money to them in your will? Yes, unless the sums are modest.

It is worth noting that you can still use the small gift exemption to give each of them up to €3,000 in any year with no tax implications for you or them. There is no requirement to limit this to people related to you by bloodline.

Of course, that presumes you have the financial wherewithal to make such gifts now while still alive without risking your own financial security and that might well not be the case.

One thing to remember if you and your partner do decide to change your status is that marriage is presumed to annul any will written before the event unless the will was specifically worded to recognise an impending marriage.

From what you say, this will has been written some time and you are not even sure now what your future plans will be in relation to marriage, so I would presume the will you refer to will count for nothing if you do decide to get married. You will need to draw up a new will at that point, even if it is making precisely the same provisions as your current one, including setting aside lump sums of money for your partner’s children.

People do occasionally worry about is whether, by getting married, they are granting a partner’s children access to a legal right share – an automatic right to a certain inheritance regardless of what it says in a will.

Legal right shares are relevant in relation to a spouse or civil partner in that they can demand one half of your estate if there are no children and one-third where there are children. That difference can confuse people into believing that the children have an automatic right to inheritance, but they don’t.

There is no automatic right in Ireland to benefit from a parent’s estate. However, any child can challenge a will under section 117.

It says: “Where, on application by or on behalf of a child of a testator, the court is of opinion that the testator has failed in his moral duty to make proper provision for the child in accordance with his means, whether by his will or otherwise, the court may order that such provision shall be made for the child out of the estate as the court thinks just.”

It goes on to say: “The court shall consider the application from the point of view of a prudent and just parent, taking into account the position of each of the children of the testator and any other circumstances which the court may consider of assistance in arriving at a decision that will be as fair as possible to the child to whom the application relates and to the other children.”

There is nothing in that to limit the age of the child but equally there is nothing in the requirement to make proper financial provision for a child that determines they must be provided for in a will.

Increasingly, I gather, the presumption of the courts appears to be that it will be difficult to challenge the provision made by parents in a will where they have provided for you into adulthood, unless you can show you have specific needs that required further support or that the parent’s estate is of such a scale that some provision might have been reasonably expected.

If the child is still a minor, the situation is likely to be different.

Separate grounds of challenge include that undue influence was exerted in the drawing up of a will that excludes one or more family members, or that the parent was not of sound mind at the time a final will was drawn up. But none of these is an easy case to make.

Finally, it appears your partner might be able to make a claim for financial provision if you were in a committed relationship (but not married) for more than five years – or more than two years where the two of you have had a child – and he was not provided for in your will, or not sufficiently provided for.

He would have to apply to the court for such provision but the advantage as I see it is that any award made by the court would not be subject to capital acquisition tax (inheritance tax).

Outside such a court ruling, your cohabiting partner is likely to be treated as a stranger (category C) under the inheritance tax code with an upper tax free limit of €16,250 – a lifetime limit, not limited just to any benefit form you.

Of course, another financial advantage of marriage is that you could leave him anything up to your entire estate, regardless of value, without any inheritance tax issues as transfers between married couples of civil partners are exempt.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice