When inheritance can be more trouble than it is worth

Inheritance is always a tricky subject. For most people, the windfall of an inheritance can be very welcome, whether it helps knock a hole in outstanding debt or gives someone the financial wriggle room to do things they might not otherwise have been able to consider. But, by definition, it also comes with a loss – loss of a close family member, relative or friend.

In Ireland, in my experience, it is particularly tricky. Though by no means universal, there are many families where older generations seem to feel almost a duty to leave something behind for others even at the cost of their own financial comfort in their later years. We’ve all heard of people who are reluctant to turn on the heat in their own homes in winter but yet leave sums to able family and friends.

And then there are younger generations who sometimes operate on an assumption of an inheritance down the line almost as an entitlement – and occasionally are none-too-subtle in their messaging on the issue to parents especially. Decisions on inheritance can also lead to intractable disputes and even legal challenge, sundering families and friendships.

More usually the decisions are simple and assets, where they exist, are spread evenly among the family unless there is a family member with generally accepted special need. That could be financial or personal, sometimes both, such as a family member who for ill-health or other reason is on welfare support.

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But good intentions can come with unintended consequences.

How does inheritance affect social welfare benefits?

There are, broadly, two types of welfare support – those that are claimed as of right due to a person’s social insurance record and those that are not. The first are based on your PRSI record and, for the most part, are reasonably limited in terms of how long they will be paid. The second are based instead on your personal financial means and can generally be paid on an open-ended basis as long as your circumstances do not change.

And when it comes to inheritance, the financial benefit it brings can destabilise the very precarious balance many of these people live in. Without careful planning, an inheritance can unravel the financial and other supports available to people least well able to cope with it.

This is particularly the case for those on disability allowance or a non-contributory pension.

Disability allowance is paid to people aged between 16 and 66 with a long-term disease or a physical or mental disability that substantially restricts their ability to work. At the age of 66, they will move to a non-contributory State pension alongside other people who have an insufficient social insurance record to be paid a pension as of right.

The critical thing for both groups is that they are subject to a means test.

The means test for disability allowance will look both at any income you earn plus savings or assets over a certain level.

On income, there is no limit on the number of hours you can work but the amount you earn can be important. Earnings up to €165 a week after PRSI, pension contributions and any union dues is not taken into account at all in assessing eligibility for welfare support.

Half of anything you earn above this €165 a week limit and below €375 a week is regarded as means in assessing your disability allowance, and all income above €375 is considered means.

Savings and assets

On the capital side – savings and other assets including property, shares etc – the first €50,000 is not taken into account when assessing your means. This is a critical difference with the means test for the non-contributory pension where the discard is a much more modest €20,000.

Over those respective limits, you are considered to have €1 of weekly income for every €1,000 of the first €10,000 above the threshold, €2 per €1,000 for the next €10,000 and €4 per €1,000 for everything above this limit.

Critically, your home, if you own it and are living there, is also discarded. And, if you are on the non-contributory old-age pension, the Department will not take into account any income from rent over the €14,000 annually rent-a-room relief threshold if you would otherwise be living alone.

Rent-a-room relief – maximum income of €14,000 a year – is also discarded for all welfare recipients since 2022.

Outside that, if you are renting your home, it is generally the market value of your home that is means tested, not the rent.

The other thing to note is that if you are moving from disability allowance to the non-contributory state pension, the Department says you will not get a lower-rate pension due to a less favourable assessment of capital. So you will still get the benefit of a €50,000 means-test free limit on savings etc.

Means-tested allowance

And of course, being of such means-tested allowance makes you eligible for other supports, such as a medical card, free access to public transport and the housing assistance programme (HAP) for those who are renting and do not own a property.

People drawing up a will often make special provision for people who are less fortunate, especially those living with disability, without considering how this generosity might upend a carefully balanced system of financial support.

Leaving someone the wherewithal to buy their own home, for instance, will immediately bring that person’s assessable assets well above the means test limit and render them ineligible for their vital weekly support payments – including HAP and, potentially, the medical card.

Inheritance and home purchase

And under law, the person receiving welfare is required to notify the department of their change of circumstances. They cannot long-finger that to bridge a gap between the receipt of the inheritance and the eventual purchase, if any, of a home.

Once they actually buy a home, the property will not be taken into account for a means test and the person will likely once again qualify for welfare support but we all know how long it can take to identify, negotiate and close on the purchase of a property, never mind the associated costs. The danger is that the inheritance benefit over that time as the person needs to tap it for their day-to-day expenses, potentially leaving them without a home and, for a time at least, with welfare support until the inheritance falls below the exempt capital levels.

That is clearly neither the intention of the benefactor nor of any use to the beneficiary.

So what can you do to avoid such a situation?

Where resources allow, you can leave a physical property to the recipient rather than the case to buy one. This can be done either through the dwelling home exemption in the unlikely event of the person living with you (unlikely because they will likely be assessed of family means not just their own) or by buying a home before you die and arranging for it to be put in their name.

Of course, you will need to consider the inheritance tax issue here, as anything left to a person over the value of €335,000 (from a parent to a child) or €32,500 from any other close linear blood relative will be subject to capital acquisitions tax and the last thing anyone wants in such a scenario is to leave a home to someone and they then having to sell that to meet their tax obligations.

Trust structure

The other approach is to consider a trust structure. If you are going down this route, you undoubtedly will need to take specific tax advice as there are various trusts structures that can operate in different ways with different financial implications.

Broadly, however, the money in a trust will not adversely impinge of welfare payments. One off payments from such trusts would also, in general, not be assessed as means although regular payments – for maintenance or whatever, would be assessed.

Discretionary trusts, which are one of a number of options, are often used by parents to provide either for people with a disability or very young children. Such trusts can meet exceptional costs, such as the purchase of a property. The key thing is the choice of trustees as they will have very wide-ranging powers when you are no longer around.

Tax considerations

There are also tax considerations to take into account and these will vary depending on the type of trust, how long it operates and the type of payments it makes to the beneficiary of the trust.

As you can see, it can be far from straightforward and that in itself is what puts many people off even considering such a structure. But, with careful planning, it is certainly an option to take care of the people you wish to benefit without jeopardising what can be a fragile and interrelated series of essential supports, financial and other.

You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.