In the journey of financial planning, a pivotal shift occurs when individuals move from focusing on immediate needs to considering their long-term legacy. At Acuvest, we’ve found that this shift happens with the prospect of retirement, as people begin to contemplate the entirety of the rest of their lives, and beyond.

The key question that we tend to pose is: What is the objective of the wealth you are accumulating? Is it to ensure a comfortable retirement solely for personal enjoyment, or is it also to potentially provide a financial stepping stone for future generations? We frequently find that clients are seeking a blend of both personal fulfilment and giving their family a helping hand.

It’s essential to understand that there’s no right or wrong objective—only what aligns with your values and vision. However, clear goals are not just about life direction; they also intersect significantly with gaining clarity around a variety of investment time horizons, and also tax implications, especially when it comes to transferring wealth to the next generation.

Reconsidering investment time horizons

As you start considering that blend of using your financial resources for both personal use in retirement as well as passing wealth to loved ones, it makes sense to broaden your thinking around investment time horizons. It is prudent to plan with multiple time horizons in mind and applying these to different portions of your wealth – we’ll call these your wealth pots.

Your first wealth pot might be to accumulate as much as possible in your pension fund to enable you to retire on a pre-determined date – maybe your 60th or 65th birthday. That’s quite straightforward.

Your second wealth pot might be to combine the first pot with other assets that you own, and this is the money that you will use for an active and fulfilled retirement. The investment time horizon on this one is less certain as it is tied to your remaining life, but you might assume that this pot needs to last until maybe age 95 or 100.

Then there is a third pot, your legacy pot.

The legacy time horizon might not involve you…

When it comes to your legacy pot, new time horizons come into play… and it may be most prudent for these not to be linked to you. Because now the objectives of how these financial assets will be used are in the hands of the beneficiaries. As you plan to leave money to your loved ones, the investment time horizon should be linked to their plans for this money, or the plans you expect the money might enable. If it’s to fund maybe the purchase of a holiday home, it may be best planning the investment time horizon to when they hope to buy this. If they plan on using your legacy towards their own retirement planning, it makes sense to link the investment time horizon to when they plan to retire – this could become part of their own retirement pot.

Then there is tax to consider

When planning a generous legacy, there are several tax angles to consider. We advocate that clients get specialist tax advice to ensure they avail of all tax mitigation opportunities.

But at a summary level, estate planning in Ireland differs from other financial planning avenues in a key aspect—the tax opportunity or challenge primarily affects the beneficiaries, typically the children, rather than the benefactors.

Since the financial crash back in 2008, tax plays a very significant role for people receiving inheritances.  A person receiving an inheritance from a parent has a lifetime threshold of only €335,000 before Capital Acquisitions Tax (CAT) becomes payable at a rate of 33%. This causes all sorts of problems for people wanting to leave assets, particularly to a single child, and where their wealth is tied up in a single property. In many cases, the low threshold results in a family home having to be sold by a bereaved child, simply to pay a tax bill.

Planning to reduce the tax burden

There are avenues to mitigate potential tax liabilities, if addressed proactively and with specialist tax advice. Parents and children can employ various strategies, such as leveraging specific life assurance solutions or utilising the Small Gifts Exemption to pass on wealth tax-free while the benefactors are still living. Some foresight in financial planning can yield significantly more favourable outcomes for all involved.

There are also certain reliefs available, particularly when transferring a farm or business or under specific conditions, such as when the beneficiary resides in the inherited property. Given these complexities, it is critical for those involved in estate planning to seek expert advice, to navigate these exceptions and optimise tax efficiency.

The key to legacy planning is timely preparation

We believe that legacy planning starts with you and how you want to live the rest of your life. It’s your money and you should enjoy it for the rest of your life. The investment time horizons should be based around you, and these pots should never be at risk of running completely dry.

But if some of your objectives are to leave a generous legacy, link the investment time horizon of that pot to the objectives of the people who will receive it. This is a more meaningful time horizon.

Specialist investment advice is crucial to helping you identify your objectives, the allocation of resources between your various pots and then developing an appropriate investment strategy for each of these pots. Tie this in with expert tax advice around legacy planning, and you’re well on the path to maximising your financial resources for both you and your grateful family.