Gifting to Grandchildren
|Client||Retired Individual with 5 Children and 11 Grandchildren|
|What they needed help with||Tax efficiently transferring assets to the younger generations|
|Service(s) we provided:||Investment portfolio re-design, income preservation strategy and annual transfer of surplus wealth to children and grandchildren|
|Results achieved||15 years on, the client’s portfolio remains very healthy, sufficient income is generated each year and hundreds of thousands of euros have been successfully transferred, all exempt from capital acquisitions tax.|
DETAILS OF OUR APPROACH
Our client had just retired in 2006. He realised he had a significant and sufficient financial portfolio but wanted to ensure two things: Firstly, he wanted to ensure he would have sufficient capital to maintain a desired lifestyle both now and into the future, which would include a significant amount of travel.
Secondly, if, based on our analysis, it was ascertained that he had more than enough to meet the first requirement, he would like to periodically make gifts to his children and particularly to his grandchildren, to avail of any exemptions possible from capital acquisitions tax (CAT). He didn’t want the next generations of his family left with a large tax bill.
Firstly, we had to do a cashflow planning exercise, to make sure that his financial portfolio could be set up in such a way as to meet his annual income requirements and to ensure that it could be set up in line with his preferred attitude to investment risk. We did this successfully at the outset. Then we moved on to the transfer of assets tax effectively. Here, we focus on gifting to grandchildren specifically.
There is a right way and a wrong way to do things. Our challenge was to work with our client to think of the long-term power of compound returns instead of putting money into low return (or no return) deposit accounts. We encouraged our client to make use of clever solutions, to drip modest amounts of money into the investment markets each month for his 11 grandchildren.
The annual Small Gift Exemption is a powerful tax planning tool. Each person in the State can make a gift to another of €3,000 per year and it won’t trigger any gift tax. This is usually used by parents making gifts to their children and grandchildren. In this case, it was the gifts to the grandchildren each year that were the most powerful and by investing long term, into a medium risk portfolio, the compound returns were significant and to the advantage of each grandchild.
Using simple mathematics, €3,000 multiplied by 11 grandchildren by 15 years is €495,000. This is a significant amount of money - taken out of our client’s taxable estate and transferred efficiently to the next generation. And of course, by investing in a certain investment product, which is effectively in the child’s name, it means that the initial gift each year is for the child’s benefit from the outset. All investment returns over the 15 years have rolled up in the child’s name – not the grandfather’s.
We have a number of product solutions that can cater for this annual investing, in the name of a child or grandchild. They are robust solutions with access to a wide range of investment funds. Selecting the structure isn’t really the main challenge or solution. The solution is arrived at by successfully setting up a person’s main portfolio properly at the outset, where they can generate the required amount of income. After that, we assisted and advised on a clever way to utilise the surplus within the portfolio and to limit the size of the taxable estate on death.
We picked one clear strategy, using one of the best investment products on the market. We agreed an investment strategy for the asset allocation of the monthly investment plans, thinking long term and ignoring short term volatility. The €495,000 invested over 15 years, month by month, is now worth well in excess of the initial amount – a gain that would otherwise have been in granddad’s estate, and thus would have been heavily taxed on death. A final note – if granddad’s late wife was still alive, she could also have availed of the gift exemption and doubled the amount transferred over the period.
The Perfect Solution for Your Situation
Financial planning is an appropriate discipline for all age groups – whether you are starting your career, whether you are looking for direction on your retirement provision or if, as in this case, you are retired and are looking for clever ways to manage your assets.
At Invesco we have an experienced team of financial professionals, who can assist you with your portfolio and your financial planning, no matter where in the life cycle you find yourself. We think long term, we use sound investment principles, and we are always conscious of the impact of tax.