Will inheritance tax treat stepchildren and children equally?
My husband and I got married 19 years ago. I have a daughter from my first marriage, he has two sons. My daughter (28) has lived with us all this time, her sons each have their own home.
Our will says that if I die before I do, I will inherit everything (including our house without a mortgage). If I die first, he will inherit everything. After we both pass away, our children (all adults) will each inherit a third of everything.
What comes to mind is that I have not legally adopted his sons (whose mother is deceased), nor my daughter (who has always lived with us. Her father is still alive.).
Even with the three children having the right to a third each after our death, will they be treated differently as far as inheritance tax is concerned? For example, if I die first and he inherits everything, then dies, will my daughter have to pay higher inheritance taxes than her sons? And vice versa?
In addition, even though the will states that all three will receive one-third each after we both die, will the surviving spouse have the right to do whatever they want with the inheritance (including primary residence? ). For example, could I donate part of my inheritance to my daughter for the rest of my life? Or, again, in case I go first and he inherits everything, will he be able to donate an amount of his inheritance during his remaining life to either of our respective children?
IIf we are both deceased and the will goes into effect, will there be different tax implications for her sons and my daughter respectively, depending on who died first?
Mrs HM, e-mail
You clearly have a very harmonious second family and you have made an effort to ensure that they are all treated equally, especially in the event of death. It is to be congratulated. However, you still clearly have a few issues going on in your head that are causing you stress.
You are certainly right to check the situation regarding the rights of stepchildren as there are still worrying inequalities in Irish law. However, the good news for you is that it shouldn’t affect your family.
Essentially, under inheritance tax law, a stepson is treated exactly the same as any other child.
Section 2 of the Capital Acquisitions Tax Consolidation Act of 2003 – which governs Irish inheritance tax – defines the term “child” to include a stepson or adopted child. There is no difference in treatment between the two categories and, if you have had children together, no difference in how either is treated compared to them.
This means that anything they receive from a step-parent will be assessed in Category A – the highest tax exemption threshold for gifts and inheritances – which covers parents giving to children. This threshold is currently € 335,000. This covers all gifts / heirlooms received from any parent – three in the case of your daughter as gifts or heirlooms from her father also fall under this heading.
So in answer to your last question, no, which of you dies first makes no difference to the tax treatment of any of the children.
The problems related to stepchildren and inheritance in Irish law mainly arise in situations where there is no will. Indeed, although they are treated on an equal footing in all respects for inheritance rights, children and stepchildren are treated differently under inheritance law.
Thus, when there is no will, a person is deemed to have died intestate. The rules on intestate succession define very precisely who inherits. Essentially, if there are children, they are entitled to a share of the estate – the amount depends on whether a spouse / partner is still alive – but stepchildren do not have the same right. They are not mentioned in the law on inheritance, which governs, among other things, intestate succession.
Children born in or out of wedlock or legal partnership are included, as are adopted children. The descendants of each of them are also covered by the law … but not the stepchildren.
This is academic in your case, for now, because there is a will, but if there was not, your daughter would have no right to your husband’s estate if you died before him. if she had lived with him in the family home since she was nine, however, she would have a legal claim to her father’s estate (assuming he left no will).
In similar circumstances, your husband’s children from his first marriage would have no claim to your estate if he died before you.
Strange, unfair, but true.
Changing the inheritance
Your other problem is what happens after the first of you dies – in particular, can either of you selectively gift some children and not others despite the terms of your will?
Before we deal with that, just a quick word about your will. You mention it in the singular. I am familiar with “joint wills” in the United States – although I am not familiar with how they work – but I have not encountered them here. I understand that in Ireland each of you should have your own will, not a common shared document. I have no doubt that someone will let me know if this is not the case.
However, the answer is that nothing prevents the surviving spouse from allocating what are now their financial assets in any way they see fit. So, yes, you or your husband, regardless of the survivor, could change the terms of their will to favor one child over another. You really rely on trust – which, to be fair, you’d like to think it should be enough in a romantic relationship.
And contesting a will if it is ignored would also be more difficult for a stepson, because it is the law on inheritance that applies.
Keep in mind that there is nothing to say that a surviving spouse could reasonably change the disposition of their will to accommodate changing circumstances – one of the three children is having difficult times or poor health. The point is that, in law, nothing prevents them from doing so – at least on the assets that belong to them.
Wills can be written specifically so that a person has the use of an asset for the rest of their life before it passes, in a pre-arranged manner, to a third party, but when you are considering a simple division of the assets. active in thirds after both of you are gone, it won’t really work for you.
As far as giving is concerned, it is an option open to each of you, even now, to make your own choices about your own possessions in your lifetime – so you could offer your daughter money or property. without necessarily giving the same to your stepson, and your husband too. It is the same after the death of one of you.
Assuming it’s not a joint will, there’s nothing stopping you from rewriting the terms before you die, but you should think carefully before doing so. Wills, especially those that are seen to treat people in an unbalanced way, have a habit of leading to lasting injury and discord.
On the last thing, just in case. I note that you contacted me from a UK email address. This is not a problem, but keep in mind that everything I am saying here concerns Irish law and practice. Sometimes the situation can be different in the UK, despite the common heritage of our legal systems.
Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reading service and is not intended to replace professional advice. No personal correspondence will be exchanged.
Get the latest business news and commentaryREGISTER HERE