For Irish professionals planning their estate, Section 72 life insurance represents one of the most powerful tools for tax-efficient wealth transfer. But what is it?
This specialised insurance policy can significantly reduce the inheritance tax burden on your beneficiaries, ensuring more of your hard-earned wealth reaches your loved ones.
Here’s everything you need to know about using Section 72 policies effectively.
What is Section 72 Life Insurance and why is it important in Ireland
Section 72 life insurance, also known as “Section 72 Relief,” refers to a specific type of life insurance policy approved by Revenue under Section 72 of the Capital Acquisitions Tax Consolidation Act 2003.
Unlike standard life insurance policies, Section 72 policies are specifically designed to help beneficiaries pay inheritance tax liabilities.
Key Features:
– Tax-free payout specifically for covering inheritance tax
– Must be written in trust or under Section 72
– Premiums must be paid regularly until death
– Cannot be surrendered or cashed in early
How Section 72 Life Insurance Policies Work for Inheritance Tax Planning
When you pass away, your beneficiaries may face a significant inheritance tax bill, currently at 33% on amounts above the tax-free threshold.
A Section 72 policy provides a tax-free lump sum specifically designed to cover this liability.
We’ve covered the ins and outs to creating a will in this blog.
Example Scenario:
Sarah plans to leave her children an estate worth €1.5 million.
The current tax-free threshold for each child is €400,000.
Without Section 72:
– Taxable amount: €1,100,000
– Tax due at 33%: €363,000
– Net inheritance: €1,137,000
With Section 72:
– Policy pays out €363,000 tax-free
– Children receive full €1.5 million estate
– Policy proceeds cover the tax liability
Here is an interesting article on Section 72 Life Insurance.
Benefits of Section 72 Life Insurance in Ireland
1. Tax-Efficient Wealth Transfer
– Policy proceeds are specifically exempt from inheritance tax
– Can be used to cover multiple beneficiaries’ tax liabilities
– Helps preserve family wealth intact
2. Estate Planning Flexibility
– Can be structured to match expected inheritance tax liability
– Allows for regular premium payments instead of lump sum provision
– Can be adjusted as estate value changes
3. Cost-Effective Solution
– Premiums often lower than the eventual tax liability
– Can be more affordable than alternative wealth transfer strategies
– Provides certainty around inheritance tax funding
Key Considerations When Setting Up a Section 72 Policy
1. Policy Requirements
To qualify for Section 72 relief, policies must meet specific criteria:
– Must be a whole-of-life policy
– Premiums must be paid at least annually
– Policy must be specifically approved by Revenue
– Cannot be surrendered or altered significantly
2. Premium Planning
Consider:
– Age when starting the policy (younger is typically better)
– Health status (medical underwriting required)
– Expected estate value and growth
– Regular premium affordability
3. Trust Structures
Most Section 72 policies should be written in trust to:
– Ensure proceeds are immediately available
– Avoid probate delays
– Maintain tax-efficient status
– Direct benefits to intended beneficiaries
Comparing Section 72 with Other Wealth Transfer Strategies
1. Lifetime Gifts
Pros:
– Immediate transfer of wealth
– Can utilize annual small gift exemption
Cons:
– May trigger immediate tax liability
– Lose control of assets
– Limited tax-free thresholds
2. Life Insurance
Pros:
– More flexible terms
– Often lower premiums
Cons:
– Proceeds may be subject to inheritance tax
– May not align with tax liability timing
Common Mistakes to Avoid
- **Insufficient Coverage**
– Regularly review policy coverage against estate value
– Consider future estate growth
– Account for all potential beneficiaries
- **Premium Payment Gaps**
– Missing payments can invalidate Section 72 status
– Ensure sustainable premium level
– Consider premium funding strategy
- **Poor Trust Planning**
– Failing to write policy in trust
– Incorrect beneficiary designation
– Inadequate trust documentation
Steps to Implement a Section 72 Strategy
- **Assessment Phase**
– Calculate potential inheritance tax liability
– Evaluate current estate planning
– Determine coverage needs
- **Policy Selection**
– Compare provider options
– Review premium structures
– Check Revenue approval status
- **Implementation**
– Set up appropriate trust structure
– Arrange premium payments
– Document policy details
- **Regular Review**
– Monitor estate value changes
– Review premium adequacy
– Update beneficiary needs
Conclusion
Section 72 life insurance represents a valuable tool for Irish professionals planning their estate.
When properly structured, it provides a tax-efficient solution to inheritance tax challenges, helping ensure your wealth transfers smoothly to the next generation.
However, successful implementation requires careful planning and ongoing management.
Consider consulting with qualified financial and legal advisors like us ensure your Section 72 policy aligns with your overall estate planning strategy.
Get in touch with us today.
*Note: Tax rates and thresholds mentioned are current as of 2024. As tax legislation can change, always verify current rates and requirements with Revenue or a tax professional.*
