When it comes to estate planning, few issues create more concern than the tax burden that loved ones may face when inheriting assets—particularly Approved Retirement Funds (ARFs). Fortunately, a valuable planning tool exists: Section 72 life insurance policies.
Originally known as Section 60 policies, Section 72 was introduced under the Capital Acquisitions Tax (CAT) Consolidation Act 2003. This provision allows the proceeds of qualifying life insurance policies to be used to pay inheritance tax, offering significant relief for beneficiaries. This is especially relevant for ARFs, where the tax implications can be substantial.
What Makes Section 72 Policies So Useful?
Section 72 policies are designed to exempt the proceeds of certain life insurance policies from inheritance tax, when the payout is used to cover CAT that arises from the insured persons death or within a year of his/her death. Moreover, these policies are also exempt when used to pay the 30% income tax charged on ARFs inherited by adult children over the age of 21. This exemption is detailed under section 784A(4)(c) of the Taxes Consolidation Act 1997 and which we also discussed in our article ‘Death and Pensions: Tax Consideration After Death’ as part of this newsletter.
In practical terms, this means that rather than leaving unexpected tax bills to be dealt with, individuals can plan in advance and ensure those costs are covered.
Let’s look at two examples to understand how this works:
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Passing an ARF to a nephew: If someone plans to leave an ARF to a nephew, a Section 72 life insurance policy can be set up to match that liability exactly, so the nephew receives the full value of the ARF, tax-free.
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Leaving an ARF to a cohabiting partner: In another scenario, a cohabiting partner who isn’t entitled to spousal tax relief might face a big tax liability. Again, this can be fully covered by a tailored Section 72 policy.
Why Early Planning Matters
High-net-worth individuals or those expecting to leave significant ARF or estate assets should consider a Section 72 policy as a proactive tax-planning measure. Without such preparation, beneficiaries could face reduced inheritances or be forced to liquidate assets to meet tax obligations.
By setting up a Section 72 policy, individuals can protect the value of their estate, reduce financial stress for loved ones, and ensure their legacy is passed on in full.
Section 72 life insurance is more than just a financial product—it’s a key part of strategic estate planning. For anyone with an ARF or potential CAT exposure, exploring this option early could make all the difference.
Consulting with Derradda Financial Services to find out how we can help.
📞Call us: Dublin Office 01 2330209 / Galway Office 091 399256
📧 Email us: info@derradda.ie