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Early retirement - what if I die?


Inheritance & estate taxes in early retirement
Does death have to mean tax?

I won't blame you for thinking this doesn't sound like the most "I want to read this" topic of the day. I know my preference is to concentrate on the living aspects of my early retirement rather than the dying part.


There's that saying, something like "the only two certainties in life are death and taxes". I tried to research its origin: Mark Twain was mentioned, as were Benjamin Franklin and Daniel Defoe but, before all of those, Christopher Bullock’s “The Cobbler of Preston” (1716) included the line, “Tis impossible to be sure of any thing but Death and Taxes”.


If death and taxes sounds negative, spare a thought for when I lived and worked in the United Arab Emirates. There was no tax there, so I guess the only certainty was death. Somehow, that sounds worse!


Watching the sun setting over Lake Geneva from the top of Mont Ouzon
Watching the sunset from the top of Mont Ouzon

I'm thinking about death for two reasons, thankfully neither of them bad. First, I received an email asking about my views on inheritance/estate tax, including passing assets to our children while we're still alive to mitigate the tax. The second reason is that Sally and I hiked with some friends last evening to watch the sunset from the top of a mountain. It was a good hike and a fabulous sunset, but the final section was a scramble and a climb - Sally thought we were mad, "one slip and we'll die" she said. Well, we're both here to tell the tale, so no slips and no death, phew!😀


Anyway, back to those pesky taxes, and my thoughts about them. If you're expecting a "how to" guide for inheritance/estate tax, sorry, this isn't it. Instead, it's my current thinking on this slightly taboo subject. As you'll see, I have competing thoughts so it would be interesting to hear whether and how others are approaching this tax.


Starting to think about inheritance/estate taxes


I'm sure I'm the same as many others who don't consider inheritance/estate tax too much - thinking about dying is simply not top of my list of fun things to do. I plan to stick around for a lot of years so why should I think about it now? I keep fit, even if at 51 I'm not as young as I'd like to be. Sally is only 46. Statistics and modern medicine make for a good chance that at least one of us will still be here for another 40 or 50 years. Most countries will have no inheritance tax on assets left to a spouse so we only have to plan for when the last of us bites the dust.


But on the other hand, the fact is we have enough money to be retired early and to last us another 50 years at least (I hope!). It's a tidy sum, and if we both popped our clogs tomorrow (fingers crossed we don't), the tax man would take around £1 million ($1.3m or €1.2m). Ouch, that's a big chunk that wouldn't go to our kids. But then I remember that both Sally and I would have to die to create that problem, and statistically I don't think that's likely.


Plus, even if the taxman took a big slice, the kids would still get a sizeable inheritance. Not enough that they need not work, but enough to make them comfortable when added to their own earnings. It would give them financial security and probably open some additional life choices, but still mean they have to earn and appreciate the value of money. Isn't that a good balance?


And is paying tax really a bad idea? We expect a certain level of public services and these need paying for. If I don't pay my fair share, then presumably someone else will have to pay extra to compensate. If everyone avoided inheritance/estate taxes, probably we'd simply have higher income tax or other taxes instead. The money needs to be collected one way or the other. I'm not saying that paying tax makes me happy, but I understand the need for it, and don't think I should be exempt from it.


Then again, while I understand the need for taxation, doesn't it make sense to take full advantage of any tax free allowances, planning opportunities or even loopholes in the rules. Probably yes, provided these stay the right side of the law.


Our very basic inheritance/estate tax plan - first draft


It feels like there are a lot of mental gymnastics required for something I'd rather not think about and hopefully isn't required any time soon. Quite probably I've tied myself in knots, but this is where I land:


  1. We (hopefully) have a lot of years ahead of us, I'm going to say we should assume fifty, so we need to keep sufficient financial assets to pay for this. Our early retirement finances are going well, but fifty years is a long way ahead to plan so I will be cautious to ensure we always have the funds to do things we want. Is it selfish for priority one to be to do the things we want rather than missing out trying to save the cash to pass on to our kids? Maybe in a few years we'll have more certainty on how big a pot we need but, until then, I feel we need to keep our finances to ourselves.

  2. I imagine using financial gifts to our children as a main method of reducing our assets and therefore our exposure to inheritance/estate tax. In the UK, so long as we live for seven years after making a gift, that gift is free of tax inheritance/estate tax. Of course, that assumes we'll end up in the UK for our final days, which we don't yet know if that will be the case.

  3. Our kids don't currently have big financial needs. Maybe they'll want to buy a home at some time, which might be when we could provide assistance. It may be the first step in reducing our tax exposure. Even if they'd like us to gift them money now, they don't really need it - it's good that they figure out how to make their own way in the world.

  4. What about using some complex financial products to reduce inheritance/estate tax exposure? I'm sceptical. Maybe it's because of bad experiences in the past, but I worry such products are often designed more to line the pockets of the finance companies and advisors instead of being particularly good for me.


So for now, I'm doing nothing on inheritance/estate tax mitigation - it's still not a subject I like to dwell on. I feel that Sally and I are young enough that the likelihood of both of us dying in the short/medium term is low. In due course, most likely not too soon (I don't want to get the kids excited in case they read this!) we'll aim to mitigate some exposure by gifting assets to our kids. And then, hopefully many decades into the future, we'll have done all the things we've dreamed of, the money will have lasted and there will be some left for the kids. Plus, if there's some tax to pay, that's probably OK, because services do need to be provided and paid for.


How does this sound? Am I being naive, should I be acting now rather than planning to act later, should I be using a financial advisor, am I mad to think that paying tax is OK? They don't teach this stuff in school, so it would be good to get your views.

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Thanks for the feedback and the links. I'll definitely head to them to find out more. From Andrew's comment, I've also just Googled "countries with no inheritance tax". Not too seriously but, as you said, it's good to be informed.

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"I'll have to look into things like trust deed and loan deposits - is it that they sit as liabilities in divorce proceedings so are somehow shielded from the non family member?"


That's basically it. You've gifted the money to the Trust so after 7 years it's outside of the reach of IHT, but as a trustee you can then control where the Trust funds are invested and how they are released to help the family legacy. What I know is only from what I've read myself, Trusts come with their own additional management costs, and there are some further taxes that do apply to them too, but it's worth investigating further. Here's a link of interest.


https://www.co-oplegalservices.co.uk/media-centre/articles-sep-dec-2017/how-a-deed-of-trust-can-protect-the-bank-of-mum-and-dad/


There's a…


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Hi Andrew (unfortunately the blog platform doesn't let me reply to comments in order). I didn't know Australia didn't have inheritance tax - I wonder how unusual that is? I like the warm hands saying. I agree that with us living longer lives, inheritance can become almost irrelevant if the beneficiary is already in their 70's. A challenge of giving earlier is that early retirement and a longer life span means there are a lot of years where we need to judge our own financial requirements. Although I think that may be as much a psychological matter as anything else.

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Sally certainly didn't like the idea of being taxed on the same money twice. Although is that worse than being taxed on the money only once when earned but at a higher rate as the tax revenue needs raising somehow? I'll have to look into things like trust deed and loan deposits - is it that they sit as liabilities in divorce proceedings so are somehow shielded from the non family member?

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Often people's frustration with inheritance tax is that it's money that's already been subject to income tax when it was earned. So shielding it legally from a further round of 40% deductions above the IHT limit seems logical.


As a second thought, passing money down to your children at least 7 years before youe own death avoids the IHT. However it immediately puts it at risk of being lost outside of the direct family should your child get married and subsequently get divorced. For example you pass the money as a gift and it gets used for a deposit onto a new home by your newly married child. Sadly the statistics for divorce these days are high so this is…


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