Leaving a lasting legacy

Professional succession planning needs to strike an appropriate balance between client protection and tax efficiency. Estate planning is a subjective exercise, often complex and an extremely sensitive issue. This statement is never truer when parents seek to put formal structures in place to ensure the future welfare of their children. Our clients have children with specific needs and our job is to put arrangements in place to properly manage these specific requirements.

It may be useful at this juncture to provide a very brief overview of the three main types of trust structure;

Discretionary Trust

With this type of arrangement, all of the assets are left on trust with the nominated trustees who have absolute discretion as to their distribution. There is complete flexibility given to the trustees to who should benefit within that class.

Fixed Trust

The trust is created within a fixed time-period framework and provides that the assets are to be held in the trust until the children reach a specified age. The children have an absolute entitlement once they reach a specified age.

Bare Trust

The assets are held until the youngest child reaches the age of 18 and the children have an absolute entitlement.

Parents are dealing with numerous issues in modern Ireland ranging from addiction, mental health problems, un-healthy associations and other vulnerabilities. There are options however available to parents to ensure that vulnerable adults receive assets in a safe and managed way. We assess the particular situation and form a recommendation that addresses both the parents concerns and the beneficiary’s needs. For example, at a very high level, a Discretionary trust may be more suitable if the beneficiary is permanently incapacitated, a vulnerable person, a person with addiction issues or an individual who is in receipt of state assets that are means-tested (medical card or free travel for example).

A Fixed trust structure may be suitable for younger children as it combines the advantages of both discretionary and absolute entitlement. It also affords the trustees the opportunity to assess the individual’s character traits and stability as the person matures. The implications in terms of choosing the most appropriate arrangement should be considered across four main sub-headings including (i) Protection, (ii) Discretion, (iii) Taxation and (iv) Flexibility. We have captured just a small sample of some of the considerations our clients face when making these decisions.

Trust Design

• The Discretionary Trust is fully protective
• The child does not get any access to the asset until the Trustees decide
• Appointments from the trust are entirely discretionary for the trustees
• There is absolutely no discretion with a Bare trust
• Once the child is 18, the trustees are required to hand over assets to the child
• Tax applied immediately on a Bare Trust
• Tax applied on a Discretionary Trust when it is appointed out
  The Fixed Trust is perhaps best described as a combination of a Discretionary Trust and a Bare Trust
• Discretionary until the age agreed

A short note on Discretionary Trust Tax

• This applies on the later of the date of death of the settlor, the date that the property becomes subject to the trust or the date that the youngest beneficiary turns 21
• There is an initial 6% charge on the capital value of the fund at that point
• There is a 1% annual charge every year thereafter; excluding the 1st 12 months
• If you appoint the assets out within the first 5 year period, then you get a refund of half of the 6% that you paid
• There is a tax cost associated with the flexibility that the client receives via the DT option

Fixed Trust & Tax

• If the income is not appointed out to the beneficiary and instead accumulated under the Fixed trust, for tax purposes that is treated as a Discretionary Trust