A trust is a legal device whereby a trustee holds the legal title to property, transferred to the trust by a settlor, on trust for one or more beneficiaries. Generally, once the trust is established, the settlor loses all legal rights to the trust property.

Below, we outline the principal benefits and explore the main tax points to consider when creating and operating a trust.

Potential Benefits of using a Trust in Ireland

1. Capital Acquisitions Tax (CAT) – Gift and Inheritance Tax Planning

One of the primary tax benefits of using a trust in Ireland is its potential to defer CAT. CAT is levied on gifts and inheritances and is subject to various thresholds and rates depending on the relationship between the settlor and the beneficiary. By transferring assets into a trust, individuals may strategically manage their CAT liability, e.g.,discretionary trusts may allow for the deferral of CAT payments until distributions are made from the trust to beneficiaries, offering flexibility in tax planning.

2. Income Tax Planning

Trusts in Ireland can be structured to provide tax efficiency for the income generated by trust assets. Depending on the type of trust established, income tax rates may be applied differently. For instance, a discretionary trust is often subject to the highest rate of income tax, but the ability to distribute income among beneficiaries may minimise the overall tax burden (by using the beneficiaries personal allowances and tax credits).

3. Protection of Vulnerable Persons

Trusts established for the benefit of vulnerable persons can have specific advantages if set up correctly.

For example, a trust may be established under the parents wills to hold assets for minor children as the parents may not want the children to inherit substantial assets at a young age.

A trust is also a method of providing for children or other family members with a disability who are unable to manage their own financial affairs. Trusts can also be used to provide for family members with addiction issues.

4. Protection of wealth for future generations

Trusts can also preserve wealth for future generations by providing for assets to pass to grandchildren i.e., generation skipping.

5. Protection Against Creditors

Trusts in Ireland can provide an added layer of protection against creditors. Assets held in certain types of trusts may be shielded from potential claims, providing a valuable tool for asset protection and wealth preservation.

6. Martial Difficulties

Parents may wish to use a discretionary trust to provide for adult children in unstable marriages. In this case, the discretionary trust could potentially protect from claims from an ex-spouse.

Key Tax Considerations

There are a number of key tax considerations which need to be taken into account before setting up an Irish trust.

1. Capital Gains Tax (CGT) on creation of the Trust

When a disponer creates a trust during his/her lifetime, he/she will transfer assets into the trust fund. Depending on the type of assets transferred to the trustees, CGT may arise (as the settlor has disposed of an asset).

If the trust is created by a will, becoming operational on death, then no CGT arises on the initial creation of the trust.

2. Stamp Duty

Stamp duty may apply on the transfer of assets into a trust created while the disponer is alive depending on the nature of the asset. If cash is transferred, no stamp duty applies.

No stamp duty applies to assets transferred to a trust created under a will.

3. Income Tax / CGT

Whether Irish income tax/CGT arises in relation to the income and gains earned by the trust depends on the residence and ordinary residence status of the trustees. Generally, if the majority of the trustees are tax resident and ordinary resident in Ireland and the general administration of the trust is carried out in Ireland, they will be liable to income tax/CGT on the worldwide income and gains of the trust.

4. Discretionary Trust Tax

Discretionary trust tax applies to discretionary trusts only. The tax applies where the settlor dies and the principal objects (children of the settlor or children of predeceased child of settlor) are over 21.

There is an initial charge of 6% payable where the settlor is dead and the last principal object attains 21 years of age. If the trust is wound up within five years, a refund of 50% of the initial charge (i.e., 3%) is available.

If the trust is created by will, and all of the beneficiaries are over 21, then the liability to discretionary trust tax arises on date of death and there is a 4 month time limit to discharge the tax.

There is an annual charge of 1% thereafter where the trust remains chargeable on the value of the trust on the 31st December each year.

5. Capital Acquisitions Tax (CAT)

No CAT arises on the transfer of assets to a discretionary trust, as the beneficiaries are not yet beneficially entitled in possession to the assets. Where a beneficiary receives an appointment from the trust, they are taxed as if the benefit was taken from the settlor/deceased.

Summary

Whilst a trust can provide a wide range of benefits, the legal and tax implications need to be clearly understood before a trust structure is implemented. It is vital that comprehensive tax advice is obtained before any action is taken. Our team has extensive experience in advising clients in relation to matters regarding trusts.