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//Private Wealth: Succession planning and protecting your vulnerable loved ones

Private Wealth: Succession planning and protecting your vulnerable loved ones

Revenue clarify circumstances where an exemption from discretionary trust levies will apply to trusts created for improvident beneficiaries, who may suffer from alcohol/drug dependency or gambling addictions.

What is a trust?

The essence of the trust structure is that the settlor or testator may decide to appoint individuals (trustees) with responsibility for trust assets, on behalf of recipients/beneficiaries. The assets may be held for a certain period, until the beneficiaries reach a certain age or a certain event occurs or perhaps for the entire lifetime of the beneficiary.

What is a discretionary trust?

Where a discretionary trust exists, the trustees retain full discretion, as to when, how and in what manner and proportion, the trust assets are allocated between the beneficiaries. Generally, discretionary trusts are used where there are young beneficiaries (who may lack sufficient maturity to handle and manage the trust assets effectively and responsibly) or beneficiaries with disabilities (where the motivation may be to preserve any social welfare entitlements of the beneficiary).

The distinguishing feature of a discretionary trust is that none of the beneficiaries of the trust are entitled as of right to any capital or income of the trust except

[is this what is meant here?] where trustees appoint trust assets to them.

What tax applies?

Discretionary trust tax includes an initial once off payment of 6% of the entire value of the trust assets and annual levies of 1% on the 31st of December of each year the trust remains in being.

The tax is imposed on the latest of the following dates:

  1. the date on which the property becomes subject to the discretionary trust;
  2. the date of death of the settlor/parent/testator
  3. the date on which there are no “principal objects” under the age of 21 years.

“Principal objects” are the spouse or children of the settlor/parent/testator or the children of
a predeceased child of such a person.

Exemption to tax where beneficiary is disabled

An exemption from discretionary trust tax applies to trusts set up exclusively for a beneficiary with a disability.

The exemption from discretionary trust tax is not, however, automatic and must be applied for by the trustees. Where a disability is the ground for the exemption, a medical certificate outlining the nature of the disability is all that the Revenue Commissioners will require.

Possible additional tax exemptions

Certainly, for many making wills and considering benefiting certain individuals with personal difficulties with gambling, addictions, drug or alcohol dependency, there can be obvious concerns around ensuring adequate provision is made for such beneficiaries and balancing that against the risks of dissipation and profligacy.

In a recent Revenue circulation, the Revenue Commissioners have clarified the circumstances in which an application for exemption will be granted for trusts set up for improvident beneficiaries.

The following non-exhaustive list of beneficiaries can be considered as potential candidates for exemption:-

  1. individuals who have a compulsion such as gambling or substance addiction;
  2. individuals with special needs who are easily influenced and vulnerable to
    being financially exploited;
  3. individuals who are spendthrift to the point that they cannot manage their
    own money.

It may be difficult to show to Revenue’s satisfaction that a trust has been established for this purpose. In the case of a spendthrift, the trustees must satisfy Revenue that the beneficiary has demonstrated a pattern of reckless spending to such an extent that he or she is incapable of managing his or her own financial affairs. It is not necessary that the behaviour be actively exhibited at the establishment of the trust provided that a pattern of improvident behaviour was previously evident and it is reasonable to assume that, based on past behaviours, the individual is likely to resume improvident behaviour if he or she were to receive a large benefit.

While a medical certificate may be conclusive, it may not always be available. Other evidence which may be persuasive includes:-

  1. a declaration made on the establishment of the trust confirming why the trust was established;
  2. inability of the individual to live independently as evidenced by repeated default on rent payments or utility bills;
  3. past financial supports required in relation to daily living expenses;
  4. discharge of improvident individual’s debts by other persons;
  5. protective financial arrangements already in place such as use of cash up-front utility providers
  6. transfer of expenses such as utility bills into other persons’ names;
  7. payment for household essentials by way of pre-paid store credit
  8. the free use of the family home or other family property;
  9. provision of an allowance for living expenses to the improvident person by family members on a regular, frequent and short-term basis, i.e. daily or weekly;
  10. inability of the individual to obtain credit
  11. inability of the individual to obtain credit from financial institutions;
  12. supporting affidavits from the settlor, other family members and associates attesting to improvident behaviour.

This is a welcome clarification from Revenue, which gives some clarity to parents/testators considering making wills and determining the best structure to put in place to ensure loved ones who may suffer personal difficulties/issues are provided for, and to ensure longevity of those funds using a trust structure that will not suffer significant tax erosion.

If you have any queries on discretionary trusts in general or in relation to substance of this article, please feel free to contact a member of our Wills and Probate Team.

2018-11-13T10:46:34+01:00March 1st, 2018|Publications|

About the Author:

Kevin Doughan is an Associate Solicitor and joined the firm in 2014. Kevin leads our Wills and Probate Unit. Prior to joining the firm Kevin practised in Dublin for over […]

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