MJ O'Connor Solicitors

The Brief

01.05.2008

Estate Planning for your Children - Discretionary Trust Will

A standard form of Will typically describes certain specific assets to be inherited by each of the children or it may set out what percentage or share of the entire estate each of the children will inherit. On death, the children take an immediate inheritance of the relevant assets. All too often, this means that the reliefs which may be claimed in relation to Capital Acquisitions Tax (C.A.T.) or inheritance tax are not available to the children. With that in mind, it may be appropriate to consider establishing a discretionary trust under the terms of the Will. This means that some or all of the assets are transferred on death to named trustees chosen by the parent who are given legal powers in the Will to deal with the assets. The trustees are not entitled to take a personal benefit from the assets and act in a fiduciary capacity to the beneficiaries. The nature of a discretionary trust means the trustees are given legal authority to decide how and when to distribute the assets between certain beneficiaries. In the Will, the parent will provide a list of beneficiaries to include his/her own children but may also consider including children’s spouses, grand-children and others. The parent will often leave a non-binding ‘letter of wishes’ addressed to the trustees with guidance on how to deal with the assets. Any individual beneficiary who is named in a discretionary trust will not be entitled to demand that the assets or any particular share of the estate be given over to him/her as that decision is only for the trustees to make. When the trustees deem appropriate, a decision is made to allocate assets to a beneficiary and it is only at that time that the beneficiary is deemed to receive his/her inheritance and be liable to C.A.T. While a discretionary trust is commonly used to protect young or vulnerable beneficiaries, it may also be used as a tool to plan for inheritance tax arising on death. Used in this way, it allows the assets to pass into the trust on death deferring any liability to C.A.T. The trustees and beneficiaries can then look at planning opportunities which might involve a change in the nature of the assets or changes to the circumstances of the beneficiary so that one of the valuable reliefs from C.A.T. will become available. For example, the trustees might postpone the vesting of a farm in a particular child until the child has ensured that he will qualify as a “farmer” under the relevant legislation by acquiring a certain amount of agricultural assets. The child can then claim relief from C.A.T. (Section 89, CAT Consolidation Act, 2003) which allows the market value of the farm inherited by him/her to be reduced by 90% before assessing the liability to C.A.T. When creating a discretionary trust, there are other tax considerations to be taken into account, including Discretionary Trust Tax (DTT). DTT comprises a once-off charge (6% with possibility of claiming 3% refund) and an annual charge (1%) on the value of assets in the trust. DTT may be deferred depending on the operation of the trust and its beneficiaries. Both Income Tax and Capital Gains Tax should also be considered as these may be a cost to the trust. Expert legal advice is essential to ensure all issues are fully addressed and the Will drafted to meet the individual’s requirements.

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