CURRENT LEGAL ARTICLES

  

A trust is a legal device for fiduciary arrangements created to manage property and assets on behalf of another person. This relationship involves:

· a settlor/trustor, who creates the trust and places the assets

· trustee(s) that hold the legal titles but are not benefiting from any interest

· Beneficiaries, concerned by the trust and benefiting from the assets

A trust can be either revocable or irrevocable, depending on whether the grantor can change the terms of the trust. Unless there is a revocation clause in the trust, the trustor loses all rights to the property. Therefore, an irrevocable trust is less flexible.

A trustee has a duty to the terms set out in the trust deed, which they must follow. Likewise, they have a duty of loyalty because they should manage the trust in the interests of the beneficiaries, and their interests must not interfere; they cannot gain personally from their role. 

Besides, they must manage the trust efficiently, so they must familiarise themselves with the terms of the faith, the assets and liabilities, the circumstances of the beneficiaries and the purpose of the trust. They must ensure that proper decisions are made promptly, considering the terms of the faith and in favour of the beneficiaries.

Similarly, the trustees must act personally, as they should be involved in the decision-making regarding the trust, even if they engage advisers. Also, there is a duty to consider the beneficiaries because the trustees must act impartially. Moreover, a commitment to account is expected, meaning the trustees must maintain records.

Setting up a trust has many benefits, such as protecting wealth, passing the assets to the next generation and tax planning.

There are three main types of trust:

1. Bare trust

The beneficiaries are immediately entitled to be transferred the assets or property at any time. Apart from holding titles, trustees do not have many active duties to perform. It can be created through a contract signed “in trust” or implied.

Tax implications

Some taxes may arise on the creation of the trust, such as the Capital Gain Tax (CGT), which is mainly dependent on the residence of the trustees. If they are Irish residents, CGT will occur on the gains from land, buildings and minerals in Ireland and on unquoted shares deriving their value or the greater part of their value from such assets. 

Likewise, stamp duty could be applicable in some cases, which depends on the assets’ nature. If it is a residential property, the levy will be 1%, but it is 2% for commercial property. 

The beneficiaries are usually liable to Capital Acquisitions Tax (CAT) immediately when the trust is set up. There are three thresholds, and if they are exceeded, a levy of 33% is applied. CAT will arise if the settlor or the beneficiaries are residents or the assets are in Ireland. 

2. Discretionary trust

Often used for family estate planning (e.g., testamentary trusts), in this trust, the beneficiaries are not directly receiving the benefits because the assets are not distributed. The trustees have discretion over the trust and decide to apply the income or capital. Generally, the settlor provides a letter of wishes, but it is not a binding document. 

Its purposes include granting and protecting assets, whether for young children or future generations (grandchildren) or to provide for a child with a disability or a non-marital partner. 

Tax implications

The Discretionary Trust Tax (DTT) comprise an initial once-off 6% levy based on the value of the assets in the trusts, which is reduced to 3% if the trust was created under a will. 

This charge should be paid within four months of the relevant valuation date, which is the latest of the following:

· The property becomes subject to the trust

· the death of the disponer

· when the youngest reaches 21 years of age

Afterwards, an annual 1% fee is applicable on the asset value on the market, which is usually December 31st. But an exemption from DTT is possible if the trust is:

· created for public or charitable purposes only

· Superannuation or unit trusts 

· Providing for the upkeep of a heritage house or garden

· benefiting persons incapable of managing their affairs (due to age, improvidence, physical or mental or legal incapacity)

Electronic Funds Transfer, cheque, or bank draft can pay the DTT. NB: there is a surcharge for late filing.

Other taxes may arise. CGT arises if the asset’s market value is superior to the acquisition value, but there is none for the direct cash transfer to the trust. Although Testamentary Trusts, meaning when created by a will, is not liable to CGT. 

Besides, CAT does not arise when the trust is established, but it will when the trustees exercise their discretion, and they distribute benefits. 

Similarly, income tax, which is also determined by the residence of the trustees, could occur. If they are Irish residents, a standard rate of 20% is charged, and a surcharge of 20% applies to any accumulated income not distributed within 18 months of the tax year.

3. Fixed trust

Each beneficiary has an entitlement to a specific share of the assets or has interests in the trust. The trustees have little to no discretion in the distribution of the assets because the settlor sets it forth.

Tax implications

The settlor is generally liable to CGT, except if they can be exempted. Stamp duty could arise for the beneficiary and CAT, but relief could be sought. 

If it is a simple cash transfer, no stamp duty can be applied, which is the same when assets are transferred to the beneficiaries accordingly to the trust’s terms. 

If the trustees can accumulate the trust’s income, then CAT and income tax will probably arise. Income tax and CGT will occur while the assets are still in trust. If they do not have the power to accumulate, then 

A testamentary trust is created through a will since it expresses the last wishes of the settlor, who is also the deceased. To be established, the subject of the trust, the beneficiaries and the trustees have to be stipulated. But it is also necessary that the trust is valid. 

Although living trusts are not created through will, they are usually in express terms, in the form of a document, such as a written deed or declaration of faith.

The trustees must also submit information about the trust to the Central Register of Beneficial Ownership of Trusts (CRBOT) when they are Irish residents or if the trust is administered in Ireland. That is only if the faith is relevant, meaning if it is an express one. 

 

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Dylan Green

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