In order to provide for a child with an intellectual disability without risking the loss of State benefits, the child should not be named as a direct beneficiary of the will. Some parents may consider leaving assets to a caring and trusted member of the family in the hope they will support the person with the disability.
However, this may place an undue burden of responsibility on the chosen person and carries certain risks, such as the risk of that person running into financial difficulties or becoming involved in divorce or judicial separation proceedings.
Accordingly, to avoid such potential difficulties arising, an option adopted by many families is the creation of a Discretionary Trust in favour of the person with a disability.
A Discretionary Trust is a mechanism through which the welfare of a family member with an intellectual disability can be provided for indirectly and not as a direct beneficiary of the will.
Funds within a Discretionary Trust are administered at the absolute discretion of the trustees and are not under the control of the person with the disability, so it is important that the trustees are carefully chosen. The funds contained in the trust will not of themselves endanger any entitlement to State benefits on the part of the disabled person, but anything in the nature of a regular income or lump sum from the trust may do so.
A Discretionary Trust may be created by deed during a parent's lifetime when perhaps a lump sum or a windfall is to be invested, or it can be established in a will which will name the trustees.
Before establishing a Discretionary Trust, parents should discuss all the issues involved with the potential trustees and, if appropriate, with their other children. Ideally, parents should also include a 'letter of wishes' with the Discretionary Trust, giving direction to the trustees on how payments might be made. Such a letter is not binding, but may be useful to the trustees.
A Discretionary Trust should give the trustees the power to invest the trust capital and the power to apply the income from the investment for the benefit of the beneficiary as they see fit.
A Discretionary Trust can be framed in such a way that funds may be spent on items or services for the person or given to the organisation caring for the person, if they are in residential care.
Parents should make it clear in the will as to where the residual proceeds of the trust are to go on the death of the beneficiary, eg to brothers/sisters or to their children. It is vital to seek the advice of a solicitor known to have expertise in drafting Discretionary Trusts.
TAX TREATMENT OF A DISCRETIONARY TRUST
Capital Acquisition Tax (CAT) could in theory arise on the appointment of funds to the beneficiary, however a benefit taken exclusively for the purpose of discharging qualifying expenses of an individual with a disability is exempt from CAT.
Qualifying medical expenses are defined as expenses relating to medical care, including the cost of maintenance in connection with medical care. Normally there is a Discretionary Trust Tax of 6pc on the value of the fund in the first year and a 1pc tax in each subsequent year.
However, this tax is not payable where the beneficiary is a person with an intellectual disability. In order to qualify for this tax exemption, the trust deed must state clearly that the trust is exclusively for the maintenance and upkeep of the named beneficiary and no other individual, although a body with charitable status may be named as an alternative beneficiary. This is not an automatic exemption and for the relief to apply, it is necessary to make an application to Revenue when the trust is established, providing them with a medical certificate from a doctor confirming the child is incapable of managing their affairs.
Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors. www.som.ie.
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