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Independent.ie

Sunday 4 December 2016

Trust others with your family's financial future

Aisling Meehan

Published 29/02/2012 | 06:00

It's one thing to plan for a scenario where you die unexpectedly. Often a simple will transferring all of your assets to your spouse will suffice.

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But how many young farmers have thought about what might happen to their family or farm if both they and their spouse died suddenly?

This is where a discretionary trust comes into play. It can hold assets in legal limbo until they are distributed to beneficiaries. It works well in a farming situation where there are young children and time is needed to consider what should be done with the assets. The other advantage of a discretionary trust is that there is often no gift, inheritance tax or capital gains tax on the assets going into the trust on the death of the person who set it up.

It needs to be administered by trustees, who take decisions on behalf of the now deceased person who set up the trust.

Ideally there should be at least three people appointed, with a simple rule that the trustees decide all matters by majority voting. Obviously, the trustees should be competent and trustworthy, but it is not necessary that they be professionals. Instead, they can hire in whatever expertise they need. It is important that the trust document states that the trustees are paid for whatever work they do. While this may sound like an unnecessary expense, it ensures that the trustees take the task as seriously as they should.

In general, the concept of a trust is that it holds the assets for the benefit of the persons who are ultimately intended to own the assets, which are normally the children. The trustees themselves have no right to any of the assets but have a general power, subject to whatever rules are written into the trust, to give the assets to the children when and in whatever amounts the trustees see fit. None of the children will have an absolute right to any part of the trust fund. Instead they can receive property from the trust fund.

Whoever sets up the trust can have their views known in two separate ways:

1) Letter of wishes -- this is not legally binding but it is intended as a guide for the trustees on how they would like the assets handled. It should include a detailed outline of who gets what and when, along with any practical information such as PPS numbers, particulars of bank accounts, assets and debts, and relevant contact details of key people such as the accountant, plumber, banker and vet. Details of title, Single Farm Payments, Department schemes, other non-farm property and who looks after it should also be specified.

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2) Write legally binding rules into the trust document. These rules should include a date by which the assets must be paid out of the trust and the trust shut down. This prevents the trustees keeping power over the assets indefinitely. It is important that these rules are not so specific as to make the trust inflexible.

For example, if the person who set up the trust provided that the farm should not be sold but instead passed on the children when they reach 21 years of age, the children might miss out on an opportunity to increase farming scale by selling some 'development land' and investing the money back into buying more agricultural land.

As stated earlier, the transfer of property into a discretionary trust may not be not taxable for gift or inheritance tax purposes. However, when a beneficiary receives either income or capital from a trust, capital acquisitions tax and income tax may be payable, depending on the relationship between the person who set up the trust and the beneficiary. A one-off charge of 6pc on the property of a discretionary trust arises when:

- The person who set up the trust is deceased; and

- The youngest child of the person who set up the trust reaches 21 years of age.

As a result, trusts are normally set up in such a way that all the property is distributed out of the trust before the youngest beneficiary reaches the age of 21, to avoid triggering the 6pc discretionary trust charge. Even if the 6pc charge is activated, half of this will be refunded if all the property within the trust has been distributed within five years of the youngest beneficiary reaching 21. In addition, a tax exemption applies to any trust which has been created for incapacitated persons, for public or charitable purposes or approved superannuation schemes.

Remember, a trust can be changed at any stage and should always be kept under review.

Disclaimer: Aisling Meehan, solicitor, does not accept responsibility for any errors. www.agriculturalsolicitors.ie

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