A bare trust, also known as a simple trust, is a tax efficient way to provide a nest egg for a minor.
What is a bare trust? When the ownership of an asset is held by one person-the legal owner-for the benefit of a different person-the beneficial owner. The legal owner is known as a trustee.
This type of structure is useful to allow the holding of assets-real property or money, for example-for the benefit of a minor child until the child reaches the age of majority-18.
There are tax benefits in bare trusts, too.
Capital acquisitions tax is the tax payable by the recipient of a gift or legacy in a will. However, there is a small gift exemption of €3,000 per person per year and using this exemption on an annual basis does not affect the recipient’s group threshold which is determined by the relationship between the recipient of a gift or inheritance.
In 2019, for example, the group threshold for a child receiving a gift or inheritance from a parent is €320,000.
A bare trust allows a child receive a gift of €3,000 from each parent; over 18 years this amounts to a tax free gift of €108,000-that is, €6,000 X 18 years.
Real property, which is likely to increase in value over time, can be transferred into a trust when the value of the property is at a low point. CAT is payable when the asset is placed in the trust but this will almost certainly be at the lowest valuation vis a vis future growth and the value of the property when it is being transferred out of the trust to the child on reaching the age of 18.
The current thresholds for CAT are €320,000 (to a child from parent), €32,500 (to a parent, brother, sister, niece, nephew, grandparent, grandchild, lineal ancestor or a lineal descendant of the disponer), €16,250 (strangers).
You will note that a parent can gift up to €320,000 tax free to a child. Remember, however, that capital gains tax may arise on the transfer of the gift into the trust as a transfer of a house, for example, is considered to be a disposal from a capital gains tax perspective.
The donor/settlor needs to remember
he will be unable to take the assets back once they are transferred into the trust and
The recipient, when she reaches the age of 18, can call on the trustees to transfer the assets to her.
The settlor also needs to consider who will act as trustees; although one trustee is all that is required at least two trustees are recommended and one of them can be the settlor.
Have you an elderly parent or loved one? Perhaps you yourself have thought about creating an enduring power of attorney to make provision for a day when you become incapacitated.
If so, the need for a power of attorney may arise at some stage.
A power of attorney is a legal document which allows a person (the donor) to give powers to another person (donee/attorney) to take certain actions on behalf of the donor.
There are two types of power of attorney:
a Power of Attorney
an Enduring Power of Attorney.
A Power of Attorney can only be created by a donor when he is not mentally incapacitated and understands what he is doing. It can grant a specific power-for example, to buy or sell property- or general powers to the donee.
An Enduring Power of Attorney(EPA) comes into being when a person becomes incapacitated.
It allows the donee to make personal care decisions on behalf of the donor when the donor becomes mentally incapacitated. Generally, anyone can be appointed an attorney (but there are exceptions eg a bankrupt or person under 18 years), but creating an enduring power of attorney is more complex than creating the general power of attorney.
How to create an enduring power of attorney
Creating an enduring power of attorney will involve a doctor and solicitor.
It can only come into effect when certain procedures have been followed.
The instrument (document) creating an enduring power of attorney must follow a certain format and must
include a statement from the doctor that the donor had the mental capacity to sign it at the time it was signed and understood the effect
contain a statement from the donor to the effect that he knew the consequences of creating the enduring power of attorney
include a statement from a solicitor that the donor had the capacity to make the enduring power of attorney, and that the donor was not acting under any duress or undue influence.
At least 2 people must be notified of the making of the enduring power of attorney, and these people cannot include the donee (attorney).
One of the notice parties must be a spouse or civil partner; if there is none, a child must be notified. If there is no child a relative must be notified.
The EPA only comes into force when it is registered. This involves an application to the Registrar of the Wards of Court in the High Court and this can only be made when the donor is, or is becoming, mentally incapable. There must be a medical certificate confirming that the donor is incapable of managing his affairs.
The High Court has extensive supervisory powers in respect of the EPA once it is registered. It can give directions about the management and disposal of the property of the donor, and it can revoke or cancel the EPA if it is satisfied that
the donor is mentally capable
fraud or undue pressure was used in the creation of the EPA
the attorney is unsuitable.
An EPA can give general powers, including personal care decisions, to the attorney, or specific powers. All decisions must be taken in the best interests of the donor and the donor’s family, and carers, must be consulted.
Personal care decisions includes things like where the donor should live, their dress and diet, who they should see and not see, and so forth.
In fact, personal care decisions are defined in the legislation as follows:
“personal care decision”, in relation to a donor of an enduring power, means a decision on any one or more of the following matters:
(a) where the donor should live,
(b) with whom the donor should live,
(c) whom the donor should see and not see,
(d) what training or rehabilitation the donor should get,
(e) the donor’s diet and dress,
(f) inspection of the donor’s personal papers,
(g) housing, social welfare and other benefits for the donor;
A donor can revoke an EPA anytime before it is registered; however, if it is registered an application must be made to the Court to have it revoked.
An EPA ceases on death of the donor, and there are also some other limited circumstances where the enduring power of attorney will be terminated.
If your will is valid, there is a presumption of testamentary capacity
The test for testamentary capacity was set out in an 1870 case: Banks v Goodfellow
There are 3 aspects to testamentary capacity: a) you must understand you are making a will to dispose of your assets, 2) you must know the extent of your estate, 3) you must be able to give consideration to those who might expect to benefit from your will
Certain situations will give rise to a presumption of undue influence; generally where the relationship of trust and confidence existed eg doctor/patient
Your children are not entitled to any specific share of your estate, unlike spouses (see 26 above)
If you don’t make a will though your children (strictly “issue”) are entitled to 1/3
Your children can bring a legal action against your estate under section 117 of the Succession Act, 1965 for your failure to discharge your moral duty to them
The time limit for bringing such an action is 6 months; and it is a strict one
You can create a trust in your will
A trust is an equitable obligation binding someone (a trustee) to deal with your property for the benefit of beneficiaries whose identity may not be known yet
Your trustees will be the legal owners of your trust property but they must carry out the terms of the trust which you will decide
If your trust property is “real property” the trust must be evidenced in writing
A trust is not a legal entity so cannot be bound by a legal contract
The late poet and author, Dr. John O’Donohue, made his own will without the benefit of legal advice.
In December, 2011 Justice Gilligan in the High Court declared the will void for uncertainty and the entire estate passed to the testator’s mother.
Justice Gilligan, in his judgment, stated that
The Testator has unfortunately provided an illustration of exactly how a person should not make a will. While there can be little doubt but that the Testator was a man of considerable learning, the fact that he did not benefit from legal advice or assistance is evident from the will he drew up. Not only was it deficient in terms of the lack of certainty as to his intention but moreover he unwittingly made the classic error of having two of the intended beneficiaries act as witnesses to his signature, thereby depriving both as a matter of law from benefiting under the terms of the will.
As an introduction to his Judgment Judge Gilligan stated:
The making of a last will and testament is one of the most important tasks most people face and unfortunately it is one often approached in haste and without due consideration for its effect. A primary purpose of a will is to make a definitive statement regarding the disposition of a person’s assets on the event of their death. A properly drawn up will, prepared with the benefit of legal advice provided by a solicitor, should ensure that the testator’s wishes for the disposition of their estate will be fully complied with.
Courts can decide what the intentions of the testator were where there is doubt as to interpreting from the will the intentions of the testator and the Court’s duty is weighted by the presumption against intestacy.
However in this case the Court was unable to decipher the intentions of Dr. O’Donohoe, even though it held that the will was valid insofar as the requirements of section 78 of the Succession Act, 1965 were met.
Once the will was held to be void the entire estate passes to the mother of the deceased in accordance with section 68 of the Succession Act, 1965.
A discretionary trust fund is one where the only interest that potential beneficiaries have is the right to be considered for an appointment of property. The beneficiaries do not have an absolute right to the trust fund so do not have an interest in possession.
A discretionary trust is useful where
There are young children
The testator wishes to postpone mainstream capital acquisitions tax
The testator wants to adopt a “wait and see” approach to see how potential beneficiaries will turn out.
The trust fund, the beneficiaries, and the trustees must be set out in the will.
Here is an example:
In my Will where the context so admits
1. The beneficiaries shall mean and include:
a) My children
b) My grandchildren born within the trust period hereinafter defined.
2. The trust fund shall mean
a) The sum of €25,000 or the whole of my estate after the payment of my debts, funeral, testamentary, administration expenses and legacies and
b) All money, investments or other property accepted by the trustees as additions.
c) All accumulations (if any) of income directed to be held as an accretion to capital and
d) The money, investments and property from time to time representing the above.
The definition of the trust fund can be as narrow or as wide as the testator chooses. It can be a specific sum of money, a property, or the residue of the estate.
The trustees need to be defined also.
Here is an example:
I appoint Jim and Mary to be trustees (my trustees) of my Will and I appoint them trustees for all the purposes of the Settled Land Acts 1882 to 1890, the Conveyancing Act 1881, the Land and Conveyancing Law Reform Act 2009 and sections 57 and 58 of the Succession Act 1965.
Once the trustees, trust fund, and beneficiaries are defined the substantive trust must be created.
Here is an example of a substantive trust:
I give devise and bequeath the trust fund to my trustees upon trust either to retain or sell it on the following trusts:
Until the vesting day to pay the capital and any income arising from it to any one or more of the beneficiaries in such shares and at such times as my trustees in their discretion think fit without obligation to make payments to or for the benefit of all the beneficiaries or to require equality among those to whom payments are made and on the vesting day to divide what remains of the capital and accrued income equally among the beneficiaries then living without regard to payments already made to them.
Trusts for Sale
This trust is where the trustees are under an obligation to sell, invest the proceeds and hold the proceeds on the terms of the original trust.
This type of trust puts the trustees in control of the timing of any sale of trust property and they cannot be forced to sell, even if a beneficiary wants them to do so.
To incorporate such a trust in a will you need to first decide:
Who are the trustees and
What is the trust property.
Here is an example of a trust to sell:
I Give Devise and Bequeath all the rest residue and remainder of my estate of whatsoever nature and wheresoever situate unto my trustees upon trust to sell the same and to hold the proceeds of such sale or my residuary estate for so long as the same shall remain unsold upon trust for my daughters Michaela Smith and Susan Sarandon in equal shares.
There is no power to postpone a sale in the wording above. If such as power is to be given then this will give that power:
I Give Devise and Bequeath all the rest residue and remainder of my estate of whatsoever nature and wheresoever situate unto my trustees upon trust to sell the same with power in their absolute discretion to postpone the said sale and to hold the proceeds of such sale or my residuary estate for so long as the same shall remain unsold upon trust for my daughters Michaela Smith and Susan Sarandon in equal shares.
If a property is not held upon trust for sale then a power of sale must be given to the trustees in the will.
An ultimate default trust will also be needed to cover the situation where Michaela and Susan referred to above predecease the settlor/testator or the trust fails for want of a beneficiary. If this default trust is not inserted the danger is that the property will pass on intestacy.
Settled Land Act Trusts
The Settled Land Act, 1882 defines a “settlement” of land. A “settlement” is where real property is held by a succession of interests or where a minor has an interest in property.
Settled Land Act Trusts are very useful for the protection of a life tenant who has the power of sale under the Settled Land Acts.
An example of a settlement would be
To my wife for life and thereafter to my son Sheamus.
One of the benefits of this type of settlement is to fix the time at which an interest will vest in the remainderman (Sheamus above) and to postpone the payment of tax to sometime int eh future.
Fixed Trusts/Interest in Possession Trusts
A fixed trust is one in which the interests of various beneficiaries are fixed at the time of the creation of the trust.
They can be very useful to
Create an immediate interest in possession eg a life interest
Provide clarity as to who will get the trust property at a fixed time in the future
Allow a testator to postpone the vesting of an interest until a beneficiary reaches a certain age
Avoid discretionary trust tax provisions.
It is worth noting the distinction between a benefit vested in possession and a benefit vested in interest.
Eg of a benefit vested in possession:
I Give Devise and Bequeath all the rest residue and remainder of my estate of whatsoever nature and wheresoever located to my daughter Emily.
Eg of a benefit vested in interest:
I Give Devise and Bequeath all the rest residue and remainder of my estate of whatsoever nature and wheresoever located to my daughter Emily and on her death to my son John.
John has a benefit vested in interest.
Trusts and Taxation
You would be well advised to obtain taxation advice about using a trust because deemed disposals of property are said to have taken place for capital gains tax purposes at different times, depending on the wording of the trust instrument/will.
The Land and Conveyancing Law Reform Act 2009 introduced a simpler way of dealing with trust land which up to then had been governed by the Settled Land Acts, 1882-1890. The 2009 Act covers all trusts of land ,whether created by will or otherwise.
The Land and Conveyancing Law Reform Act 2009 also sets out the powers of trustees of land, procedures for resolution of disputes, jurisdiction of the Courts to vary and make other orders in relation to trusts, and offers protection for purchasers of trust land.