Trusts

The Benefits of Forming a Trust

A trust allows you to protect your personal wealth whilst still retaining control of your assets. There are many benefits in setting up a trust.

Resthome Subsidies

Despite some suggestions that resthome subsidies were likely to be removed by the new government, subsidies have only been abolished for hospital care. Resthome subsidies are asset tested, and to apply for a subsidy the level of your assets must be minimal. Assets over that level will need to be sold by you to pay for resthome care if they are not already owned by a trust.

The Department of Social Welfare also operates a policy of looking at any gifts of assets made by you in the five years prior to applying for a resthome subsidy and takes those gifts into account when calculating the level of your assets. So, the sooner you start a gifting programme the more effective the trust will be in terms of qualifying for a resthome subsidy.

Excluded from resthome subsidies is gifts of $5,000 per annum and pre-paid funerals.

Estate Duty

Estate duty was abolished for those who died after 17 December 1992. However, at least two political parties propose to reintroduce estate duty.

For this reason some prefer to form what are known as "mirror trusts". Mirror trusts were principally used to avoid payment of estate duty. This is where one spouse gives assets to a trust for the benefit of the other spouse and vice versa.

Mirror trusts had the advantage of avoiding the requirement to pay estate duty but had the disadvantage that once one spouse died the survivor was only a beneficiary of one of the two trusts which held their former matrimonial assets. Some prefer to adopt mirror trusts to guard against the re-introduction of estate duty. Glaister Ennor prefers to use a single trust which is prepared in a form allowing for maximum flexibility to re-arrange the trust in the event that estate duty or capital gains tax is introduced (assuming that no legislation is passed to prevent a re-arrangement).

If estate duty is re-introduced it is likely new legislation will not allow you to avoid estate duty by creating mirror trusts as the only purpose of mirror trusts was to avoid estate duty.

Family Reasons

Rather than having your children inherit your assets when you die, it is becoming increasingly common for your assets to be bequeathed to your trust instead.

As a trust has a life of 80 years, you can have greater control of your estate upon your death than you would otherwise have by your assets being immediately divided among your children and other relatives. There are a number of reasons why you may wish to retain control over your assets after you have died. You may wish to protect your children from creditors' claims against their legacy, or from the possibility of a spouse of your children claiming half of such legacy if the marriage breaks down. Also, you may not wish to give your entire inheritance to one or all of your children in one lump sum (if you fear they may be irresponsible when dealing with it) and instead your trustees could spread their inheritance over a number of years.

As trust assets are not deemed to be matrimonial property under the Property (Relationships) Act 1976, you can to some extent, also protect your assets from claims against future spouses by transferring them to a trust prior to entering a new relationship. This is often preferred to entering into a pre-nuptial agreement which requires the spouse to be a party to that agreement.

Tax Savings

A trust pays tax at a flat rate of 33% per annum on any income which the trust assets earn, except where that income is distributed to beneficiaries.

Where income is distributed within the financial year in which it is received, the tax paid on such income is calculated at the beneficiaries tax rate. If distributions are made to children (e.g. to pay for their education or health care) or to a non-working spouse, such distributions would be taxed at their lower tax rate. This can best be explained by using the following example:

John and Mary Smith both work and have a salary of $40,000 each. They also have an investment portfolio which earns $20,000 per year. If the investments were not owned by a trust the income received would be added to John and Mary's salaries and would be taxed at 33%. However, if the investments were owned by a trust, the income received could be used for the benefit of John and Mary's children, and provided those children had little or no income themselves, this would be taxed at 19.5%. The tax saving would be $2,700 per year.

For more information on setting up a trust contact Glaister Ennor.

The information on this web site is of a general nature only. Readers are advised to establish the applicability of information in relation to specific circumstances and not to rely solely on the information provided here.