Whats a trust, and why do people use them?

thejourney

Can someone explain a trust and name the advantages of having one?


The internet has to much american stuff. I need an Irish view on them#

Peregrinus

A trust is an arrangement by which a person (the "settlor") transfers the ownership of some property (the "trust property" - could be land, could be cash, could be stock and shares, could be anything) to someone else who he trusts (the "trustee") on terms that that person will use it not for his own benefit, but for the benefit of one or more third parties (the "beneficiaries").

They are an extremely flexible mechanism, and you can use trusts for a whole variety of purposes. For example:

X has underage children. He makes a will saying that, if he dies while his children are underage, his property is to be paid to trustees who will manage it until his children are of full age, and then transfer it to them.

Y has a learning disability. His family establishes a trust into which they put assets to be used by the trustees for Y's benefit. The assets could include a house in which Y will live and/or financial assets which will generate interest/dividends to provide an income to Y.

Z is an employer. He establishes a pension trust into which he pays pension contributions to build up a fund, out of which the trustees will pay pensions to Z's retired employees.

Etc, etc. Trusts are used for a lot of things.

Internationally, trusts are often used as tax planning/tax minimisation mechanisms, particularly what is called a "discretionary trust". The idea here is that the trustee has power to pay any or all of the assets to any of a class of people (usually family members of the person who set up the trust) in whatever shares, and and whatever times, he decides. Because the settlor has given the trust property away, he's not taxable as the owner of the property. Because the individual beneficiaries are not entitled to get the trust property, they're not taxable either - or, at least, not taxable until trust property is actually transferred to them. The trustee may be liable to tax, but he could be offshore. Set it up right, and the property and the income it generates could be sheltered from tax for years.

Whether and to what extent this works depends entirely on the tax laws of the country where you're trying to not pay tax.

In Ireland, the tax laws positively encourage certain types of trust by providing favourable tax treatment - pension trusts, charitable trusts, trusts for disabled family members. Usually there are very strict criteria to qualify for the favourable tax treatment so unless what you are trying to do with your trust happens to be what the legislation wants you to do, you won't get favourable tax treatment.

General discretionary trusts, as described above, in which you simply squirrel assets away for the (later) benefit of family members, are generally not tax-favoured in Ireland. Public policy is not to encourage the establishment of such trusts, and in most circumstances the tax outcome will be better if you don't establish a trust than if you do. When you set up a discretionary trust, there's a special inheritance tax on property put into the trust. If the trust generates income and the trustees distribute the income to the beneficiaries, the beneficiaries are taxed on it. If the trustees don't distribute the income, then the trustees are taxed on it, plus they pay a 20% surcharge.

thejourney

Peregrinus wrote: »

A trust is an arrangement by which a person (the "settlor") transfers the ownership of some property (the "trust property" - could be land, could be cash, could be stock and shares, could be anything) to someone else who he trusts (the "trustee") on terms that that person will use it not for his own benefit, but for the benefit of one or more third parties (the "beneficiaries").

They are an extremely flexible mechanism, and you can use trusts for a whole variety of purposes. For example:

X has underage children. He makes a will saying that, if he dies while his children are underage, his property is to be paid to trustees who will manage it until his children are of full age, and then transfer it to them.

Y has a learning disability. His family establishes a trust into which they put assets to be used by the trustees for Y's benefit. The assets could include a house in which Y will live and/or financial assets which will generate interest/dividends to provide an income to Y.

Z is an employer. He establishes a pension trust into which he pays pension contributions to build up a fund, out of which the trustees will pay pensions to Z's retired employees.

Etc, etc. Trusts are used for a lot of things.

Internationally, trusts are often used as tax planning/tax minimisation mechanisms, particularly what is called a "discretionary trust". The idea here is that the trustee has power to pay any or all of the assets to any of a class of people (usually family members of the person who set up the trust) in whatever shares, and and whatever times, he decides. Because the settlor has given the trust property away, he's not taxable as the owner of the property. Because the individual beneficiaries are not entitled to get the trust property, they're not taxable either - or, at least, not taxable until trust property is actually transferred to them. The trustee may be liable to tax, but he could be offshore. Set it up right, and the property and the income it generates could be sheltered from tax for years.

Whether and to what extent this works depends entirely on the tax laws of the country where you're trying to not pay tax.

In Ireland, the tax laws positively encourage certain types of trust by providing favourable tax treatment - pension trusts, charitable trusts, trusts for disabled family members. Usually there are very strict criteria to qualify for the favourable tax treatment so unless what you are trying to do with your trust happens to be what the legislation wants you to do, you won't get favourable tax treatment.

General discretionary trusts, as described above, in which you simply squirrel assets away for the (later) benefit of family members, are generally not tax-favoured in Ireland. Public policy is not to encourage the establishment of such trusts, and in most circumstances the tax outcome will be better if you don't establish a trust than if you do. When you set up a discretionary trust, there's a special inheritance tax on property put into the trust. If the trust generates income and the trustees distribute the income to the beneficiaries, the beneficiaries are taxed on it. If the trustees don't distribute the income, then the trustees are taxed on it, plus they pay a 20% surcharge.

Give this man a medal. Always giving great answers. I could never get that from internet.
So its really only works in america in the banhamas islands.

Can Irish tax consultants or advisors set up a trust offshore. If that person moves to bahmas in 20 years they would not owe tax in Ireland.

The person who sets up trust fund for kids in ireland. Moves to bahanms and 20 years later is residient in banhams so pays no tax or retries in banhams

Peregrinus

If by "work" you mean "reduce tax", trusts work in lots of places, including Ireland. But whether a particular trust works will depend on what the trust is going to do, and what tax you hope to avoid.

If you become non-resident in Ireland, you won't owe income tax in Ireland (except on any income you derive from Ireland, of course). But this is true whether you have a trust or not.

I think your real question is, while you're still resident in Ireland, can you reduce or eliminate your liability to Irish income tax by setting up an offshore trust?

The answers is, possibly, although this is very unlikely to work if the income in question is earned in Ireland (rents from Irish property, waqes from Irish employment, etc, etc). It might be of some benefit if, say, your non-resident millionaire uncle wants to give you his Argentinian cattle ranch and you say "tell you what, uncle, why not transfer it to this handy trust I have established in the British Virgin Islands?" That might be effective to avoid Irish income tax - so long as the trust didn't pay the ranch profits on to you, of course - though it probably wouldn't do much to address liability to Argentinian tax on the ranch and its earnings.

But you're really asking the wrong question here. Your question should not be "what can I use a trust for?" It should be "what income/assets/wealth to I have, and how can I arrange my affairs so that my liability to tax is minimised?" A trust might or might not be of some value in achieving your objectives; it's impossible to say if we don't know what income and assets you have, where your assets are situated, what your need for income to live on is, whether you're willing to put up with Bahamian beer in your declining years, and a host of other questions.