Creating a family trust

the O Reilly connection

I spoke to a solicitor this morning about setting up a family trust. I mentioned transferring my current accounts over to the trust so to avoid probate in the future. He said it doesn't make sense from a tax point of view.

I thought a trust is just a legal document. What's the big deal?

NSAman

While I haven’t researched this in-depth, trusts in Ireland don’t give the same protection and tax advantages as they do, in say, the USA.

i too have approached a solicitor and tax accountant in relation to my will in Ireland. Simple advice is that there are other more tax efficient options available in Ireland.

Peregrinus

If you thought transferring your current accounts to a trust would avoid "probate tax" in the future, then obviously you think using trusts does have tax consequences.

You can't simultanously think that, and also think that a trust is "just a legal document" that can't have tax consequences that you don't like.

Trusts are not just legal documents. They are significant and meaningful property and business arrangements that attract signficant and meaningful tax consequences. The tax consequences may be beneficial in your cirumcumstances and given your objectives, or they may be disadvantageous, meaning that a trust may or may not be a suitable vehicle for you, depending on what your circumstances and objectives are.

Family trusts are little-used in Ireland, because their tax consequences are not beneficial for most families in most circumstances. This is not necessarily the case in other countries, but Ireland is a whole different country with its own tax laws so, basically, disregard everything you read or hear about the use of family trusts for tax planning in countries that aren't Ireland. It is irrelevant to your situation.

the O Reilly connection

So say for example, a grantor sets up a family trust and becomes the sole trustee. The trust has 1,000 euros placed into it from the beginning.

The grantor wants to add some more money to it as time goes by, and then decides to add shares of a company to the family trust, can this be done without the need for a solicitor or does each transaction that enters the trust need a solicitors approval?

Calahonda52

You need to comprehend the import of post 3.

The first requirement for contemplating trusts is a large asset base.

The second requirement is the ability to pay stiff legal fees.

The third requirement is to recognise that they are not used much in Ireland, see post 3

Many have tried this and in many cases the Revenue have attacked the transactions, in some cases winning in camera court cases as they don't want to reveal what was tried.

Its a bit like asking about gas mileage in a Silver Phantom, if you ask you clearly can't afford it, same here asking for specific legal advice from randomers,

even very skilled ones like post 3😎

Marcusm

https://www.boards.ie/discussion/comment/121866529#Comment_121866529

Using terms such as grantor rather than settler implies a US background rather than an Irish or U.K. one. You don’t need a solicitor to do any of this but you’d be a mug to set one up without legal advice. What’s your aim or object? To alienate the assets from you so that they cannot be accessed in a divorce or maintenance (including of non-marital children) perspective or do you think that you can reduce your tax burden? The latter is very complex and often ineffective due to taxes incurred on assets being placed in the trust and/or annual levies.

the O Reilly connection

I've had some self employed ventures in the past and I thought that paying this income into a trust rather than myself might make more financial sense. I have considered a company but by the time corporate tax and tax on shares is paid it doesn't make much sense.

Peregrinus

https://www.boards.ie/discussion/comment/121866529#Comment_121866529

Once the trust is established, you don't need a solicitor to pay money to the trust, or to transfer shares to it. These payments/transfers are effected in the same way as any other payments or transfers.

https://www.boards.ie/discussion/comment/121870342#Comment_121870342

What makes you think the trust doesn't pay tax on its income and gains?

Lenar3556

https://www.boards.ie/discussion/comment/121870342#Comment_121870342

Incorporation generally does make a lot of sense if you were bringing in considerable income, plus you have the added benefit of limited liability.

There is no tax on shares in this scenario

the O Reilly connection

Sure don't I know it now?

Donald Trump

Rule against inalienability might limit your trust depending on how long you envision it continuing after you

the O Reilly connection

https://www.boards.ie/discussion/comment/121877749#Comment_121877749

It would depend where the trust was based for tax purposes. If the trust was offshore, sure wouldn't it be tax free?

Peregrinus

https://www.boards.ie/discussion/comment/121982969#Comment_121982969

Fair question. I had assumed the OP was asking about the tax implications of setting up a trust in Ireland.

If the trust is to be set up offshore — i.e. in another country — then you have to specify what country that is. The laws of that country will determine what taxes the trust pays on its income and gains.

Unless, of course, the trust earns income and gains in Ireland — e.g. from Irish land held in the trust; from an Irish business conducted by the trust; etc. Those will be within the charge to Irish income tax and CGT regardless of where the trust is established.

One other point should be noted. At the time when you establish your trust and transfer your assets into the trust, you are of course disposing of your assets, so the question of a CGT liability arises.

Marcusm

even if the trust is established offshore (ie with non-Irish trustees) then the creation of the trust may become liable to Ireland’s discretionary trust tax at 6% on creation dependent on the terms of the trust, the residence of the disponer/settlor etc.

the O Reilly connection

https://www.boards.ie/discussion/comment/121991055#Comment_121991055

I was referring to an offshore jurisdiction such as the Isle of Man.

Peregrinus

At this point I think we have to start exploring what wealth/assets it is that you want to manage through the trust, and how you propose to get them in. In the OP there's vague talk about " transferring my current accounts over to the trust", but current accounts are generally not worth very much — money goes out as fast as it goes in, and you generally only keep a sufficient balance in them to cover your short-term liquidity requirements. You'll have noticed that, right now, your current accounts do not attract much or any tax in themselves, so the scope for avoiding tax by replacing them with accounts run by trustees in the Isle of Man is not great.

People who have offshore accounts for tax evasion purposes are often using them to try to conceal a source of income that they have. It could be illegal income — the profits of my drug-running enterprise. Or, it could be legitimate income — the payments I get for providing consultancy service in my area of professional expertise — but I don't want to declare it to the Revenue and pay income tax on it. Obviously the success of this strategy crucially depends on the revenue never finding out that you have the offshore account. Equally obviously, we've all know for the last couple of decades that the revenue can find out, so people might use a trust as an added layer of concealment. The profits of your trade are paid into an account with the Entirely Legitimate Banking Co. in Douglas, Isle of Man but as far as the bank is concerned, the customer on that account is not Mr. O'Reilly Connection from Mullingar, but JB Solicitor Esq, of Douglas. There's a trust deed by which Mr Solicitor declares that he holds the balance on this account in trust for the Connection family of Mullingar, but the bank doesn't know about that.

That's all very shonky and, of course, illegal. You may or may not get away with it in practice, but what you're doing here is illegal. I presume that's not the kind of family trust you are thinking of setting up.

The other, and slightly more respectable, reason people set up family trusts is because they have wealth - assets, that produce income, that is taxable. Suppose Great Aunt Bessie wants to gift you (A) her cattle ranch in Argentina, where she resides; (B) her 3% stake in Apple Corporation; and (C) a large amount in US government bonds. If she simply gives them to you, as an Irish resident you'll have a substantial gift tax liability. Plus, the income they generate each year after that will be chargeable to income tax in your hands. So instead she gives them to Mr JB Solicitor of Douglas. Aunt Bessie and Mr Solicitor execute a trust deed declaring that he holds these assets on trust to distribute any or all of the the income and/or the assets themselves to such member or members of the Connection family of Mullingar as he may select, from time to time. Until income and/or assets are actually distributed to members of the Connection family, they haven't received anything and so have no liability to gift tax or income tax.

This may or may not work — it gets very complicated very quickly. Usually it works, at best, to defer and manage and minimise tax liability, rather than to avoid it altogether. But the whole thing only make sense because you have Aunt Bessie, who is not an Irish resident, and because you have substantial assets that are not connected with Ireland. If Aunt Bessie lives in Ballisodare instead of Buenos Aires, or if the cattle ranch is in Meath, there's a lot less scope.

So, what property is it that you are thinking of putting into the trust?

the O Reilly connection

https://www.boards.ie/discussion/comment/122020816#Comment_122020816

Company shares

Peregrinus

Couple of questions:

1. Are these shares in an Irish company, or a company that does business in Ireland? Is it a publicly-listed company or a private company? Does the compnay carry on a trade, or is it an investment company that holds assets and receives the income they generate?
2. Who currently owns the shares? (I.e. who will be transferring them into the trust?)

3DataModem

I know a US resident with a trust in the Isle of Man. Costs are 35k setup, 15k annual ongoing.

The benefits are that some assets (shares) in a non-Irish business are held by that trust, and the income from those shares stays in the trust, and the purpose of the trust includes costs attributable to his children, so basically makes transferring wealth to kids more tax efficient.

But if the person, the business, the income are Irish… then trusts ain't the thing.

Peregrinus

Essentially, yes. Where trusts of this kind work, they mainly work by enabling you to spread income around. Instead of all the earnings coming to you, and being taxed as your income, they get split up between different people — usually, different members of your family. So, if nothing else, you get several personal allowances, and several standard rate bands, to use before tax at the higher rates starts to kick in.

But, note, you really are giving your income away here. The payments made to your partner, you children, your brother, etc, are not your income; they are theirs. The money you pay to them is not available to pay your mortgage, finance your car, etc. If you yourself have a lifestyle that requires a certain level of income to sustain it, then you have to draw, and pay tax on, that income yourself. Plus, if your 19-year old is young and stupid and has a peanut for a brain, you'd want to think twice before setting things up so that he can get an income of €45k from the family trust; God knows what he'll spend it on.

Plus plus, this of course only works to the extent that you have people you want to transfer income to who have unused personal allowances and standard rate bands. If your partner, your kids, or whoever are already working and earning their own income, the scope for tax miminisation by using the trust is greatly reduced. It might be tax-efficient to give money to your unemployed second cousin, but if you don't otherwise accept a moral or familial obligation to support your second cousin, you'd be letting the tax tail wag the common sense dog by doing that.

(A question that a lot of people ask: can you avoid tax by having the trust pay out money, not as the income of any person, but directly to third parties to settle debts, purchase goods or services, etc? For example, could the trustees pay my children's university fees, the rent on their flat, etc? The answer, unsurprisingly, is that this doesn't work to avoid tax. If the trustees pay out money for the benefit of X, or to settle X's debt, most revenue systems will tax that as income of X, even if it never actually passes through X's hand's, or X's bank acccount.)

The other way trusts can sometimes be effective is by not paying out money at all. If the trust has extremely valuable assets that generate, say €1 million of income every year, and you and your family can comfortably live in the style you like on €200k, then the trust can distribute €200k to you and your family and just bank (or reinvest) the remaning €800k. But:

• In Ireland, this doesn't work. The trust pays tax itself on the income, plus a surcharge on undistributed income. Generally an Irish trust will want to distribute all it's income in the year it's earned.
• Even in other jurisdictions, it only works for a while. The trust can't continue for ever; while laws vary from place to place nearly everywhere puts a maximum limit on the duration of a private trust. And, even if you could reinvest the income and keep it in the trust for ever, why would you want to? It's no use to you there; there's no advantage in the never-ending accumulation of wealth that you never get your hands on and never spend.
• So you can used trusts to defer the payment out of money and associated payment of tax on that money, but generally not to avoid it altogether.

the O Reilly connection

https://www.boards.ie/discussion/comment/122028697#Comment_122028697

The shares are in an offshore llc out in the BVI which acts as a type of holding company directing operations in taxable jurisdictions.