What happens to our daughter’s trust fund at 18?

Q: Our wonderful daughter, who has a mild general learning delay and attends a special school, is about to turn 18. I’m struggling with the arrangements we need to put in place for her.We have used the annual €3,000 small gift exemption for many years and the resulting fund is held in bare trust for her benefit.We need guidance on how to transfer it to her in a way that best serves her. In our will, she will equally share our estate with her two siblings in time. A: The parents have used the small gift exemption here to good effect. This is where anyone can give someone else €3,000 a year, tax-free. That’s a potential gift of €6,000 per calendar year from two parents without reducing a child’s lifetime Capital Acquisitions Tax (CAT) threshold. READ MOREThis money has been accumulating in a bare trust for their daughter’s benefit. Parents considering gifting money in this way should ensure the account is designated as a trust at the outset, says Greg Flanagan, solicitor, and partner at Lavelle Partners.If it’s simply in a bank account in a parent’s name, Revenue may refuse to recognise it as being in trust for the child, he says. This will have tax implications.[ Inheritance tax reform could unlock €170bn sitting on deposit, expert saysOpens in new window ]The beneficiary of a bare trust is the true owner of the assets, says Catriona Cody, head of tax at stockbroker Goodbody.“The trustees merely hold and administer the assets until the beneficiary is legally entitled to take control of them, typically age 18 in the case of a child,” Cody explains.“Some immediate practical steps these parents can take now are to review the bare trust arrangement, confirm the balance and investment ownership, and plan with their daughter how the account will operate when she turns 18.” Depending on her needs and wishes, the family could consider a supported bank account, proportionate spending controls agreed with her, a decision-making assistance or co-decision-making agreement, and an enduring power of attorney made by her if she has the required capacity, says Cody.The reader indicates that in time, her three children will inherit the parents’ estate in equal parts.Using a discretionary trust may be particularly suitable for this future inheritance, Cody says.Rather than leaving her a one-third share outright, the parents could revise their will so that her intended share passes to trustees who can apply the assets for her housing, care, education, therapies and wider support, while making controlled payments over time, according to Cody. These trustees would have full discretion about when and how the daughter receives the money, so it is important that trustees are people who you trust. Typically, the parents would write a “letter of wishes” to guide the trustees. Although the letter is not legally binding, it is an important guide to the parents’ intentions.But the existing bare trust fund is different. As the daughter is already the beneficial owner, the parents cannot unilaterally transfer her money into a discretionary trust, Cody says. “If, once she is 18, she has capacity to make this specific decision, she could choose to settle some or all of the fund into a new trust, but she should receive independent legal advice and understand that she would be giving up an unrestricted entitlement in favour of trustee discretion,” Cody adds. Her agreement must be voluntary and properly informed. Having a mild learning delay does not of itself mean that someone lacks capacity.“Capacity is presumed and is assessed in relation to the particular decision, with appropriate support,” Cody says.[ All inheritance tax-free thresholds rise in the budget but no wider reformsOpens in new window ]“If she lacks capacity to decide whether to place her existing property in a discretionary trust, her parents cannot simply consent on her behalf.”Advice would be needed on the supported decision-making arrangements available under the assisted decision-making framework. Any proposal that removes her existing absolute entitlement to the bare trust would require careful scrutiny, Cody says. ‘Payments of trust income may also have income tax implications for the trustees and/or the daughter, depending on how the payment is made and its source’— Catriona Cody, GoodbodyBefore any transfer to a discretionary trust is considered, the family should obtain professional advice to determine the legal, tax and social welfare implications of the daughter’s particular circumstances.However, one of the major benefits of a discretionary trust created under her parents’ will is that for a child with additional needs, their entitlement to State supports such as social welfare, a medical card and disability benefits may be protected. These supports are means-tested. While assets retained in a discretionary trust are not generally owned by the child, any money or assets paid or appointed to her could become her income or capital and may affect her eligibility for means-tested support. Get advice before distributions are made, Cody advises. A discretionary trust is normally subject to tax of 6 per cent of the capital value of the trust fund in year one, and 1 per cent of the capital value for each year afterwards, for as long as the trust continues. If the beneficiary has additional needs and the trust is set up exclusively for them, a discretionary trust tax exemption may apply. To qualify, Revenue usually requires a medical report or letter from a doctor confirming the child is incapable of managing their own affairs, says Flanagan. [ Can I avoid capital gains tax on a rental property by gifting it to my child?Opens in new window ]When assets are eventually distributed or appointed out of the trust to a beneficiary, standard gift or inheritance tax rules and thresholds still apply at a rate of 33 per cent on amounts above the child’s €420,000 tax-free threshold, regardless of disability, Flanagan says.However, depending on the nature and purpose of a payment from the trust, it may be CAT exempt – for example, where funds are used for the beneficiary’s qualifying support and maintenance, or for qualifying expenses related to medical care. Payments of trust income may also have income tax implications for the trustees and/or the daughter, depending on how the payment is made and its source, so specific tax advice should be taken, Cody says. The parents might also want to consider the dwelling house exemption – this would allow their daughter to receive the parents’ main home, lived in until the time of their death, tax-free if certain conditions are met, Flanagan says. If the daughter has occupied this as her main home three years before the date of inheritance, and will continue to do so for at least six years after, and she doesn’t have an interest in another residential property at the date of inheritance or the valuation date – in her own right or in her parents’ will – she could inherit the property tax-free.The name of the reader who submitted the question is not being published to protect the identities of those involved.Please send your legal queries to Joanne Hunt, Ask the Lawyer, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to joanne.hunt@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice.