As estate planning or wealth management advisors, we often encounter historic trusts in practice. However, there seems to be a popular misconception that trusts are less relevant in a modern context. This thinking may derive from the fact that trusts are less attractive for resident and domiciled individuals as a tax mitigation device. In this note, we set out the key features of a trust and where, in practice, we see a trust offering considerable value as a wealth planning device.
What is a trust?
A trust is legally binding agreement created by a settlor (the owner of the assets) who transfers some or all of their assets to an individual person or organisation (trustee) to manage the assets for the benefit of another (beneficiary).
A seminal feature of the trust is that the settlor is divesting themselves of their personal ownership of the assets.
The trustee holds and manages the trust assets, but their authority to deal with those assets is constrained by the terms of the trust and their duties as a fiduciary. A fiduciary is someone who owes a duty of good faith which in this case is owed to the beneficiaries of the trust. The beneficiaries of a trust have a right of action against the trustees if the trustees breach their fiduciary duties.
In fact, the essential feature of a trust is that, by creating a trust, a settlor has divested themselves of assets previously held personally, from which many of the benefits from holding assets in a trust arise.
Typically trusts are no longer attractive from an income tax / capital gains tax perspective for Irish resident and domiciled individuals. Offshore trusts may still be used by Irish resident but non-domiciled individuals, subject to management of the relevant anti-avoidance provisions.
A correctly structured and well administered trust may produce tax planning advantages. For example, assets can be passed to a suitably drafted interest in possession trust to trigger an immediate event for capital acquisitions tax ("CAT") purposes, but defer the date upon which beneficiaries may become absolutely entitled to capital. Discretionary trusts can also be used as an asset holding vehicles, pending maturing of beneficiaries and / or the qualification for capital tax reliefs in certain circumstances.
Trust structures can be used to keep confidential the connection of trust assets to a particular class of beneficiaries.
A trust is a...