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Reasons To Settle A Will Trust

Reasons To Settle A Will Trust
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Reasons To Settle A Will Trust

In this blog we will look at some of the reasons why a person would choose to settle a Will Trust in Ireland. An inter-vivos trust is a trust that is created during the lifetime of the settlor or grantor.

A Will Trust, or Testamentary Trust, is a trust which arises upon the death of the testator and is specified in his or her Will. The Trustees of the Trust will usually be the Executors of the Will.

Benefits Of A Testamentary Trust

A Will Trust can facilitate;

  • Succession planning for family assets including a family business;
  • Creditor protection, provided the testator was solvent at the time and had no known claim against them by a creditor;
  • Management of the Testator’s assets by professional trustees following their death rather than appointing family members who may not be equipped to manage the assets;
  • Tax planning

Succession Planning For A Family Business 

The importance and key areas of this form of succession planning were discussed in our blog, ‘Succession Planning for Family Business

Testamentary trusts are widely used to achieve the prime objectives of succession planning for family business in terms of the continuation of the business. It can be difficult to establish and agree upon a clear balance of power and to have clarity of roles within the business following the retirement or death of the principal. Retiring generations may wish to provide financial security and/or career opportunities to family members, manage family wealth through future generations, maintain the family tradition in business or to support loyal employees, suppliers and other stakeholders.

Shares in a business held by individual family members may need to be sold or transferred at some future point, for example, on the death of the shareholder, a divorce settlement or a decision by the owner to sell their shares. In these circumstances, there may be a delay with the transfer of ownership. However, a Will trust can provide for greater flexibility and ensure ease of transition between generations. 

Asset/Creditor Protection

Property transferred to a Will Trust must still follow the appropriate legal procedure of admission to probate but will no longer form part of the testators estate and therefore will not be subject to claims from potential future creditors provided the following conditions are met at the time of settlement;

  • they are solvent at the time the trust is created;
  • they have no known debts or claims against them that cannot be discharged from their own personal property without recourse to the proposed trust assets; and
  • there is no expectation of any debts or claims in the foreseeable future.

Many countries have enacted laws prohibiting individuals from moving assets so that they are beyond the reach of their creditors.  The bankruptcy and family law provisions of the relevant jurisdiction should be carefully examined before establishing a Will Trust for asset protection purposes. 

The use of a Will trust, which provides for trustee discretion as to how the assets are distributed, once the above conditions are satisfied, will put those trust assets beyond the reach of creditors, thereby ensuring the continued use and enjoyment of those assets for future generations.

Related:2 Methods Of Settling A Trust

Management Of The Testator's Assets By Professional Needs

Protecting A Family With Illness Or Special Needs

A Will Trust may be used to entrust the Trustee to provide for long term care and support for children or other family members who require medical care or have special needs after a parent has died. The Irish tax legislation recognises the fact that where a Discretionary Trust is used to protect a beneficiary incapable of managing their own affairs because of age, physical, mental or legal incapacity, a discretionary tax exemption will apply.

Protecting Against Spendthrift Family Members 

Will Trusts can provide for long term protection of family assets where there are concerns about how certain family members manage their own financial affairs. The income or capital needs of family members can be provided for through a Will Trust as their needs arise rather than handing over assets to children who may dispose of them in a reckless manner thereby leaving them in poor financial standing over the long term.

Related:Momentous Decisions - A Must Read For Trustees  

Protecting Against Relationship Property Claims

If you gift assets to your children during your lifetime, these assets may become available to their partners under relationship property laws should their relationship end.

In Ireland, by placing these assets in a Will Trust instead of directly in the name of your children, your children may continue to receive the benefit of those assets without the assets forming part of their personal property and provided certain conditions are met may not be subject to claims from partners.

Tax Planning

Generally no Irish stamp duty or capital gains tax arises on the transfer of a testator’s assets to a Will Trust when the assets are passed on death rather than during their lifetime. Discretionary Trust tax will not apply until the children of the Testator have reached the age of 21 years. Once the beneficiary reaches the age of 21 a once off charge of 6% of the total value of the trust assets and an annual charge of 1% of the total value of the undistributed assets will apply. 

Where the trust is wound up and all assets are appointed absolutely to the beneficiaries within a period of 5 years of the creation of the trust, half of the initial charge is refunded.

Any Income received by the trust is subject to Irish income tax at a rate of 20%. Where the income is not distributed by the trustees to the beneficiaries within 18 months of the period in which it arises, a further Irish income tax surcharge of 20% would apply.

Capital gains tax should be considered on capital appointments of non-cash assets to beneficiaries during the course of administering the trust. Where the trust acquires the assets on death, the trust is treated in relation to a subsequent disposal of those assets as if they had been acquired at their market value at the date of death. 

Related:7 Reasons To Set Up A Family Trust

 

Distributions of non cash assets out of the trust to the beneficiaries (where structured correctly) should not give rise to Irish stamp duty. Irish income tax and capital acquisitions tax should also be considered by beneficiaries when contemplating any distributions of assets out of the trust to them.

Final Comment

A Will trust can offer many benefits including inheritance planning, tax planning and protection of assets. Before establishing a Will trust, detailed and jurisdictional specific legal advice should be sought.

Disclaimer: Please note that this commentary does not purport to be a comprehensive review of the Irish legal treatment on Will Trusts. Detailed appropriate advice should be taken before any particular transaction is entered into. 

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