What is a trust?

Home › Investments > What is a trust?

A trust is a legal arrangement that helps protect and manage assets for the benefit of children, grandchildren, or other beneficiaries until they gain access. Many people in Ireland also use trusts for their tax benefits. But how do trusts work, and why might you consider setting one up? In this article, we’ll look at the meaning of a trust and answer all your questions.

A trust is a legal arrangement where a person or entity manages assets on behalf of one or more beneficiaries. These assets can include cash, property, land, or shares. The trustee is the one in charge of the trust, and they must act in the best interests of the beneficiaries.

Trusts are set up through a legal document, either during a person’s lifetime or upon their death (through a will). These documents outline how the assets should be managed and distributed.

Someone might choose to set up a trust to transfer ownership of their assets in a way that’s still in keeping with their wishes. They might go to the benefit of individuals who are underage, incapacitated, or otherwise unable to handle their own financial affairs.

Oxford Dictionaries gives the following definition of a trust:

An arrangement whereby a person (a trustee) holds property as its nominal owner for the good of one or more beneficiaries.

But what exactly do each of these roles entail?

Settlor: The settlor is the person who sets up a trust in the first place, and they do this by transferring their assets into it. Also known as the disponer, grantor, donor, or trustor, the settlor sets out how the assets are to be managed and used, typically in a document called the trust deed.

Trustee: A trustee is a person or professional appointed to manage the trust and act in the best interests of its beneficiaries. They hold the legal title to the trust’s assets but not the beneficial interest, meaning they manage the assets for the beneficiaries, not for personal gain.

A trustee’s responsibilities include:

• Following the terms of the trust.
• Managing and investing trust assets responsibly.
• Keeping detailed records of the trust’s finances, including income and expenses.
• Filing tax returns and paying any taxes due.
• Treating beneficiaries fairly.

Trustees can be family members, friends, solicitors, or accountants, the difference being that professionals charge for their services from the trust fund. Some experts even recommend having two or three trustees, with four usually being the maximum.

Beneficiary: A beneficiary is the person or group of people for whom the trust is created. The most common beneficiaries are families. They are entitled to benefit from the assets held in the trust, as outlined in the trust agreement.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Trusts usually set certain conditions that must be met before the funds can be released. Often created for children or grandchildren, these trusts typically specify a minimum age for access, such as 18, 21, or 25. In some cases, funds may only be accessible once the person using the income passes away.

Once the conditions are met, the trustee can distribute the assets in one of the following ways:

• Income only, such as rent from a property held in trust.

• Capital only, e.g. receiving shares when they reach a certain age.

• Both income and capital, depending on the terms of the trust.

You might also be wondering, “What are trusts used for?” There is sometimes a specific purpose attached to the usage of the funds, such as for education, basic living expenses, or supporting a business venture. In some cases, the income may be limited to a certain period.

The trustee may be given power to withdraw assets for a particular beneficiary, even if this might lower the overall funds for other beneficiaries. This might happen if a beneficiary has special needs that were not clear when the trust was formed.

When setting up a trust, the settlor transfers control of their assets, but in some cases, they can still benefit from the trust. The level of control a settlor holds onto depends on the type of trust they choose. Some trusts offer more flexibility than others. For example, a revocable trust allows the settlor to modify or cancel it at any time while they’re still alive. In contrast, an irrevocable trust is more rigid and cannot be easily changed once it’s set up.

With a discretionary trust, the beneficiaries are not automatically entitled to the trust’s assets. Instead, the trustees make decisions based on the terms set in the trust deed or will. Beneficiaries can ask to be considered for a distribution, but they cannot insist on receiving anything. The trustees have the final say on who gets what and when.

This trust type can be a more flexible way of managing and distributing assets, especially when a beneficiary can’t manage their own affairs. It’s often used for families with children or adults with special needs. Other common uses include to protect assets, preserve wealth for future generations, or provide for a partner outside of marriage.

The settlor of a discretionary trust may leave a letter of wishes to guide the trustees, but it’s not legally binding. Ultimately, it’s down to the trustee to decide how income or capital is distributed, which can sometimes lead to tension among beneficiaries who may feel overlooked or unfairly treated.

Discretionary trusts in Ireland are subject to both an initial levy and an annual levy. The initial levy is a once-off charge of 6%, applied to the value of the trust’s assets. This levy is due on the later of the following dates:

• The date the assets are transferred into the trust.
• The date of the settlor’s death.
• When there is no longer a ‘principal object’ of the trust who is under 21 years of age (e.g., a child or spouse, but not grandchildren unless they are children of a deceased child).

Once the initial levy is paid, the discretionary trust is then subject to an annual levy of 1%. There is an exemption for trusts set up exclusively for incapacitated persons.

This is one of the most common types of trusts in Ireland. With bare trusts, the trustee holds assets on behalf of the beneficiary (who is usually a minor) until they reach a certain age, typically 18 or 21. This makes them a popular choice for parents and grandparents who want to contribute to their children’s education or long-term savings.

While the beneficiary has full ownership of the assets, the trustee manages and protects them until the beneficiary is old enough to take control. The trustee’s role is much less involved than with a discretionary trust; it’s mainly administrative. 

Some tax experts have noted how bare trusts could be used together with the small gift exemption. This would allow a couple to gift money worth up to €6,000 per child each year (€3,000 per parent) without incurring tax. Over 18 years, this could result in up to €108,000 being gifted tax-free. Of course, a trust isn’t necessarily needed for this; they could also simply deposit the funds into a children’s savings account.

A trust fund is often used interchangeably with ‘trust’. To be precise, ‘trust’ refers to the legal concept, while a trust fund is the actual vehicle where money, stocks, investment, or property are held. The trust fund is what’s created when these assets are transferred into it. 

People often associate ‘trust funds’ with something for the ultra-wealthy. Trust funds also tend to have the negative connotations of care-free children living off the funds of their rich parents or grandparents. But they can actually be used by anyone looking to protect assets for the future benefit of someone else.

In Ireland, trusts are subject to various taxes at different stages, depending on the type of trust and assets involved. 

1. Tax when transferring assets to a trust – When assets are transferred to a trust, capital gains tax (CGT) may apply, unless the trust is created through a will. Stamp duty may also apply, though cash transfers and assets in trusts created by a will are typically exempt.

2. Tax during the trust’s lifetime – Income tax is due on any income earned from the trust’s assets, charged at the standard rate. Beneficiaries can claim a tax credit for this income tax. If assets are later sold, capital gains tax may apply on the increase in value from the date of death to the date of sale.T

3. Tax on distributions to beneficiaries – Distributions from the trust are usually either capital (subject to CGT) or income (subject to income tax). Distributions may in some cases be taxed with capital acquisitions tax, a type of inheritance tax.

What many people are concerned about when planning their estate is how to transfer assets to the next generation in the most tax-efficient way. That’s where trusts can be beneficial. 

Here are some of the most common reasons why individuals set up a trust:

1. One of the primary advantages is keeping inheritance tax to a minimum. By placing assets in a trust, individuals may defer capital acquisitions tax until distributions are made to beneficiaries. Discretionary trusts can be particularly beneficial in this regard.

2. Trusts can also be used to reduce income tax liabilities. The income generated from trust assets can be distributed among beneficiaries, potentially lowering the overall tax burden by making use of individual allowances and tax credits.

3. Trusts are often used to protect vulnerable family members, such as minor children or individuals with disabilities. Assets are managed responsibly and distributed as needed, without the beneficiary having to manage finances on their own.

4. Trusts allow you to pass assets to grandchildren or other family members, helping to keep wealth within the family.

5. A trust lets you decide how and when assets are passed on. This is especially helpful in complex family situations, where you can set conditions for the distribution of assets.

While trusts can provide valuable benefits, it’s important to consider the potential costs and taxes involved. Discretionary trusts, for example, are popular for their flexibility, but the regular taxes due on them can add up over the years.

If you’re considering setting up a trust in Ireland, you may want to start by saving for a sum of cash that could be transferred into the trust. An account such as a fixed term deposit can be a quick and easy way to grow your savings for this purpose.

By opening a Raisin Bank account, you can access competitive interest rates and easily manage your savings. Register today to explore a range of savings options with no fees or paperwork, all protected by European Deposit Guarantee Schemes.