FAQ A step by step guide to giving €3,000 a year to a child via a bare trust

[Brendan Burgess]

I have no practical experience of this. So please correct any errors or add any bits of information.

1) Both parents can give €3,000 each to each of their children each year without it impacting Capital Acquisitions Tax thresholds.
(While this is the most common arrangement, it does not have to be parent to child, it can be anyone to anyone.)
2) If they formally set up a bare trust, they can manage the money on behalf of their child and the child can't access it until the age of 18. But at the age of 18, the child can demand the proceeds of the trust and can spend it as they see fit.
3) Grandparents, or anyone else, can also contribute to the trust fund.
4) The child is the beneficiary
5) The parents would usually be the Trustees
6) Who ever contributes to the fund are Settlors
7) The simplest is to set it up via a fund with Zurich Life or some other funds company, but these are subject to 41% exit tax.
8) The most tax efficient is to buy shares directly via a stockbroker as the dividends and capital gains will be taxed in the child's name and they will benefit from the usual tax credits and annual CGT allowance

 

[Brendan Burgess]

How to set up a trust.

Just get a form and fill it in, sign it and witness it.

You must register the Trust with Revenue

How to register on the CRBOT

This page explains how to register for the CRBOT

www.revenue.ie

The stockbroker will ask to see it when setting up the account.

 

[Brendan Burgess]

Frequently Asked Questions

Where can I get a blank Bare Trust form?

Which stockbrokers will open accounts for Bare Trusts?

Can I spend the money in the Trust on the child's education?
No.

Can I get the money back out for myself if I need it?
No

Can the child access it before the age of 18 if he needs it?
No.

 

[Brendan Burgess]

What is the difference between a Bare Trust and a Discretionary Trust?

A Discretionary Trust gives the Trustees more flexibility in determining when the beneficiary gets the money and how it can be spent.

But... the tax consequences are severe and so they are not recommended unless there are very large amounts of money involved and after expensive tax and legal advice.

 

[TomEdison]

2) If they formally set up a bare trust, they can manage the money on behalf of their child and the child can't access it until the date set out in the trust document - usually, but not necessarily, the age of 18.

As regards "not necessarily the age of 18" — I don't think this is right.

Once the child is over the age of 18, and assuming that they are not under any other legal disability (e.g. mentally incapacitated) they are absolutely entitled to the trust property as against the trustees. If the child asks the trustees to hand over the any or all of the trust property, they must do so.

(You can set up trusts where this is not the case — where the trustees have a discretion about when and/or how much to hand hand over to the beneficiary, and the adult beneficiary is subject to the trustees' discretion — but such a trust is not a bare trust; it's a discretionary trust. Discretionary trusts attract various kinds of tax unpleasantness, the details of which are outside the scope of this thread. It's enough to say that you don't want to set up a discretionary trust without first having got detailed professional advice, and you definitely don't want to set up a discretionary trust by mistake.)

 

[Brendan Burgess]

such a trust is not a bare trust; it's a discretionary trust.

That is great. I had originally planned to mention discretionary trusts and forgotten to do so.

 

[GSheehy]

7) The simplest is to set it up via a fund with Zurich Life or some other funds company, but these are subject to 41% exit tax.

I'd change that point 7) to .....but these are subject to the prevailing Life Assurance Exit Tax rates. As these rates will change.

Who knows? Could be the same rate as CGT in a few years time.

It doesn't have to be a Trust. It can be done by Deed of Assignment where the policy is assigned to the child and ownership of the asset, by them, is immediate. There are differences between DoA and Trust so clearly the legal departments of product providers (and advisers) have different opinions on which model they think might be 'better'.

These products should really just be used by donors that know now that the beneficiary will be inheriting in excess of the prevaling threshold relevant to the relationship between donor and beneficiary. U18, policy by DoA, Over 18, policy in the name of the beneficiary.

Can the child access it before the age of 18 if he needs it?
No.

Under DoA, the policy can still be encashed whilst the child is a minor by his/her parents/guardians however the money received must be for the full benefit of the child.


Gerard

www.InvestAndSave.ie

 

[Marc]

I had a visit from Revenue on this very subject.

Apparently low compliance with registration on CRBOT is a concern.

I set out a detailed analysis here

How should a parent set up an investment for a young child under the age of 18?

If you have children (or grandchildren) under the age of 18 and wish to set up an investment there are some issues (practical, taxation and legal) which need to be considered in order to establish the most suitable and appropriate course of action. I discuss some of the points raised in this article

www.linkedin.com

 

[Brendan Burgess]

It doesn't have to be a Trust. It can be done by Deed of Assignment where the policy is assigned to the child and ownership of the asset, by them, is immediate. There are differences between DoA and Trust so clearly the legal departments of product providers (and advisers) have different opinions on which model they think might be 'better'.

Thanks Ger.

So can I clarify this.
Daddy and Mammy set up a policy for Little Jimmy who is 5 with Zurich Life.
They contribute €3,000 each, every year to it.
If Daddy and Mammy's financial position deteriorates, they can cash it in whole or in part to pay for Little Jimmy's education, for example.
If Little Jimmy wants a motorbike at 16(?), they can cash part of it for his benefit.

It strikes me that the Bare Trust is much better because the parents should not be giving Little Jimmy €6,000 a year unless they are very sure that they won't need it themselves.

The tax treatment of the Bare Trust is much more favourable.

 

[Brendan Burgess]

I set out a detailed analysis here

Excellent article Marc.

The point about not replacing normal parenting expenditure is very good. I need to stress that more.

 

[tinymouse]

I had a look into this when my kids were born. And it seems with the high fees - 1.5% - a year I think it was, it wouldn't be long before that'd eat into the tax savings in 18 years time over just investing yourself and giving them a lump sum down the line and paying the Exit tax of 41% . (I know there's a CAT allowance but for simplicity sake, I'm assuming it's not part of the equation)

I'm not that great with these kind of maths. But assuming the same return on self investment vs using a fund (And I know that's a big assumption), at what point does a 1.5 % fee each year exceed 33% of the final sum? Would it make sense to start making transfers to a trust at say age 10, because in 8 years you'll lose less than 33% CAT.

 

[Brendan Burgess]

The 1.5% charge is irrelevant . You will pay that whether you invest via a bare trust or directly in shares.
Likewise the Exit Tax is irrelevant. You will pay the Tax after 8 years whether you invest in your own name in a fund or via a bare trust.

 

[Steven Barrett]

And it seems with the high fees - 1.5% - a year I think it was

On a €6,000 contribution? €90 in year 1

And for that you are getting:

1. A legal document drawn up for you
2. Fund management
3. Administration of your investment
4. All taxation taken care of

The relatively small amounts that go into these policies as well the relatively short investment period means that the charges are higher for regular savers than they are for pensions.

It doesn't have to be a Trust. It can be done by Deed of Assignment where the policy is assigned to the child and ownership of the asset, by them, is immediate. There are differences between DoA and Trust so clearly the legal departments of product providers (and advisers) have different opinions on which model they think might be 'better'.

One of the differences is that Zurich Life do not allow you to switch funds under their deed of assignment. People should be aware of this.

You must register the Trust with Revenue

You cannot get the money out of the policy without showing the provider that the trust was put in place.



Thank you @Brendan Burgess for the step by step guide. I have mentioned this before that these are not easy structures to put in place. As well as the investment element, there is the legal and revenue requirements to be set up. I have lost count of the amount of enquiries I have gotten from people who want an "execution only" bare trust and think I'll do it for a few hundred quid (also ignoring the fact that they are new clients and require onboarding). It is not simple investment structure to put in place.

 

[ClubMan]

The 1.5% charge is irrelevant . You will pay that whether you invest via a bare trust or directly in shares.

Surely direct equity investments shouldn't involve ongoing charges this high? I have some and certainly don't pay anything like that. Just the trading costs which are negligible especially because I don't trade frequently and just buy and hold long term. Or do you mean buying shares while holding them within a bare trust so the 1.5% is the cost of maintaining the trust?

 

[Brendan Burgess]

@ClubMan

I was comparing like with like for tinymouse

His criticisms of funds held through a bare trust apply equally to funds invested in a life company in the parent's own name.

7) The simplest is to set it up via a fund with Zurich Life or some other funds company, but these are subject to 41% exit tax.
8) The most tax efficient is to buy shares directly via a stockbroker as the dividends and capital gains will be taxed in the child's name and they will benefit from the usual tax credits and annual CGT allowance

I will amend this to reflect the fact that the costs of owning shares directly are generally lower.

 

[TomEdison]

(I know there's a CAT allowance but for simplicity sake, I'm assuming it's not part of the equation)

When people do set these arrangements up, the main motivation is to access the annual small gifts exemption.

The arrangement is attractive to high net worth individuals who expect their child's inheritance to be north of €400k. The parents can give the child up to 6k per year without eating into the 400k lifetime threshold. By setting this up at birth using a bare trust rather than waiting until the child is 18, that's an extra 18 yrs x €6k = €108,000 you can transfer to the child free of CAT, on top of the €400k threshold. More, really, since the investment return accrues to the child rather than to the parents, and so CAT is avoided on that too. So this structure can save you tens of thousands in CAT, and the cost of setting it up and administering it is amply justified.

But it's only attractive to high net worth individuals who expect to pass more than €400k to their children. Plus, it's no use if your high net worth is largely represented by your house, your business or other assets that it wouldn't be a good idea to transfer to your infant child. You pretty much have to have ê6k/year after-tax disposable income, after you've covered all your expenses and outgoings, and done all the retirement and other saving that you want to on your own account.

 

[GSheehy]

And it seems with the high fees - 1.5% - a year I think it was

@tinymouse Can you confirm that it was 1.25% you posted before your comment was edited by a moderator? I had read this earlier and could have sworn you posted 1.25% (after you mistakenly said 3%)?

And for that you are getting:

1. A legal document drawn up for you
2. Fund management
3. Administration of your investment
4. All taxation taken care of

...and advice.

One of the differences is that Zurich Life do not allow you to switch funds under their deed of assignment. People should be aware of this.

Indeed, because God forbid that you have a parent that thinks that they can time the market and takes advantage of the four free fund switches in any one year. In fact, it's not the parents money so they shouldn't be messing with it this anyway under Trust model, IMHO.

 

[GSheehy]

You pretty much have to have ê6k/year after-tax disposable income, after you've covered all your expenses and outgoings, and done all the retirement and other saving that you want to on your own account.

Probably not what you meant, but for the purposes of clarity, you don't have to put in €6Kpa. You can reduce it or stop it at any stage if the purse strings are under pressure.

When I was ready to do this, I chose the Deed of Assignment model. It just suited me and I'm happy to pay the AMC for the simple 'wrapped' product I have and fund choices available. My daughter really doesn't know if there will be a deemed disposal event on the 8th anniversasaries or what the rate of taxation on growth might be in the future. Dogs. Wags. Tails. Taxes.

 

[TomEdison]

Probably not what you meant, but for the purposes of clarity, you don't have to put in €6Kpa. You can reduce it or stop it at any stage if the purse strings are under pressure.

Oh, yes. What I should have said was, to take full advantage, or to maximise the CAT advantage, you have to be in a position to contribute €6k/yr. But it can still be attractive if you contribute a lower amount, or variable amounts. The key is that you think your child's total of gifts+inheritance from parents will exceed €400k. If it won't, then I think it would be hard to justify the costs of this structure.

 

[GSheehy]

the costs of this structure.

I'm not seeing any alternative cost structure for €250/€500pm for a DIY Trust via a stockbroker.