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

[Brendan Burgess]

If the parents are confident that they will be gifting or bequeathing a sum well in excess of the CAT threshold of €400,000 to their child, they can between them gift €3,000 a year without impacting that threshold. If they gift €6,000 a year for 10 years, that would be increasing the tax-free gifts by €60,000 + any investment return on the €60,0000. Let's say it amounts to €90,000, that would be a saving of €30,000 in CAT at 33%.

If you do not expect to gift your children in excess of €400,000, then this is not relevant to you.

There is no point in doing this to fund normal parenting expenditure e.g. the cost of third level education. Such expenditure does not impact the CAT threshold.


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 give the child the money directly now, the child can spend the money. Parents usually want the child to build up their savings.
3) 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.
4) If the parents set up a trust and donate €3,000 each a year, they can stop contributing or contribute a lower amount if their circumstances change.
5) Grandparents, or anyone else, can also contribute to the trust fund.
6) The child is the beneficiary
7) The parents would usually be the Trustees
8) Who ever contributes to the fund are Settlors
9) 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 and 8 years deemed disposal. While these rates may change in the future, currently they are significantly less tax-efficient.
10) 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]

Think long and hard before setting up a bare trust.

The downside is that you lose control of the money when the child reaches 18. They can blow it on whatever they want.

You might prefer to forego the tax advantages in exchange for retaining control of the money.

If you contribute €6k a year from age 8, that would be €60k + the investment return when they are 18.
You are saving 33% CAT , so €20k.
Given that you are going to be leaving them in excess of €400k, is that material?

Another approach is to start giving them the €3k a year at age 18 on condition that they put it aside as the deposit on a house.

 

[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.

 

[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]

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.

 

[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.

 

[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.

 

[T McGibney]

I'm definitely not getting into the weeds on this one except to note that throughout my career whenever I have seen people build longterm plans on the back of complex and/or expensive contracts, agreements or structures, more often than not these go awry because circumstances change, priorities change and/or the people running them neglect them.

 

[Steven Barrett]

why would you pay any cost for a trust or similar if you don't anticipate some CAT saving? Why set up the trust at all?

Because people want to help out their children with buying property. Using a regular saver plan helps them do it by paying in on a monthly or annual basis. If money is tight, they can stop or reduce the amount.

For me as a financial planner, it is more about putting away money regularly for a large expense in the future as anything else. The €6,000 gift exemption is good to be able to use but I certainly wouldn't let a child's future CAT liability be a factor. They need the money now, not when they are 60.

 

[Zenith63]

Perhaps I’ve just seen more than my fair share of young people with wealth going off the rails, but I’d advise anybody thinking of doing this to think long and hard about how they would feel if their child developed a drug/drink/gambling habit in their teens that an injection of cash at their 18th birthday might hugely exacerbate, all to save a few quid tax. Or think of a child that is struggling to develop independence. There are much worse outcomes than little Jimmy wasting his trust fund on a flash car.

YMMV but we decided this risk was not even close to worth taking, so we will pay the tax and help our kids buy houses from our own investments when the time comes.

 

[TomEdison]

Because people want to help out their children with buying property. Using a regular saver plan helps them do it by paying in on a monthly or annual basis. If money is tight, they can stop or reduce the amount.

But you can do that without setting up a trust. You just open a savings vehicle of your choice which you earmark as the vehicle through which you will save regularly to build up a fund that, When The Time Is Right, you can give to your kid towards the deposit on a house.

Until you give it to them, it's your money. When you give it to them, it's within the charge to CAT. But if you expect the total of the gifts and inheritances they will receive from you will be less than €400k, that doesn't matter.

Plus there are advantages to doing it this way; there's no risk that your child will improvidently squander the fund at age 18; you don't have to gift it to him until he is actually buying a house.

 

[GSheehy]

You can choose not to tell/educate your U18 child about the annual gift, but I don't think that's a good idea. Best to actually give them some reponsibility in their future and not try to control their lives indefinitely.

You could tell them about it at age 34, because that's the average age of a gambling addict entering treatment, or at 43, because that the median age for individuals entering alcohol treatment in Ireland. I know older people again that still can't manage money because no one ever taught them how. There's no guarantee that the 50/60 year old (or their spouse) won't go bananas with an inheritance. No one can control the outcome.

Again, availing of this specific annual exemption should really only be the concern of those that know now that the CAT threshold will be exceeded.

 

[faketales]

so we will pay the tax and help our kids buy houses from our own investments when the time comes.

There is also an option of transferring €6k to them annually once they hit 18 and you are satisfied they are responsible. You could ask that they save / invest it before contributing the next 6k the following year. So by the time they turn 30 you could have transferred 72k exempt of CAT in a more managed way.

 

[Brendan Burgess]

OK, I have tidied up the thread and incorporated most of the suggestions into the first few posts.

Does anyone have a link to the form needed to set up a bare trust? They are on the life company websites but come with their branding and product selections.

Or if you have set up a bare trust, could you attach the form here?

 

[Marc]

I have a trust deed which could be used for an investment account so that the trust receives CGT treatment rather than Exit tax. However, as I set out in this article, if you start early enough and invest prudently with some regular contributions from both parents and grandparents, you could find yourself running into a very significant problem of a young adult at the age of 18 finding themselves with €1m available to them.

Is a bare trust the right answer?

Mary and Joe are Grandparents of Jane who has just been born. They want to put aside some money for Jane’s future and wish to make the maximum possible saving of €40,000 under the CAT B exemption along with each paying in €3,000pa.

www.linkedin.com

 

[Brendan Burgess]

Hi Marc

Why would the grandparents put in €40k when the child is born? It makes no sense.

The objective of the bare trust is to put in amounts which are not subject to CAT.

The €40k can be left directly to the child at any age. There is no advantage in putting it in now.

I suspect that a family which can put in €12k a year for each child from the day they were born until the age of 18 will have other wealth problems as well.

I don't think that most people would be interested in the costs and potential of the Family Partnership that you suggest as an alternative.

Family partnerships

A family partnership is a term used to describe a partnership between members of a family, often parents and their children. It can be a useful vehicle for holding investment and/or trading assets for the benefit of a number of family members.

www.grantthornton.ie

 

[Marc]

Why would the grandparents put in €40k when the child is born? It makes no sense.

If the grandparents kept the 40k and invested it properly themselves all things being equal it would double every 10 years (rule of 72) so now they have €160k in their estate and, as you say they can pass on €40k tax free to tiny Tim but the excess would be taxed at 33% an extra €39k in CAT payable compared to making the gift earlier.

There is a huge advantage I making a gift earlier, especially if you are generating skipping from grandparents to grandchildren.

 

[Marc]

I don't think that most people would be interested in the costs and potential of the Family Partnership that you suggest as an alternative.

Many many people are and do have family partnerships for exactly the reasons I have explained