Planning for discretionary trust

A friend of mine is a widower and and is considering putting in place a discretionary trust for one of his children in his will. Before talking with his solicitor, just wondering if anyone can advise on the following please?
1. When is CAT payable on the money earmarked for the trust?
2. I've seen the term protective discretionary trust - is this the same thing as a discretionary trust?
3. In order to avoid the initial and on-going discretionary trust taxes, what evidence is likely to be needed to demonstrate that his son (with autism) is unable to manage his affairs?
4. Is it sufficient for now to provide for the establishment of the trust in his will (and select the trustees) or is there more that needs to be done now?

Any insights appreciated.

1. Putting money into the trust generally doesn't attract CAT; CAT arises when money is paid out of the trust, to one or more of the beneficiaries.

2. It's not a strictly defined term, but "protective discretionary trust" usually refers to a discretionary trust established for the benefit of a beneficiary who is unable to manage their own affairs, and needs protection (as in this case). Sometimes it refers to a trust established for someone who is already seriously in debt and needs protection from their creditors.

3. Where you're establishing a trust for the benefit of a person with an incapacity, you need to apply to the Revenue and get their clearance; otherwise you don't get the discretionary trust tax exemption. Your friend will ll need a medical report from a doctor. The time for doing this is when the trust is established which, in the case of a trust established by will, is after your friend's death. Your friend doesn't need to do anything now but, for their own comfort, might want to get confirmation from the child's medical advisers that, when the time times, they will be happy to give the necessary medical report.

4. Provide for the trust in the will, select the trustees and (optional, but usual) write a letter of wishes setting out how he would like the trustees to use the trust fund. (This isn't binding on the trustees, but it's something to which they normally attach considerable weight.) From time to time after the will has been made your friend should review the arrangements and consider if they need changing — e.g. if one of the trustees originally nominated is no longer able to act; if the child's circumstances change; if your friends views on how the money should be used change.

Thank you so much for taking the time to make such a detailed and informative post - very much appreciated. Can I cheekily ask a few follow-up questions/comments please!

1. Regarding CAT - any additional info on how it works would be appreciated. Like, for example, say the Group A threshold is €400k - is the first €400k taken out of the trust tax free and the balance taxable? Basically, I'm trying to figure out if there's any sensible/smart planning that can/should be done (or is worth considering) at this stage.

2. Regarding the will, is it enough to say in the will that the money earmarked for the child is to be placed in a discretionary trust? Hopefully, the parent here has many years to go before the will becomes relevant! Is it an option to keep the Executor updated on the details of the trustees and the "wishes" of the parent for this trust without having to adjust the will each time?
[The "wishes" of today may be different next year and in 10 years time, etc., so is the option of simply keeping the Executor informed (albeit via an updated Letter of Wishes) a sensible approach or is it better to be more prescriptive in the will itself?]

1. The first €400k received by the beneficiary is exempt; when receipts go above that he starts paying tax.

Note that it's €400k from all donors within what's called Group A. So if the child receives, in this order, €100k from Dad and then €50k from Mum, and then €300k from a trust established and funded by Mum and Dad, all those donors are in Group A, so:
- no CAT liablity on the first €100k received;
- no CAT liablity on the next €50k; but
- when the €300k comes in, total gifts/inheritances from Group A now amount to €450k, so the threshold has been exceeded. CAT is due on €50k. Any further gifts/inheritances that come in from Group A will attract CAT on the full amount.

2. This will will neeed to be professionally drawn up and it will have to include the full provisions that are necessary or desirable to govern a discretionary trust, which are extensive; you're not going to get this in a make-your-own-will kit. How is the money to be invested and managed by the trustees? Is there anything they must do? Anything they may not do? What happens if the child dies while there is still money in the trust — who gets it? If the child marries and/or has children, can the spouse/children be given money from the trust or is the child the only permitted beneficiary? Etc, etc. It's not just a matter of finding the right legal boilerplate text to stitch into the will; there are actually big decisions to be made when setting up a trust of this kind; you'll need professional advice to identify the decisions that you have to make, and to guide you through the process of actually making them.

The will does have to name the trustees, but you can foresee and provide for some contingencies — e.g. "I appoint my brothers and sisters A, B, C and D as trustees"; if B dies before you the appointment of A, C and D will still take effect so you don't have to alter your will unless, e.g., you want to nominate some other trustee instead of B. Or "I appoint A and B as trustees but if either of them is unwilling or unable to act then I appoint C in the place of that person". That kind of thing.

The letter of wishes tell the trustees your thoughts about the decisions that they will make. But it is the will which will determine what decisions they can make — there is no point in writing a letter saying that you would like the trustees to do X if the terms of the trust don't allow the trustees to do X, or require them to do Y instead.

TomEdison said:

This will will neeed to be professionally drawn up

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His solicitor previously drafted a will (before the child's condition was clear) and now the will needs to be updated. There's no question of a DIY will! I'm somewhat surprised that the will...

TomEdison said:

will have to include the full provisions that are necessary or desirable to govern a discretionary trust,

Click to expand...

We'll see what the solicitor advises.

Some info and guidance about wills and trusts in this document - as well as other aspects of preparing for the future.

Not sure why you would be surprised that a document that established a discretionary trust needs to set out the terms that will govern the trust. It would be more surprising if it didn't need to do that.

Let's see what the legal advice is.