Providing for a child’s financial future is daunting enough but ensuring continued care and financial support for a vulnerable child can create additional anxiety. With gift and inheritance tax ('IHT') rates at 33%, care must be taken to protect a child's inheritance when reliefs may be available for individuals with special needs. Using a trust, for example, will maximise the value of your estate available to ensure continued quality of life for a vulnerable child during adulthood.
Ordinarily a child is liable to IHT to the extent that an inheritance exceeds €280,000 (this is the life-time limit that a person may taken from one or other parent). This figure is relatively low when one considers the level of fund required to provide for a child's adulthood. Also, assets held in certain trusts attract a once-off initial charge of 6% and annual charges of 1%. Without planning, these taxes will significantly erode the value of an estate which has been ear-marked to provide for a vulnerable child's maintenance and support.
Fortunately, it is possible to eliminate these liabilities, or to achieve substantial reductions, by establishing a tax-efficient Special Needs Trust ('SNT') during your life-time.
While a tax-efficient SNT is particularly useful for managing the financial affairs of individuals with mental and physical disabilities, it may also be used to provide for adult children who suffer from drug, alcohol, gambling or other problems.
ESTABLISHING A TAX-EFFICIENT SPECIAL NEEDS TRUST
A trust must be established under the terms of your will. The SNT must be designed during your lifetime although it will only become operative on your death. Until then you will be free to deal with your assets as you chose.
Your will must specify the assets that will transfer into a trust to provide for your child's ongoing needs. This may include the proceeds from the sale of assets or the proceeds from life assurance policies.
Although your child will be the beneficiary of this trust, a trustee will need to be appointed and this person will have total control over the distribution of the trust assets.
ADVANTAGES OF USING A TAX-EFFICIENT SNT
No charge to IHT arises on the creation of a discretionary trust. A charge to IHT may arise when the beneficiary receives an appointment, however with planning, benefits may be taken in a way that does not trigger IHT. Therefore, provision can be made for a child’s needs tax-efficiently.
The trust can be set up so the inherited assets do not affect the beneficiary’s eligibility for State benefits.
The trust is designed so that your assets are managed so as to ensure that funds are available for the care of the child. This is especially comforting when there is a concern that the child could be influenced or taken advantage of in matters concerning money.
Funds are not available to creditors or for paying judgements. The money is used only for the care of the person.
ISSUES TO CONSIDER WHEN DRAFTING YOUR WILL
The trust is irrevocable, so it cannot be amended or revoked.
To guarantee eligibility for State benefits, the beneficiary may not own or have direct access to the trust funds.
You must give a trustee absolute discretion regarding the distribution of the trust benefits to your child.
The beneficiary has to request funds from the trustee and the trustee has complete discretion as to whether the request is appropriate based on the terms laid out in the trust. Thus, the person has very little control over the use of their money. This can lead to feelings of frustration and decrease independence.
Once you have decided to set up a SNT, there are other things you must consider, including who to appoint as a trustee and ensuring that the trust complies with the relevant tax provisions.
Richard and Anne Murray have a 22-year-old son with special needs. Because they are able to provide him with all the support he needs, their son doesn’t currently receive State assistance. They want to make sure that he receives the necessary care and support after they die. With this in mind, they intend to leave their son an inheritance with a value of €550,000.
Without tax planning, the net benefit taken by their son, after inheritance tax, will be €460,900 (i.e. this is the net value of his inheritance after tax taking into account his life-time threshold of €280,000).
The Murrays have decided to set up a special needs discretionary trust as part of their estate planning. They designate their only daughter, Rose, to be the trustee and give her complete discretion regarding the distribution of their son’s benefits. After their deaths, Rose will manage their son's inheritance to ensure his continued maintenance and care.
Using a tax-efficient SNT will ensure that their son receives the full value of his inheritance (€550,000 a saving of €89,100). In addition, because they carefully established the trust and gave full control to the appointed trustee, their son will still be eligible to apply for State medical and financial support.
HOW WE CAN HELP
As specialist tax advisors and trust and estate practitioners, we can help you and your legal advisors to implement tax-efficient structures for vulnerable members of your family. Some of the ways in which we help include:-
Advising on the tax-efficient transfer of assets to family members and vulnerable relatives,
Advising on tax-efficient strategies to minimise exposure to IHT and discretionary trust taxes after death,
Reviewing and updating legal documents including wills,
Provision of professional trustee services, and
Designing and implementing tax-efficient trust and asset protection structures.