A bare trust is a simple and transparent trust arrangement where assets are held in the name of a minor child beneficiary but managed by a trustee until the child reaches a particular, normally 18 or 21. The trustee, who can be a parent, grandparent, or another trusted individual, manages the assets for the benefit of the child. Once the child turns 18, they gain full control over the trust assets.
It is a simple form of trust where the beneficiary has an immediate and absolute right to both the trust property and any income generated from it. In the case of a bare trust, the beneficiary is usually responsible for any tax implications arising from the trust rather than the trustee.
Here are some key points regarding the tax implications of a bare trust in Ireland:
- Income Tax:
- Income generated by the trust assets is typically taxed as income of the beneficiary, not the trustee.
- The beneficiary is responsible for declaring any income received from the trust on their own personal tax return.
- Capital Gains Tax:
- If trust assets are disposed of and a capital gain is made, it is usually the beneficiary who is liable for any Capital Gains Tax (CGT) that may be due.
- The beneficiary must report any gains made on the disposal of trust assets in their own tax return.
- Inheritance Tax:
- Inheritance tax may be a consideration when assets are transferred into a trust or when they are distributed to beneficiaries.
- It’s important to consider the inheritance tax implications at the time of creating the trust and when assets are transferred in or out of the trust.
- Stamp Duty:
- Stamp duty may be applicable on certain transactions involving trust property, such as the transfer of property into or out of the trust.
- The rates and rules for stamp duty can vary depending on the type of asset and the value involved.
- Tax Reporting:
- Beneficiaries of a bare trust should ensure that they understand their tax obligations and report any income or gains correctly to the Irish Revenue Commissioners.
- Keeping accurate records of all income and gains received from the trust is important for tax reporting purposes.
Investment and Growth
Bare trusts can be used to invest in a variety of assets, such as equities, bonds, or property, allowing the trust to grow over time. Parents often choose more aggressive investment strategies due to the long-term horizon until the child reaches 18. This approach can potentially yield higher returns, providing a significant financial foundation for the child.
Limitations
The primary downside of bare trusts is that once the child turns 18, they gain full legal control over the assets. This could be problematic if the beneficiary is not mature enough to manage large sums of money responsibly. Additionally, once assets are placed into a bare trust, they cannot be reclaimed by the settlor.
For more information or to schedule a consultation, please contact Peter O’Connor & Son Solicitors. Let us help you secure your child’s financial future with confidence.
