Discretionary Trust

A discretionary trust is a legal document, which if correctly drafted, creates a legal relationship between the “settlor”, the person setting up the trust, the “Trustees”, the individuals selected to manage the trust, and the “beneficiaries”, the persons for whose benefit the trust was created.

Definition and Structure

Discretionary trusts are more flexible and complex compared to bare trusts. In a discretionary trust, trustees have the discretion to decide how and when the trust assets are distributed among the beneficiaries. This type of trust can include multiple beneficiaries and is often used to manage larger sums of money or assets over a longer period.

The tax implications of a discretionary trust in Ireland can be complex and will depend on various factors. Here are some key points to consider regarding the tax implications of a discretionary trust in Ireland:

Discretionary Trust Tax

Discretionary Trust Tax is payable by the trustees or by an agent acting for the trustees. The following DTT charges apply to trust assets:

1. An initial once-off 6% charge applies to the value of all the assets in the trust.
2. An annual 1% charge applies on 31 December each year to the value of all the assets in the trust on that date.

However, certain types of discretionary trusts are exempt from Discretionary Trust Tax. Trusts are exempt where it can be shown to Revenue’s satisfaction that they are:

• created exclusively for purposes that, in accordance with the law of the State, are public or charitable
• superannuation or unit trusts
• trusts providing for the upkeep of a heritage house or garden or
• trusts for the benefit of persons who are incapable of managing their affairs due to:
  • age or improvidence
  • physical incapacity
  • mental incapacity or
  • legal incapacity.

The following taxes may arise during the course of a Discretionary Trust.

1. Income Tax:
   • Income generated by the trust assets is typically taxed at the standard rate of income tax, currently 20% for discretionary trusts.
   • The trustees are responsible for paying income tax on income generated by the trust assets.
2. Capital Gains Tax:
   • Capital gains made on the disposal of trust assets are usually subject to Capital Gains Tax (CGT) at the prevailing rate.
   • Trustees are responsible for reporting and paying any CGT due on gains made by the trust.
3. Inheritance Tax:
   • Inheritance tax may be applicable when assets are transferred into a discretionary trust, as well as when assets 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 or distributed.
4. 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.
5. Tax Reporting:
   • Trustees of a discretionary trust must keep accurate records of the trust’s income, gains, and distributions.
   • Trustees are responsible for filing annual tax returns for the trust and ensuring that any tax liabilities are paid on time.

Advantages

Discretionary trusts provide greater control over the trust assets, even after the beneficiaries reach adulthood. This can be beneficial if there are concerns about the beneficiary’s ability to manage the assets. The trustees can make decisions based on the needs and circumstances of the beneficiaries, providing a safety net for unforeseen situations like divorce or financial difficulties

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