Saving for your children with a trust fund
Planning for your children's future is a priority for most parents. This may involve saving to fund education, to purchase a first home or simply to accumulate a nest egg with no defined purpose. Whatever your motivation, if you are putting money aside for your children it is worth doing a little planning to optimise the value you pass and avoid unintentionally accruing a tax bill or diminishing future flexibility. By making appropriate use of certain exemptions and structures you can mitigate or eliminate these risks.
Key considerations in saving for your children should include:
Preserving the spending power value of your savings over time
The broader value of your estate
You capacity to save
Health issues affecting you or your child
Choosing an appropriate structure will address many of the above issues. In the case of ill health or where a child may require ongoing support, it will be possible to avail of additional reliefs and exemptions; detailed consideration should be given to long term planning. This page does not consider details in this regard however, we would be happy to assist should you require advice.
Financial Education & Controls
Many parents have concerns about their child when they become young adult having access to considerable sums of money. In planning with our clients, we often assist in providing strategy by which a saving plan can be used as a means of providing a basis through which to educate their children about long term savings and investment but also how to manage money more generally. This can be a powerful way of establishing good financial habits that they will benefit from in later life. We also tend to encourage the use of simple rules and incentives to encourage ongoing good behaviour once the child has become a young adult. Ultimately, as life evolves and your child finds their way in the world, parents concerns about financial prudence tend to diminish.
While your child is under 18 you will retain full control of how their funds are invested. However, once your child reaches their 18th birthday, they will be able to access the funds you have accumulated for the. Hence it is important to set parameters at an early stage that are understood so as your objectives are met. Once again, appropriate education and soft rules tend to be the solution.
Generally when one person gifts money to another this will give rise to a Capital Acquisition Tax (CAT) charge. CAT is a tax payable by a person receiving a gift or inheritance. For the purpose of CAT people are grouped into classes dependant on their relationship with the person from whom they receive money. Generally, the closer the relationship the greater the exemption.
More information can be found at https://www.revenue.ie/en/gains-gifts-and-inheritance/cat-thresholds-rates-and-aggregation-rules/cat-thresholds.aspx . Currently a parent can gift or leave an inheritance to a child of €335,000 free from the charge of CAT however, in most instances this limit is best preserved especially where the ultimate value of an estate is likely to exceed these limits.
Whilst these limits can come into your planning, we would suggest that you first consider taking advantage an exemption known as the “Small Gifts Exemption”. This is a particularly useful exemption which allows a gift of €3,000 per annum to be gifted annually without CAT being chargeable or the above thresholds being impacted. Where there are two parents, involved, this limit can be used for each making it possible to pass up to €6,000 per year to each child tax free.
Tax is chargeable on interest or investment gains made on your savings or investments. This will most commonly be in the form of DIRT tax or Exit tax which is levied on gains at rate of 35% (in 2019 reducing to 33% in 2020) and 41% respectively.
By using a trust structure it is possible to pass money from your beneficial ownership to that of the child. A trust will defensibly facilitate moving money out of your name and ultimately to that of your child despite their being a minor. Should you avail of the small gift exemption, this exemption must be used annually and can not be carried forward hence the imperative to move funds out of your name to preserve threshold limits. By way of an example, if you were to start saving when you child was 1 year old at the maximum limit of €6,000 per year with the child receiving the benefit of you efforts at age 18, in very simple terms you would have accumulated €102,000 (no cost, possible interest or investment growth are considered here). In passing this over you would decrease the available limit on inheritance from €335,000 to €233,000. Had your savings efforts been channeled through a trust, the available limit would remain at the maximum €335,000.
You will maintain control of investment choice.
Let’s take an example of €3,000 contributed to the trust each year for 15 years for the benefit of a grand-child with an annualised investment growth rate of 6% per year being achieved. This would amount to an accumulated fund of €74,000 which would pass tax free and without affecting the life-long thresholds. It would therefore be possible for the grandparent to leave an additional €30,150 to the grandchild within their estate without this amount being subject to CAT. Had the original money simply been accumulated by the grand-parent to be bequeathed upon their death the figures would look like this. €74,000 to be bequeathed less CAT exempt limit of €30,150 = €43,850. Taxed at 33% = €14,615. Total received by beneficiary €59,385 as opposed to €74,000 and there would be no remaining scope to gift tax free.
It will also be important to consider how you invest your money. Generally for younger children it is advisable to take on a slightly higher level of investment risk then you may ordinarily consider. This is primarily on account of the duration of the investment. However, what constitutes an appropriate investment depends entirely on your personal circumstances, preferences and risk tolerances. We individually access all clients in advance of making specific investment recommendations.
Where large sums are involved a bespoke trust may be established. However, where smaller sums such as those considered here are used, it is possible to use an off the shelf solution. This will generally be provided alongside an investment product provided by a life insurance office. Typically there will be a small upfront cost in establishing your savings plan. You can expect this to be in the region on €500 however where multiple children are involved the unit cost in this regard will decrease. On an ongoing basis you can expect to pay between 1% and 1.5% by way of an annual management charge, this will cover the cost of ongoing advice, investment management, accountancy reporting and the administration of your investment.
Setting up your plan
Setting up your plan requires completing a set of proposal documents. This is a relatively straightforward process and contributions can be made on a monthly, quarterly or annual basis. Whilst this page considers contributions at the limit of the Small Gift Exemption, we can facilitate from as little as €125 per month. If you wish to pass a large amount, we can assist in formulating an efficient plan to do so.
Using a Small Gift Exemption and a bare trust structure offers the following key advantages:
Allows parents to pass between €3,000 and €6,000 per year without CAT or Thresholds being effected
Allows for investment growth on beneficiaries side hence reducing potential tax charge
As trustee, you keep control of investment
Flexible, you choose when and how much to contribute
At SMP Financial, we have considerable experience in advising clients on savings for their children's future.
To discuss childrens savings and trusts please enquire through the form below or email email@example.com