Bare trusts can make a real difference to the lives of those we love and wish to provide for. Here we break down what bare trusts are and how they are managed …
What is a bare trust?
A bare trust is a type of trust that allows money to be paid by into a fund managed by a trustee (often parents and grandparents) on behalf of the beneficiary of the trust (usually the trustee’s children).
Why might you need one?
Bare trusts are usually used for a future life event like third level education fees or a down payment on a house when the beneficiary comes of age. Given the rising cost of education and eye-watering inflation, a bare trust can act as a great safety net for the little ones in your life, without adding to their future tax bill.
Unlike some trusts, a bare trust cannot be revoked. Once monies are paid into the trust, the beneficiary is entitled to the assets, without any conditions. A transfer of money into the trust cannot be reversed. Even if the beneficiary turns out to a mini-Voldemort, they will still be getting the funds!
How does it work?
Under Irish tax legislation, any person can gift another person up to €3,000 in a calendar year without a gift tax liability arising for the recipient, referred to as the Small Gift Exemption. For minors, each parent can contribute a maximum of €3,000 annually and the beneficiary will not owe any gift tax on the money. For tax purposes, this amount is also treated separately from a child’s lifetime inheritance allowance of €335,000.
As the trust is operating over a decade or more, and the amounts invested are relatively small, guardians are usually happy to entertain a higher degree of risk in order to help grow the trust.
Parents (or a guardian) set up the trust and can make contributions of €250 each per month or less if they wish. They act in the role of “settlors” of the trust, and they are responsible for managing and controlling the funds until these are released to the beneficiary at a date in the future. Grandparents or anyone else can also make regular or sporadic contributions to the trust for birthdays and other milestones, keeping in mind the €3,000 Small Gift Exemption limit.
What degree of risk is involved?
As the trust is operating over a decade or more, and the amounts invested are relatively small, guardians are usually happy to entertain a higher degree of risk in order to help grow the trust. They might opt for a higher allocation to equities (stocks) over bonds or even invest 100% of the trust in equity funds. Goodbody wealth managers work with guardians to make sure clear objectives are met, taking account of contributions and the degree of risk that trustees are comfortable with.
Case Study Example
Goodbody clients Ronan and Niamh have made contributions of €250 each per month to their son Conor’s bare trust since he was three. He is now 18, so the contributions have amounted to €6,000 per annum for 15 years. Conor’s grandparents, aunts, and uncles have also made occasional contributions to the fund. This provides Conor with a trust worth over €100,000. You may now be wishing Ronan and Niamh were your parents instead.
When does the beneficiary obtain access to the trust? Can the trustee retain some control over the use of trust funds?
The investment is held in the name of the beneficiary until they are 18 years old, unless otherwise specified. Once the funds are released, trustees have no control over what the money is used for. However, most parents are reluctant to give a meaningful sum of money to their teenage children without financial education. Young Conor might be more interested in sports cars rather than his future, but at Goodbody, we regularly engage with the children of our clients to ensure that the money accrued is devoted to a long-term and fruitful goal, for example, college fees or a deposit for a house.
Getting started
Putting aside money for those who will need it later is always a good idea and bare trusts offer an opportunity to do this efficiently. Reach out to sandra.manning@goodbody.ie to learn more about how to get started.