Discretionary Trust Tax

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Fergal

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Hi, I am acting as executor for my late sister and not long after probate was granted, I received a letter from Revenue, Athy stating that 6% DTT is payable when the youngest child reaches the age of 21. I was surprised because the amounts involved are significantly less than the inheritance tax threshold but I understand now that in some cases, a DT can reduce inheritance tax. My understanding is that my late sister wanted money to be kept in trust until they are mature enough to spend it wisely.

Q1: Is the initial 6% DTT charge based on the initial value of the trust OR is it based on the value of the remainder of the Trust when the youngest child reaches 21. If the latter, then with 3 children, the amount remaining in the trust will be a small fraction of the initial value.

Q2: Could I avoid the 6% fee by closing the trust BEFORE the youngest child reaches the age of 21.

Q3: Is this a Discretionary Trust given that the will says the each child should receive an equal share? Full text below.

Extract from the will

"All the rest remainder of my estate of every nature and description and wheresoever situate I give devise and bequeath to my children in equal shares with such shares of my estate to be held by my trustees on trust to pay or apply the whole or any part or parts of that share and any income arising from it towards the educational, welfare, medical and maintenance costs of such beneficiary in such amounts and at such times and in such manner generally as my Trustees in their discretion shall think fit until such beneficiaries shall have attained the age of twenty four years and to vest what remains of the capital and accrued income of that share of my estate to that beneficiary after reaching the age of 24. If any beneficiary shall die before reaching the age of twenty four and before their share shall be vested in them then the remaining balance of that share shall pass to their brothers (in equal shares if more than one) and if at that date such are still under twenty four this share shall form part of the trusts under which their benefit is held, to be distributed to them on reaching twenty four."

i.e. the trustee has discretion to advance the payment of a child's share before they reach 24 for education, etc. However the trustee has no discretion regarding the total amount that each child is due.


Extract from [broken link removed]

"The distinguishing feature of a discretionary trust compared to a strict settlement is that, neither any one of the objects of the trust in whose favour the discretion might be exercised, nor the class of beneficiaries as a whole, is entitled, as of right, to any capital or income of the trust, except when the trustees appoint property out to them. Each object of the trust has merely a hope or expectation that the trustees may exercise their discretion in his or her favour."
 
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Thanks Gabby, so the answer to Q2 is that no payment will be due if the DT is fully appropriated before the youngest reaches the age of 21.

I'll go back to revenue to argue Q3: That this is not a Discretionary Trust because the children can expect to receive equal portions ... I'll post again with the result.
 
Coming back to this post as the youngest is approaching the age of 21 ...

Re Q2: I suspect that Gabby was not aware of changes in 2012 where Revenue now take the view that the 'initial levy' begins on the date of death of the disponer rather than the date that the youngest reaches 21. See https://www.revenue.ie/en/tax-professionals/tdm/capital-acquisitions-tax/cat-part05.pdf which suggests that the date that the youngest reaches 21 is just the date that the 6% becomes payable (+ fines if later than 4 months)

Re Q3: Revenue replied to say that 'There are two definitions of a discretionary trust - the legal definition and the tax definition. What is described in the Revenue manual is akin to the legal definition while the tax definition is as set out in Section 2 of the Capital Acquisitions Tax Consolidation Act, 2003 and this includes a trust where the trustees have power to pay or apply income or capital for the benefit of even one beneficiary as they see fit'

In summary, it seems that
  • the 6% must be paid no later than the date that the youngest reaches 21 + 4 months
  • the 6% initial levy applied to the value at the date of death (even though the value of the trust was not known until some time after). Therefore the liability cannot be reduced by paying out before the youngest reaches 21
  • a death-in-service benefit must be included in the 6% initial levy even though it was not mentioned in the will
  • I could have reduced the 6% tax to 3% if I had wound up the trust less than 5 years after date-of-death (but that would have been contrary to the wishes of the will)

IMHO, this is all very harsh considering the trust is much less than the 400K inheritance tax allowance. Given that the 6% levy amounts to 4K, can anyone give their own opinion or advise if it is worth getting an opinion from a tax specialist?
 
Update: I got professional advice and despite the changes in 2012, the second point above is incorrect (Gabby was correct after all)
- if the trust is closed before the youngest beneficiary reaches 21 then no DTT is payable and form IT4 does not need to be returned
- DTT is only payable on the amount that exists in the trust on the date the youngest reaches 21. This DTT is further reduced to 3% if closed 5 years after the date the youngest reaches 21.

In hindsight, after spending at least 10 hours reading revenue and eventually legal Acts, wading through nuances like whether the trust was created before or after death, this task has to be delegated to a tax professional. The tax rules change over time (see 2012 ref above) and the trustee is forever liable for any mistakes.
 
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