Life Insurance Association (LIA)

and IRISH TAXATION INSTITUTE (ITI) 

JOINT ANNUAL CONFERENCE

 

 

 

 

ASSET PROTECTION

AND

SUCCESSION PLANNING

 

 

 

 

 

 

 

 

 

29 – 31 May 2012

Aileen Keogan

Solicitor & Tax Consultant

www.aileenkeogan.ie

 

© 2012 Aileen Keogan All rights reserved.

 

1  Introduction

 

Succession planning and asset protection traditionally have gone hand in hand. Assets were built up by a person who then became concerned to maintain those assets and pass them on tax efficiently to the next generation. In recent years, inevitably the matter of asset protection has become a synonym for creditor protection, whether it be protection from the creditor of the parent who has built up the assets over the years or protection from the creditor of the child about to inherit.

 

In referring to an ‘asset protection structure’ in this paper, generally this includes the traditional discretionary trust format and/or the protective trust format but also any simple transfer to another party, such as a spouse or child, with a view to putting the asset out of the reach of persons seeking the asset from the transferor.

 

2  Timing issues

 

The question of when an asset protection structure is set up and transfers made into it is crucial in determining whether the structure and/or transfers into it can withstand challenge. Where structures have been created and managed over a considerable time, the subsequent insolvency of the creditor of the structure is less likely to affect the validity of that structure in contrast to those set up shortly before a challenge is taken.

 

In the run up to Ireland’s economic woes, there appeared to be a flurry of transfers out of the names of persons who had built up large debts into names of their spouses, children and trusts. To a certain extent, those who had set aside assets out of their names effectively before any indications of economic difficulties might consider themselves to be ‘home and dry’ provided they were not seen to enjoy those assets as if the structures did not exist. However anecdotally and through the NAMA legislation, we are seeing that even those assets are still being considered by the banks as ‘part of the pot’ in negotiations. Transfers made after the collapse of Lehman Brothers and the granting of the bank guarantee in Ireland (September 2008), if not already, may yet be challenged. It is clear from the newspaper reports that there has been unwinding of transfers made in those times.

 

Clients may still enquire about transferring assets now. However, if they are ‘remaining solvent’ by servicing their borrowings on an ‘interest only’ basis, whether such transfers can ever hold up is highly questionable. As advisers, we need to take care to ensure that a client is not brought down a route which will be costly in setting up a structure yet where such structure will not hold up to reasonable challenge, quite apart from reputational issues that may arise.

 

The question of solvency is determined at given points in time under Irish creditor protection legislation. Timing can also be a factor in inferring a particular intention bearing in mind the economic climate (macro and micro) when the structure is set up. If at a particular time there is no obvious reason for transferring other than to avoid creditors, the creditor protection legislation in Ireland is relevant. Finally the question of solvency is dependant on valuations where there is no actual sale and we are very aware in this uncertain market that the timing of a valuation is crucial.

 

The insolvency procedures limit an individual’s ability to deal with his assets prior and during the insolvency procedure. The creditor usually claims against the assets by stating either that:

 

• the settlor retains a beneficial interest capable of being taken in the execution of the judgment (a ‘sham trust’ argument); or
• the transaction creating the trust is liable to be set aside in whole or in part as either a fraud on the creditors or made within a particular time frame that it can be set aside and thus the assets can be taken to satisfy judgment in the creditor’s favour.

 

The following can assist the creditor in making such a claim:

• General law of sham
• Bankruptcy Act 1988
• Land & Conveyancing Law Reform Act 2009
• NAMA Act 2009

 

On the other hand the impending new reforms to the insolvency rules as outlined in the Personal Insolvency Draft Bill 2012 might give some relief to the debtor.

 

2.1 General Law of Sham

 

Where a trust is created so that the person who owns the assets (the ‘settlor’) transfers the assets to another person (the ‘trustee’) for the trustee to hold the assets solely for the benefit of the settlor, a bare trust or nomineeship is created. Despite the fact that the legal ownership of the assets is transferred out of the settlor’s name, creditors of the settlor could still look to these assets as they are held by the trustee beneficially for the settlor.  Therefore the transfer of the assets to a bare trust is not an effective method of asset protection. 

 

In many cases, it is not obvious on the face of the document that the trust is a bare trust.  If a trust is created that appears to be one of substance and is not a bare trust but discretionary but subsequently it is held that the trust form is a sham, it becomes a bare trust as, while the legal ownership is held by the trustees, the equitable ownership and control remains in the settlor. The crucial question to ask is whether the form of the trust instrument is such that the settlor retains equitable ownership in the capital so that the trustees hold the capital to his order without the settlor having to do something positive. If the trust is a sham, apparently having legal effect but not really intended by the parties to have any legal effect (the settlor having real control of the trust fund), then the trust is ineffective except in the nomineeship/bare trusteeship sense as the whole equitable ownership remains in the settlor.

 

The case of Rahman -v- Chase Bank (CI) Trust Company Limited [1] was a case where the trust was determined to be a sham. If the trust instrument, such as the one in Rahman, provides for many rights and powers to remain with the settlor then the easier it is for the trustees to let the settlor run the trust and the easier it becomes to attack the trust as a sham. If the transaction is shown to be a sham then the assets are treated as continuing to belong to the settlor and those assets can be taken to satisfy any creditor’s judgment.

 

The difficulty for clients is that the client as settlor typically wants to keep control of his assets, particularly where the assets being transferred to the trust are business assets. It is therefore important that the client and indeed the trustees are all made aware of the dangers of the sham argument and that they ensure that sufficient control is handed over to the trustees. Over compliant trustees and a demanding settlor is the ‘Achilles heel’ to an effective discretionary trust.

 

If the truth is that the property continues to belong to the settlor and the transaction of creating the trust is merely a smoke screen, it is open to challenge.

 

2.2 Bankruptcy Act 1988

 

Section 59 Bankruptcy Act 1988 provides that if the transferor of assets at an undervalue becomes unable to meet his debts as they fall due within 2 years of the transfer, the transfer can be set aside without any proof required by the creditor or the Official Assignee as to solvency at that time.  Therefore if a person is fully solvent now and transfers assets into a trust but becomes insolvent within two years of that transfer, the transfer can be set aside. If the transfer is made bona fide for full consideration (a bona fide purchaser for value without notice) however, the transfer is protected.

 

If the transferor of assets at an undervalue becomes unable to meet his debts as they fall due within 3 to 5 years of the transfer, the transfer can be set aside unless the transferor (or the transferee on his behalf) proves that the transferor was in fact able to meet his debts without recourse to the property transferred at the time of the transfer.

 

These provisions apply to any transfers made at an undervalue, i.e. by way of gift or partial gift, unless made before and in consideration of marriage, in which case separate provisions apply.  Where consideration is paid, the courts do not strike down the transaction if the consideration is not fully equivalent in value to what has been transferred provided the transfer has been made in good faith. If however the court finds that the consideration received bears little resemblance to the value transferred, the court will likely strike it down.

 

 

The legal practice to provide good title to the assets transferred is that the client swears a declaration of solvency stating that he is solvent without recourse to the assets proposed to be transferred.   However in addition it would appear sensible for the client to back up that declaration with a statement of net worth that has been prepared and analysed critically by professionals.  While this would not protect the transfer until the 2 year cut off period has passed (during which time, if the client becomes insolvent the transfer can be declared void whether or not the client was without doubt solvent at the time of the transfer), it will assist the transferee to resist a claim made if the client becomes bankrupt within 5 years of the transfer (but after the 2 years have passed). This can protect the transferor from the creditor arguing successfully that much lower values should have been applied as the creditor has the benefit of hindsight in a falling market.

 

There is no requirement for an Official Assignee to prove a fraudulent intention in these cases.  If the bankruptcy occurs within 2 years, no proof is necessary regarding fraud or solvency.  If the bankruptcy occurs within 3 to 5 years, the only proof required is that the settlor could not pay his debts at the date of the transfer without recourse to the property transferred.

 

2.3 S 74 Land & Conveyancing Law Reform Act 2009

 

Where there is a conveyance of property made to a third party with the intent to delay, hinder or defraud creditors and others of their just and lawful debts, rights and remedies, such a conveyance is voidable by any person prejudiced unless the conveyance is bona fide for full consideration to a person not having notice or knowledge of the intended fraud. 

 

There is no time limit on this provision. In this case the intent to defraud must be proved by the creditor. It is not essential to prove that the transferor of the property is insolvent at the time of the transfer although a fraudulent intention is more readily proved if he is in fact insolvent.

 

A fraudulent conveyance is in itself an act of bankruptcy and a creditor can within 3 months of the conveyance bring a petition for bankruptcy against the transferor on the basis of that fraudulent conveyance.

 

Again the bona fide purchaser for value without notice of the fraudulent intention is protected under this legislation and so any transfer to such a person cannot be unwound. The consideration need not be adequate consideration but the purchaser must not be privy to the intention of the vendor.

 

Proving fraud is a matter of proving that the transferor had the intention to prejudice his creditors by putting the asset beyond their reach, i.e. that he was not acting honestly in the context of his relationship as debtor to each creditor. It is therefore quite far reaching and does not have to be obvious – it can be inferred by the court.

 

A number of factors may lead a court to such a conclusion such as:

 

• if the debtor disposes of all or virtually all of his property;
• where, after transferring the property, the property remains in the debtor’s possession;
• where the transferor retains an interest in the transferred property;
• where the debtor retains a right to get the property back;
• where the transferor and transferee are closely related;
• how close in time the transfer is made to the creditor seeking to enforce judgement;
• where the consideration is inadequate.

 

2.4 National Asset Management Agency Act2009

The National Asset Management Agency Act 2009 (the NAMA Act) was passed into law on 22 November 2009 and came into operation on 21 December 2009.

The principles of the NAMA legislation were heavily ‘flagged’ for some months prior to publication. Many properties are rumored to have been transferred into asset protection structures during that transition time. It is understood that properties that had been transferred by debtors whose loans have been transferred to NAMA are now being included in revised business plans submitted to NAMA after discussions with NAMA. The power of NAMA in negotiating this would arise from Section 211 of the Act which is as follows:-

 

1. “Where, on the application of NAMA or a NAMA group entity, it is shown to the satisfaction of the Court that
2. an asset of a debtor or associated debtor, guarantor or surety was disposed of, and
3. the effect of the disposition was to defeat, delay or hinder the acquisition by NAMA or a NAMA group entity of an eligible bank asset, or to impair the value of an eligible bank asset or any rights (including a right to damages or any other remedy, a right to enforce a judgment and a priority) that NAMA or the NAMA group entity would have acquired or increased a liability or obligation but for that disposition,

the Court may declare the disposition to be void if in the Court’s opinion it is just and equitable to do so.

 

1. In deciding whether it is just and equitable to make a declaration under subsection (1), the Court shall have regard to the rights of any person who has in good faith and for value acquired an interest in the asset the subject of the disposition.
2. Nothing in this section affects the operation of section 14 of the Conveyancing Act 1634 or section 74(4)(a) of the Land and Conveyancing Law Reform Act 2009.”

 

Therefore the matter of timing and/or intention, as mentioned above as issues for non NAMA creditors, is not relevant here. In addition to such other protections, NAMA can request the Court to unwind a transfer by assessing the effect of that transfer rather than the intention as to its effect. There is no time limit as to when the transfer has taken place.

 

2.5 Personal Insolvency Bill 2012 – Draft Heads

On 25 January 2012 the Government approved and published the heads of the proposed Personal Insolvency Bill. 

This draft Bill proposes the introduction of three non-judicial debt settlement arrangements and a reform of the existing bankruptcy regime. The new arrangements will allow for the write down or restructuring of both secured and unsecured debt owed by certain eligible individuals.

 

The Draft Bill provides for three separate non-judicial debt settlement arrangements designed to offer an alternative to bankruptcy namely

• Debt Relief Certificates ("DRC") in respect of unsecured debt up to €20,000;
• Debt Settlement Agreements ("DSA") in respect of unsecured debt above €20,000; and
• Personal Insolvency Arrangements ("PIA") in respect of secured and unsecured debt between €20,001 and €3,000,000. 

The existing Bankruptcy procedures would also be changed including the reduction of the period of discharge from 12 to 3 years.

 

The Bill itself was due to be published at the end of April but this has now been pushed back to end June 2012.

 

In the case of a PIA, which is likely to be mostly relevant for clients considering asset protection, the Heads of the Bill make reference to a clawback of transfers made within 2 years of the application. However it is already clear that the wording on this area will likely be tightened up before the legislation is enacted and in force.

 

The PIA would allow a person to pay off on a reasonable basis (reasonable determined by a personal insolvency trustee appointed for that purpose (akin to an Official Assignee in Bankruptcy but who formulates the proposal on the pay down of the debt and write off of part) and with the general consent of the creditors) debt over a 6 year period at a maximum, allowing secured debtors the right to be repaid at a minimum the amount of their loan or the value of the property on which the loan is secured (whichever is the lower). Therefore in theory if a loan of say €1,000,000 was secured on property that only realises €600,000 on a sale, the lender would have to accept the €600,000 in full and final settlement. This is the principle behind the legislation but there will be a lot of checks and balances to get to that point, e.g. the consent of a certain percentage of secured versus unsecured creditors will be required (the details of which are still not clear).

 

An interesting aspect of the Heads of the Bill is the provision in relation to the protection of the family home and the business of the debtor. There is reference to a duty on the trustee in his proposal to the creditors that assets reasonably required for the debtor’s business or employment should not be sold, nor should the family home be sold or provision made whereby the debtor must cease to occupy the family home. There are caveats if the costs of remaining in occupation are in the opinion of the trustee disproportionately large relative to the debtor’s income and other financial circumstances and the reasonable accommodation needs of the debtor and his family.

 

The Heads of Bill envisages that the debtor will only be entitled to enter into a PIA once in a lifetime and only if it is unforeseeable that he can become solvent without a PIA within 5 years.

 

In the overall, to apply for a PIA, the debtor must show good faith at all times and submit what will be known as a Standard Financial Statement for the purposes of assessing his financial position. Regulations will need to be published on this aspect and the matter of assets transferred out of the name of the debtor within a certain time period will likely be relevant here.

 

 

3 How assets are protected

 

There are different approaches to the way a person may wish to protect assets, ranging from the simple to very complicated.

 

3.1 Incorporation

 

Where a person incorporates his business into a limited liability company, he is protecting his personal assets from being attacked in the case of any insolvency of the business.  The company becomes a separate legal entity from its members/shareholders so that creditors of that company cannot attack the assets of the owner of the company to recover debts owed to them to the extent that the shareholder has fully paid up the shares in the company. 

 

Incorporation is highly recommended for businesses that may be subjected to claims against them in respect of the products of that company or by its own employees e.g. construction companies are vulnerable to claims against them by purchasers of houses in respect of a fault in the building of its houses and by its employees in the event of accidents on the worksite. 

 

There are however limitations to the benefit of incorporation such as the following:-

• In cases where the company takes out borrowings for the business, usually the bank may require a personal guarantee from the directors/ shareholders of the company thus defeating the benefit of the limited liability status in respect of those borrowings. 
• Many professional trades are not permitted by virtue of their governing bodies to incorporate in a limited liability fashion, e.g. solicitors, doctors, architects, accountants.
• Where the courts or the legislature permits the lifting of the corporate veil. A company is a distinct legal entity separate from its members.  A veil therefore separates the company from its members from the date of incorporation.  However, the courts and the legislature in certain instances (e.g. in the case of reckless trading) can lift the corporate veil and look through the separate legal entity of the company to its shareholders.  If this happens, individual members can be held liable for the debts of the company itself.

 

The effect of incorporation is therefore limited from a pure asset protection point of view.

 

The transfer of ‘healthy’ assets into a limited company will not protect those assets from an attack by the creditors of the shareholder.  If the shareholder himself is likely to become insolvent, the transfer of his assets in advance of insolvency into a corporate structure will not protect those assets from claims by his creditors.  The shares of the bankrupt shareholder (and therefore the value of the company and the assets within that company) are available to the Official Assignee in Bankruptcy.

 

On the other hand, if the company turns out to have bad debts and needs to be wound up, the debts of the company will not generally affect the solvency status of the shareholder other than that he no longer holds any value in the shares.

 

Similar principles can arise for limited partners in a Limited Partnership.

 

3.2 Nomineeship or Bare Trust

 

As outlined at paragraph 2.1 above, the creation of a bare or absolute trust where a person holds as nominee assets for another provides no protection from an asset protection perspective. A creditor is entitled to insist on the legal owner of the asset dealing with the asset as if it were that of the debtor’s himself. Therefore this is not an asset protection structure.

 

Indeed where a creditor has successfully challenged a transfer to a discretionary trust or another person, the trustees or other person holding the asset is then deemed as a consequence to hold the asset on bare/resulting trust for the debtor.

 

3.3 Life Interest or other Interest in Possession Trust

 

Where a trust is created so that the person who owns the assets (the ‘settlor’) transfers the assets to another person (the ‘trustee’) for the trustee to hold the assets solely for the benefit of the settlor for his lifetime and for the assets to pass on the settlor’s death a certain way (e.g. to the spouse or children of the settlor), a life interest trust is created.  This is a form of an interest in possession trust, other forms being trusts in favour of a person for a period shorter than the life of the beneficiary involved.

 

The effect of such trusts is that the beneficiary of the interest in possession has the right to receive the income of the trust.  Therefore, if such beneficiary were to become bankrupt, his creditors could require the trustees of the trust to pay that income to them to meet the debts incurred by the beneficiary. 

 

Therefore the transfer of a client’s assets into a life interest trust or other interest in possession trust will not give any protection to the income arising out of such assets and will not protect the assets from being converted into income producing assets, which income can be taken by the client’s creditors to meet debts. Nevertheless it should protect the capital transferred subject still to the rules regarding insolvency fraud etc as outlined above.

 

 

3.4 Protective trust

 

The protective trust originated in Dickensian times as a trust whereby the benefactor sought to ensure that his dependant received a living from a trust through a life interest but, concerned that the dependant might seek to borrow against the promise of the income and squander the capital borrowed, the trust would automatically convert to deprive him of the interest in the trust on certain acts arising so that the beneficiary would not be guaranteed anything into the future (and so his creditors could not claim that interest from him).  While it is still suitable for the improvident and the profligate, in more modern times with adjustments it has also become more fashionable for the risk taking entrepreneur.

 

A protective trust in modern times is a combination of a life interest and a discretionary trust.  It is a trust which provides that the beneficiary, who may become vulnerable to creditor claims, receives all the income from the trust fund during his lifetime but, if certain acts occur or if the beneficiary himself commits any act which would, if he were entitled absolutely to the trust fund, have the effect of depriving him of it, his interest as a beneficiary would cease and determine immediately. In such a case, instead of the trustees holding the trust fund for the beneficiary for his lifetime, they would automatically hold the trust fund on discretionary trusts for a class of beneficiaries including the original beneficiary, his spouse and children and other extended family members if so desired.  The discretionary trust would continue for the balance of the lifetime of the original beneficiary and if required could automatically cease on the death of that beneficiary to pass on death to specific persons e.g. to his spouse and/or children.

 

The effect of this is that the funds would still be available to the beneficiary through payments to his family or on a discretionary basis to discharge outgoings actually incurred by him, yet he would not be automatically entitled to the assets in the event his creditors sought to recover from them.

 

 

3.5 Discretionary trust

 

A discretionary trust provides that trustees hold the trust fund on discretionary trusts for a class of beneficiaries including the ‘intended’ beneficiary, his spouse and children and other extended family members if so desired.  The trustees are usually guided by a letter of wishes written by the settlor regarding how they might exercise their discretion.  This letter is not legally binging on the trustees. The discretionary trust could continue for the lifetime of the ‘intended’ beneficiary and if required could automatically cease on the death of that beneficiary to pass on death to specific persons e.g. to his spouse and/or children.  The advantage to this trust over the protective trust is that the automatic change in status of the trust from a life interest trust to a discretionary trust would trigger capital gains tax (as outlined below) but if the trust is always discretionary such tax would not arise on the beneficiary becoming bankrupt. 

 

It has become a trend that on the creation of discretionary trusts for the purposes of protecting assets further obstacles are put in place against attack such as through the creation of blind trusts and/or locating such trusts offshore.

 

3.5.1 Blind Trust

 

To be valid a trust must have certain ascertainable beneficiaries.  In many instances a trust is set up whereby the beneficiary is a charity, such as the Red Cross, and the trust is held for exclusively charitable purposes or such exclusively charitable purposes as the trustees may select from time to time. There is then power to add anyone in the world to the class of beneficiaries or a power to appoint to anyone in the world which power is to be restricted to persons nominated in writing by either the settlor, the protector or existing beneficiaries.  This is done often for perception purposes, given that it would on the face of the trust appear that the settlor is not a beneficiary of the trust and therefore his creditors are less likely to seek to attack the trust. 

 

The trustees will be subject to the rules regarding accountability which means that each beneficiary needs to know that he is a beneficiary so he can bring the trustees to account if necessary.  Therefore in a discretionary trust where the Red Cross are named as the charitable beneficiary, the Red Cross would need to be informed that they are the potential beneficiaries.  Indeed as charities are becoming more active in asserting their rights under trusts, this has lessened the attractiveness of these trusts.

 

3.5.2 Offshore Asset Protection Trust

 

Frequently the asset protection trust is created offshore where the trustees, the governing law and the situs of the assets are all out of the jurisdiction where the settlor carries on or has carried on his business. It is not necessary for this to happen, however the offshore element is usually included so as to provide further obstacles to attack. 

 

The offshore asset protection trust (‘offshore APT’) is designed to side step the insolvency law, the succession law and the matrimonial law of the jurisdiction local to the settlor. However it is not usually designed to be tax efficient.

 

Another typical feature of an offshore APT is that the settlor remains very much the principal beneficiary, if not the only beneficiary, during his lifetime.  He may have a life interest or other interest in possession limited to come to an end in certain circumstances (such as bankruptcy) i.e. as a protective trust, but the settlor will occupy a particular role in the control of the assets in question.  This is the great attraction of the offshore APT for the settlor but can also be its downfall.

 

While the offshore element of the APT seeks to cause an obstacle to the creditor enforcing the judgment or the relative making the claim, it is not necessarily an insurmountable one. The Brussels Conventions[2] and general private international law can facilitate the creditor considerably in enforcing his claim if the creditor obtains a judgement in one of the EU states and the offshore APT is located in another EU state.  Because of this, typically offshore APTs are located outside of the EU however this can introduce further taxation downsides.

 

There is also the possibility that specific provision can be made whereby the situs of the offshore APT would move jurisdiction.  In such cases clauses known as “flee clauses” allow for a trigger event asa technique in asset protection planning where the trustees do not move but the assets within the APT do, leaving one trust and joining another. 

 

Quite apart from the cost involved in going to such extremes in resisting creditors enforcing judgements against the trust in various jurisdictions, the downside to this approach is that on the transfer of the trust to another jurisdiction the trust may not comply with the laws of that jurisdiction.  If the trust is defeated by provisions within the legislation of that jurisdiction, the result may be that that jurisdiction would decide that the trustees hold the assets on resulting trust for the settlor himself thus unwinding the protection.  This also ignores the significant local tax implications that could arise on a trust exiting one jurisdiction and entering another.

 

Such provisions however will only protect the trustee in the trustee’s home jurisdiction. If he or the assets of the offshore APT should stray outside of that offshore nirvana or if the trustee himself holds assets in other countries, the trustee may find himself subject to legal proceedings, judgments and orders under a more creditor friendly jurisdiction. Therefore if the assets consist of Irish situate property and this property is transferred into an APT created in Belize, the creditors can still attack the assets in Ireland even though the Belize law does not recognise the attack on the trust itself. The trustee therefore needs to bear in mind that the trust can be subject to claims within its home jurisdiction and more significantly claims within any jurisdiction where the trust assets are located.

 

 

3.6 Transfer to spouse

 

The simplest and most tax effective way of protecting assets is to transfer them to a spouse, provided of course the client is comfortable with the spouse owning the assets solely going forward.

 

The complexities arising from this approach would be

 

• What types of assets are most suitable for transferring?  It would be sensible to transfer only assets that have no borrowings secured against them;
• Would the spouse also be vulnerable to being made a bankrupt?  If the spouse is also in a business that is exposed to claims, are the assets moving from the proverbial ‘frying pan into the fire’?;
• If assets that are currently free of borrowings are transferred to the spouse, will these need to be used by the spouse to earn a living for the family and, if so, will the spouse have to enter into borrowings in her own right?  There is a dilemma if a good trading asset is transferred to the spouse but later that trade needs finance and the spouse then also enters into the spiral of borrowing;
• What about future divorce or separation?  Marriages are put to considerable tests when financial difficulties arise.

 

Typically a client is usually comfortable in transferring the family home (or his undivided joint share in it) to his spouse provided he clears the borrowings off it in advance of the transfer. There is an element of resignation that in any future divorce the spouse would get the house anyhow!

 

Interestingly the recent divorce case of XY v YX[3] recognises that the ‘proper exercise of the [family law jurisdiction of the Courts] involves not the division of assts between the spouses to the exclusion of the creditors, but the provision of necessities such as living accommodation, basic maintenance and in appropriate cases security,…, bearing in mind that while in social terms creditors have rights, the only protection thereof lies under the bankruptcy code. Such rights should not be allowed to act in an oppressive manner over the rights of spouses, so as to potentially leave them in a position where they must rely on State Social Welfare.” The Court then awarded a maintenance order with security for a defined period on the basis it was just and equitable. In this case the creditors were both NAMA and other banks. Insofar as these hardened times are putting pressures on marriages, in light of this certain spouses may take the somewhat extreme measure of divorcing to ‘get ahead of other creditors’ at least to secure maintenance and the family home for some period of time.

 

3.7 Transfer to children

 

Another simple way to protect assets is to transfer them to a child or children (or in trust for them if they are under age 18). 

 

The complexities arising from this approach would be

 

• The transfer will trigger taxes, unlike in the case of a transfer to a spouse;
• What types of assets are most suitable for transferring?  It would be sensible to transfer only assets that have no borrowings secured against them;
• If assets that are currently free of borrowings are transferred to the child, will these need to be used by the child in a risky fashion to get their value worth and, if so, will the child have to enter into borrowings in his own right?  There is the same dilemma that if a good trading asset is transferred to the child but later that trade needs finance and the child would also enter into the spiral of borrowing;
• Is the child capable of managing the asset?  Coming into assets at a young age can be intimidating or could set a child off on a spending spree!  While the client may be there to guide the child, at the end of the day it is the child’s assets with which he can do what he pleases!

 

 

4 Taxation

 

The following is a note of the taxation considerations that could arise on the creation, running and ultimately disbanding each asset protection structures already discussed.  This is not intended to be a comprehensive discussion as in many cases, for instance in the case of incorporation, whether a trade or an investment property should be incorporated or not are subjects worthy of a seminar in itself.

 

4.1 Creating the Asset Protection Structure

 

On the creation of an asset protection structure, the client is disposing of his assets and effectively putting them out of his (and his creditors’) reach.  This means that for tax purposes, he is disposing of his assets and, unless the disposal falls into any of the exemptions or reliefs or is a disposal of a non chargeable asset, CGT and Stamp Duty (SD) will arise on the creation of the asset protection structure.

 

For this reason, the client usually limits the amount and type of asset put into the trust to cash assets and/or assets that will not trigger a hefty tax charge; otherwise the creation of the asset protection structure will create a further debt for the client (a tax charge).

 

4.1.1 Incorporation

 

On the transfer of assets in a business from an individual to a company, specific reliefs are available under Sections 596 to 600 TCA 97 so as to defer any CGT arising until the shares in the new company are disposed of.

 

Stamp Duty will arise on the transfer of assets other than those that can pass by delivery[4] or where the transfer can ‘rest in contract’.  Thus stock in trade, plant and machinery (not fixed), cash, bank accounts can pass without documentation to avoid triggering a charge to Stamp Duty. 

 

In the case of the transfer of non business assets from an individual to a company, CGT and Stamp Duty will arise in the normal course.

 

4.1.2 Bare Trust

 

As there is no change in the beneficial ownership of the assets passing from the client to the trustee/nominee of the bare trust, no taxes (CAT, CGT or SD) arise.  However, as already highlighted, neither does any protection arise!

 

4.1.3 Interest in Possession Trust

 

On the transfer of assets from an individual client to a trust to hold on behalf of that individual for life or for any period certain, there is a deemed disposal for CGT, CAT and SD purposes.  The disposal is deemed to have occurred at the open market value of the assets transferring.

 

For CGT purposes the charge arises in the hands of the client transferring the asset.  For this reason, it is best to transfer assets that on disposal will produce no gain or indeed will produce a loss (which loss would be available for the client against any other gains).

 

For Stamp Duty purposes, even if the trustee is a relative of the client, the consanguinity relief[5] is not available as they are receiving the benefit in their capacity as trustees.

 

For CAT purposes, assuming the beneficiary of the interest in possession is in fact the disponer, no CAT will arise[6].

 

4.1.4 Protective Trust

 

On the transfer of assets from an individual client to a trust to hold on behalf of that individual for life or determinable on his bankruptcy, similar to the interest in possession trust, there is a deemed disposal for CGT, CAT and SD purposes.  The disposal is deemed to have occurred at the open market value of the assets transferring.

 

For CGT purposes the charge arises in the hands of the client transferring the asset.  For this reason, it is best to transfer assets that on disposal will produce no gain or indeed will produce a loss (which loss would be available for the client against any other gains).

 

For Stamp Duty purposes, even if the trustee is a relative of the client, the consanguinity relief[7] is not available as they are receiving the benefit in their capacity as trustees.

 

For CAT purposes, assuming the beneficiary of the interest in possession is in fact the disponer, no CAT will arise[8].

 

4.1.5 Discretionary Trust

 

Again on the transfer of assets from an individual client to a discretionary trust to hold on behalf of a class of beneficiaries including himself, similar to the interest in possession trust, there is a deemed disposal for CGT, CAT and SD purposes.  The disposal is deemed to have occurred at the open market value of the assets transferring.

 

For CGT purposes the charge arises in the hands of the client transferring the asset.  For this reason, it is best to transfer assets that on disposal will produce no gain or indeed will produce a loss (which loss would be available for the client against any other gains).

 

For Stamp Duty purposes, even if the trustee is a relative of the client, the consanguinity relief[9] is not available as they are receiving the benefit in their capacity as trustees.

 

For CAT purposes, CAT will arise only on the appointment out of assets from the trust and not on its creation.  As the settlor is alive, no discretionary trust levies will arise.

 

Finance Act 2012 extended the definition of discretionary trusts for Irish discretionary tax purposes to entities similar to discretionary trusts, e.g. Jersey foundations, Swiss stiftungs and Liechtensteiner anstalts

 

4.1.6 Transfer to Spouse

 

On the transfer of assets from an individual client to his spouse, any CGT, CAT or Stamp Duty that would normally arise will be exempt[10].

 

4.1.7 Transfer to Child

 

 On the transfer of assets from an individual client to a child (or to a trust for the absolute benefit of a minor child), there is a deemed disposal for CGT, CAT and SD purposes.  The disposal is deemed to have occurred at the open market value of the assets transferring.

 

For CGT purposes the charge arises in the hands of the client transferring the asset.  For this reason, it is best to transfer assets that on disposal will produce no gain or indeed will produce a loss (which loss would be available for the client against any other gains).

 

For Stamp Duty purposes, as the child is a relative of the client, the consanguinity relief[11] is available so that where ad valorem rates apply, these are discounted by 50%.

 

For CAT purposes, CAT will arise based on the value of the asset passing and the extent of prior benefits that the child has already received[12].

 

4.2 Running the Asset Protection Structure

 

Once the asset protection structure is created, it is a different entity to that of the client and different taxes may arise in the new entity which taxes might not have been a concern when the client held them in his own name.

 

4.2.1 The Company

The income and gains arising from the assets are now in the regime of corporation tax and not income tax, including close company surcharges etc. 

 

4.2.2 Bare Trust

As there was no change in the beneficial ownership of the assets passing from the client to the trustee/nominee of the bare trust, the same taxes arise in the hands of the client as when he owned the assets legally in his own name. 

 

The trustees have power to recover from the trust assets if they are assessed to income tax[13].  This would normally arise in the case of the client becoming non resident and Irish source income arises[14].

 

4.2.3 Interest in Possession Trust

 

If the client life tenant is in receipt of income which is mandated to him, he will be assessed to income tax direct as before[15].  If not, the trustees should pay income tax at the standard rate and pass over the net income to the life tenant, providing him a certificate of income tax deducted[16].  The life tenant is then assessed to income tax on the income received from the trust as Schedule D Case IV income and is allowed a credit for the income tax paid by the trustees.

 

CGT on any gains arising in the trust is charged in the hands of the trustees with no annual exemption available to them. 

 

4.2.4 Protective Trust

 

The client life tenant/ trustees are assessed to income in the manner of the interest in possession trust on the basis set out at 5.2.3 above but, once the trust is converted into a discretionary trust, the income is assessed as on the basis set out at 5.2.5 below and the levies may arise again as set out below.

 

If the trust is converted into a discretionary trust there is an automatic trigger of capital gains tax on any increase in the value of chargeable assets in the trust even though no assets have actually been disposed of[17].  The chargeable assets are deemed to be disposed of by the trustees for their market value and reacquired by them at that value.  This is a principal drawback of the protective trust as against a discretionary trust.

 

4.2.5 Discretionary Trust

 

The trustees of a discretionary trust should pay income tax at the standard rate and pay an income tax surcharge of 20% on any income not paid out of the trust to a beneficiary within 18 months (the discretionary trust income surcharge).  If the trustees do pass over the net income to a beneficiary they should provide him a certificate of income tax deducted[18].   The beneficiary is then assessed to income tax on the income received from the trust as Schedule D Case IV income and is allowed a credit for the income tax paid by the trustees. If that income is paid over after the surcharge has arisen though, the surcharge is not available as a credit.

 

The trustees need to take care in deciding to pay over the income on a regular basis to a beneficiary as, if it appears that the trustees are automatically treating a beneficiary as being entitled to the income, the Revenue (or indeed other creditors) may seek to claim the trust is not in fact discretionary. However where the beneficiary is the original settlor, there is no advantage to the Revenue to argue this as no CAT arises.

 

CGT on any gains arising in the trust is charged in the hands of the trustees with no annual exemption available to them.  On the appointment of any capital to a beneficiary in the form of an asset, a charge to CGT could arise as there would be a deemed disposal for CGT purposes. If the trust is held offshore[19] where gains are made by the trustees when managing the trust, anti avoidance legislation can trigger CGT in the hands of an Irish beneficiary[20] whether he receives benefits or not (in the case where there has been an Irish settlor[21]) and otherwise on the payment of capital benefits to that beneficiary[22].

 

The advantage to this trust over the protective trust is that the automatic change in status of the trust from a life interest trust to a discretionary trust would trigger capital gains tax (as outlined above) but where the trust is always discretionary such tax would not arise on the beneficiary becoming bankrupt. 

 

If the settlor dies, discretionary trust levies may arise, depending on the trust documentation and who are the beneficiaries.  If the discretionary element of the trust ceases on the death of the settlor (which can be written into the trust), the levies will not arise.  Assuming the concern for protection was merely for the settlor himself, there seems little need to continue the discretionary element of the trust beyond his death. However if the settlor’s family are young at the time he creates the trust he may wish to keep the trust discretionary beyond his death to ensure his children do not come into assets at too young an age.

 

If the discretionary element of the trust does not cease on the death of the settlor, if the trust does not include principal objects[23] of the settlor, a 6 % initial levy[24] will arise together with an annual 1% levy as long as the trusts remains discretionary. 

4.2.6 Transfer to Spouse

 

The same taxes arise in the hands of the spouse as had arisen in the hands of the client when he had owned the assets. 

4.2.7 Transfer to Child

 

 The same taxes arise in the hands of the child as had arisen in the hands of the client when he had owned the assets. 

 

4.3 Winding Up the Asset Protection Structure

 

Times may come good again for the client or the threats he had perceived may have dissipated and the client may then wish to unwind the asset protection structure and get it back into his own hands.  Even though this is something the client wants however he is not entitled to demand it and he will have to persuade the trustees/his spouse/his children to get it back as the asset is no longer in his control.  Assuming he is successful in persuading the relevant party, taxes can arise on the undoing of the structure.

 

4.3.1 The Company

 

Here the client does have the control as shareholder to wind up the company.  Assuming there is an uplift in value in the company on assets in the company (e.g. a property gain), if the client wishes as shareholder to take back out the property he will be subject to the double charge to CGT (the gain on the property in the hands of the company and the gain on the shares in the hands of the shareholder).

 

Unless the assets are distributed in specie to the client, Stamp Duty will arise on the taking out of the assets from the company.

 

4.3.2 Bare Trust

 

As there was no change in the beneficial ownership of the assets passing from the client to the trustee/nominee of the bare trust, there is no change in getting it back into his own name and no taxes arise. 

4.3.3 Interest in Possession Trust

 

On the early winding up of a life interest trust, the trustees would need to ensure they have been given power to appoint all of the capital back to the life tenant.  In such a case no CAT should arise as the disposal is made to the original disponer. Otherwise a CAT charge will arise depending on the relationship of the beneficiary(ies) to the disponer. Either way CGT and Stamp Duty will arise.

 

For CGT purposes, the trustees are deemed to dispose of the chargeable assets in the trust for their market value[25] and so CGT may arise.

 

The disposal of the assets to the client also triggers Stamp Duty and, even if the assets include shares which are normally subject to the 1% rate, in this case it is a disposal of trust assets, all therefore coming under the ad valorem rates.  Again no consanguinity relief will be available as it is a disposal from persons in their capacity as trustees even if they are relatives of the client[26].

 

4.3.4  Protective Trust

 

On the winding up of the protective trust while it is still in the form of a life interest trust, the trustees would need to ensure they have been given power to appoint all of the capital back to the life tenant.  In such a case the provisions outlined in paragraph 4.3.3 above would apply.

 

On the winding up of the protective trust while it is still in the form of a discretionary trust, the provisions outlined in paragraph 4.3.5 below would apply.

 

If the trust has already become discretionary, the death of the beneficiary who was the original life tenant does not trigger a charge to CGT if the discretionary element continues beyond the death of the client.  However if the trust deed provides that the discretionary element ceases automatically on the death of the original life tenant, CGT would arise on a deemed disposal by the trustees as they would then hold the assets absolutely for named individuals e.g. the spouse and children[27]. 

 

4.3.5Discretionary Trust

 

On the appointment out of all the assets in a discretionary trust to the beneficiary, CGT and Stamp Duty arises. 

 

For CGT purposes, the trustees are deemed to dispose of the chargeable assets in the trust for their market value[28] and so CGT may arise.

 

The disposal of the assets to the client also triggers Stamp Duty and, even if the assets include shares which are normally subject to the 1% rate, in this case it is a disposal of trust assets, all therefore coming under the ad valorem rates.  Again no consanguinity relief will be available as it is a disposal from persons in their capacity as trustees even if they are relatives of the client.

 

As with the protective trust however, if the trust deed provides that the discretionary element ceases automatically on the death of the original life tenant, CGT would arise on a deemed disposal by the trustees as they would then hold the assets absolutely for named individuals e.g. the spouse and children[29]. 

 

4.3.6Transfer to Spouse

 

On the transfer back of assets from the spouse to the client, any CGT, CAT or Stamp Duty that would normally arise, will be exempt[30].

 

4.3.7Transfer to Child

 

On the transfer back of assets from the child to the client, there is a deemed disposal for CGT, CAT and SD purposes.  The disposal is deemed to have occurred at the open market value of the assets transferring.

 

For CGT purposes the charge arises in the hands of the child transferring the asset. 

 

For Stamp Duty purposes, as the client is a relative of the child, the consanguinity relief[31] is available so that, where ad valorem rates apply, these are discounted by 50%.

 

For CAT purposes, CAT will arise based on the value of the asset passing and the extent of prior benefits that the client has already received within the Group B threshold[32].

 

 

 

5Succession Issues

 

As mentioned previously succession and asset protection have traditionally gone hand in hand.

 

The most important matter to first consider in any succession plan is how to provide for succession on death. Once it is clear what are the client’s wishes as to how assets should pass once s/he has died, it is then easier to debate whether assets can pass tax efficiently during the client’s lifetime and what protections need to be placed around any transfers made.

 

Once a Will has been made, it should be reviewed regularly to account for changes in family circumstances (e.g. a reduction in value of the parent’s assets, if a child is possibly insolvent, if a child develops special needs, where a child is having marital difficulties), changes in legislation (the cohabitants legislation introduced in 2010 significant rights which were not there before), changes in taxation.

 

5.1Divorce and other creditors of child

 

The divorce of the child or the child being under pressure from creditors is a significant concern for many older clients at the moment. How to protect the inheritance earmarked for that child from that child’s creditors or the estranged spouse?

 

In the case of divorce, while it is possible to provide for an inheritance to pass for the benefit of the child in a form of asset protection structure such as a discretionary trust, there is danger that the assets in the trust would still be considered by a court as if it were owned by the child when the court is deciding what is available in the division of the family assets. The court may seek to include the trust assets as part of the assets available to the child but award an amount payable out of other assets. Alternatively the court could ‘judicially encourage’ the trustees to appoint assets out to a beneficiary to enable a payment to be made to the other spouse. Therefore a trust is not a complete protection in a divorce situation and care must be taken in how it is structured and managed, particularly if the child is to be a beneficiary.

 

The Supreme Court case of Y.G. v N.G. in November 2011 has provided greater certainty on the question of the ‘second bite of the cherry’ in Irish divorces. Previously there was a concern that where a divorced child received an inheritance after separation, his former spouse could apply to Court to amend the agreement/award made at the time of the divorce because new assets were available. This recent case decided that only in limited circumstances would there be an award made against such a later inheritance.  The acquisition of wealth after separation (where the wealth is unconnected to any joint project by the spouses during their married lives) is not a factor of itself to vest in the other spouse a right to further monies/assets. The Supreme Court decided that its duty was to ensure ‘proper provision’, not to enter into a ‘redistribution of wealth’.

 

The right to a ‘clean break’ while not established under Irish law is now confirmed as a legitimate expectation.

 

Similar principles might apply to general creditors of a child where an inheritance is placed into discretionary trust rather than direct to a child, however usually it would be on the principles of sham as already discussed at 2.1 above.

 

 

5.2Taxation changes

 

Over the last few years a combination of an increase of the inheritance tax rate and a significant reduction in the tax free thresholds has resulted in tax being an issue for many where previously it had been only an issue for the very wealthy. For instance where previously a family of 3 children could between them inherit nearly €1.63m before tax at 20% would arise, now 30% tax would arise on their assets exceeding €750,000. Even despite the drop in values of assets in this recession, allowing for insurance, property and pensions, estates still reach that level regularly.

 

Despite that, there is not the same appetite for sophisticated (and costly!) tax planning for many so the ‘back to basics’ approach is relevant such as considering

 

• Spreading the thresholds among the extended family through legacies
• Making ‘free of tax’ gifts
• Using the annual thresholds - €3,000 pa spread among the extended family
• Ensuring reliefs and exemptions that are available will qualify and are utilised to their best advantage (dwellinghouse relief, business property relief, agricultural relief, CAT/CGT set off).

 

5.2.1Ensure no cost to client

 

For instance in the case of the CAT /CGT set off in gifts it is important to ensure no cost to the client.

 

If the gift to be made will trigger CGT, it is important to bear in mind the seeming inequity of the CAT/CGT set off under s 104 CATCA03 and protect the client making the gift. In this relief where a gift is made which also triggers a disposal for CGT purposes, the CGT remains payable by the donor whereas the donee not only gets the gift but also gets the relief of the credit for the tax. The donee’s tax can be significantly reduced if not eliminated yet the donor is left with the tax bill.

 

Consideration should be given to structure the gift to shift the burden of the tax payment onto the donee.  This can be done by providing that there is a partial sale of the asset for a consideration that equates to the amount of the CGT that the donor has to pay.  That is not to say that the consideration is the payment by the donee of the donor’s CGT which in such a case results in no deduction for the consideration, albeit the credit is available. In the slides there is an example of how both a deduction and consideration can result in the parent not being out of pocket for the tax and indeed a tax saving is achieved.

 

Later at paragraph 5.3 I mention the danger of over complicating structures. Bearing in mind the required holding period of 2 years for the CGT/CAT set off to be available, it is important to ensure the child is prepared to take the risk on paying for the asset and triggering a tax cost for his parent where he cannot sell the asset for another two years. This is a commercial risk separate from the tax saving.

 

5.2.2Realising cash & asset protection

 

For the more sophisticated client prepared to invest in planning there are also opportunities to release cash or protect the asset from future liabilities. Often an elderly client is asset rich but cash poor. While this was more prevalent in the height of the Celtic Tiger as the assets felt more valuable, still where there is equity in a house and where there are ongoing costs clients may seek to release the equity in their homes.

 

The sale of a reversionary interest is generally a tax efficient way of releasing equity allowing protection for the elderly client by ensuring reasonable value being obtained, security of living in the house and tax efficiency for the purchaser of the reversionary interest. Usually this is better done as a sale to whoever is likely to inherit the house so that the payment in advance of monies will be offset by the perceived reduction in CAT (as there would then be no CAT on the death of the life tenant). It is best confined to the house that the elderly client lives in to ensure that Principal Private Residence Relief is available for CGT purposes in the hands of the Reversioner on a later sale. The method of the sale can appear to be complicated but is fundamentally a sale of a future interest. If it is necessary for the purchaser to borrow to fund the purchase, care should be taken to avoid the property itself being charged so as to protect the elderly client.

 

 

5.3Complicated structures – Communication and Suitability

 

In light of the increasing capital taxes to date and the known restrictions on CGT retirement relief after 31 December 2013, a parent may be encouraged to transfer assts now and be introduced to a tax planning ‘structure’ that seems an eminently sensible matter to undertake. Care should be taken to ensure that any elderly person involved in the structure understands what it is all about and what the purpose of the complications are likely to achieve. 

 

The difficulty is that often there are considerable tax and financial risks associated with complex structures. In such cases, is an elderly client able to cope with the risks? What may be somewhat low risk in the mind of a middle aged person could prey more on the mind of the elderly person. Therefore the likes of the general anti avoidance caveat given to clients may sit uncomfortably on the mind of your client, putting unnecessary stress on him. Tax is not always certain and the question of whether to utilise the facility of an expression of doubt or a protective notice in itself can cause stress and anxiousness to all involved (advisers included!) but possibly more so to the elderly client.

 

An example of this is the sub-sale schemes put in place for the CAT/CGT set off after the two year hold period was introduced. In some cases put and call options were used to bind the ultimate sale after two years.  In these cases questions arose

 

• as to whether this would be caught as anti avoidance, so the CGT would not be effectively set off in reducing the CAT, and the consequences at that time of secondary liability
• the CGT had still to be paid by the donor/parent at the beginning of the transaction even though no sale had gone through
• there was a risk that the ultimate purchaser would not complete despite the option rights because the purchaser is insolvent
• whether the tax was overpaid depended on valuations. Were the values correct at the time of the gift so no refund would be available now even if the sale has fallen through - the gift was made at the height of the market?

 

Where holding periods are required for tax planning purposes, e.g. in the case of business relief, agricultural relief, dwellinghouse relief or where there is a doubt or risk, care should be taken to ensure that the elderly client is comfortable in taking the risk particularly where the risk will impact on him if it comes to pass. The risk tolerance profile of an elderly person is often much lower than that of the younger generation.

 

In my view while the tax issues are greatly important, they should not be the sole motivation of a transaction for estate planning purposes. Returning to the matter of what the client wants to provide after he has died, this should be the starting point as to what should be achieved by transfers. Who should benefit and is it fair for the family and can the assets be managed effectively. Only after dealing with the Will should there then be the debate as to whether the client can afford to transfer assets now, whether he needs the income from those assets or indeed the capital for a rainy day, whether he is able to let control go and whether the assets can be properly managed and cared for by the beneficiary. Much of this debate is one that should be done within the family with us as advisers assisting them to ensure they have the knowledge of the implications of their wishes. Communication in this regard is key.

 

5.4Specific Protection – the Vulnerable Person

 

The discretionary trust structure is ideal for those with special needs who are expected to inherit and yet such an inheritance would result in benefits being lost and them possibly being taken into Wardship so that the money could be protected. Such a trust must be carefully structured to ensure that the conditions to capital tax reliefs are fully availed of. The obvious ones available for vulnerable adults are as follows

 

• Exemption from CAT for benefits taken for the support, maintenance, education of minor child where both parents have died s82(2) CATCA03

 

• Exemption from CAT for benefits taken exclusively to discharge medical expenses of a permanently incapacitated individual s84 CATCA03 [but note Revenue interpretation of the legislation that the benefit must state the qualifying purpose].

 

• DTT – exempt levies if the discretionary trust is made exclusively for the benefit of persons and for the reason that all such persons are because of age or improvidence, or of physical, mental or legal incapacity incapable of managing their own affairs s17(1)(d) CATCA03

 

A parent can create, either during the parent’s lifetime or under the Will, a specialised trust for that child’s benefit which can avail of the above specific tax reliefs and also protect the child financially and put structure to his finances. Indeed it is a useful asset protection structure for the child in the event of the child incurring liabilities (in the case of the improvident child) and for the moment in the event of the child seeking means tested State benefits. This can be a valuable protection for the person with a disability, particularly where the giving of a weekly allowance to a person with a disability can give that person a sense of dignity that he has his own (albeit small amount of) money and can spend it as he wishes, quite apart from the valuable medical card, free transport, heat and phone allowances and the possibility of obtaining funding for accommodation, sheltered or otherwise, that come with the package of benefits once the means test is passed. Each of these add on benefits is valuable in the financial sense as each reduces the costs that would otherwise have to be funded elsewhere.  Obviously this is subject to State cutbacks on the funding of these benefits and therefore there is still a need to have a pool of funds set aside in the specialist trust.

 

5.5Succession and the ‘Younger’ Client

 

As mentioned at paragraph 3.1 above the use of companies and indeed limited partnerships can be useful for the client who is likely to enter into risk taking business. In this way the risk is kept under the limited liability umbrella.

 

If it is not possible to incorporate, the form of protective trust might be suitable provided that the trust itself does not take on its own liabilities.

 

The younger client, conscious of the potential to inherit from his parents and pay tax on that inheritance may be interested in funding that tax over time in a less costly manner than if his parents were to fund it through insurance. If the insurance is taken out by the child on the parent’s life and paid for by the child, any payment out of that insurance is free of inheritance tax. This can be a useful tool in cash flow planning in the case of the expected inheritance of assets that may be difficult to sell or mortgage in the future.

 

Business clients with teenage children need to keep it flexible as to how and when his children are to inherit the business. While a discretionary will trust is suitable while there are still children under 21, the structure needs to be tailored to deal with the transition of the child to maturity without triggering discretionary trust levies. As it is important to protect a child from an inheritance that the child is not yet ready for (and may ultimately never be able for if the business does not come naturally to him) yet such a protection can trigger double taxation in effect without proper planning.

 

Family partnerships where control can be retained but capital value pass out is a suitable vehicle for asset accumulation but not for assets that will be traded or leveraged.

 

Business clients who run family companies with siblings or other relatives need to manage the succession in due course for when one of the siblings has died. The issues to consider for this is a seminar in itself but issues to consider apart from taxation issues are

• Key man insurance to fund inheritance taxes or buy outs
• Buy out agreeements
• Shareholder agreements including preemption rights.

6Conclusion

Succession planning should begin with working through for the client what he wishes should happen on his death and provide for this under a Will. This is the first step to considering the overall plan, incorporating estate tax planning and where required asset protection planning, whether it be for the client or the beneficiaries of the client. The client needs to be aware however of the limitations of asset protection planning as the creditor protections available are significant. If these limitations can be addressed, the client needs to balance the importance of tax efficiency against the importance of asset protection as the asset protection structure is not necessarily a long term tax efficient structure.

 

• Disclaimer

 

The material contained in this paper and related slides is for general information purposes only. While every care has been taken to ensure that the information in this paper and related slides is accurate and up to date, you should seek specific legal and/or taxation advice in relation to any decision or course of action.