COMMON STRUCTURES IN ESTATE PLANNING. By John Gill, Partner, Matheson Allison Dey, Principal, Allison Dey Solicitors

Transcription

1 COMMON STRUCTURES IN ESTATE PLANNING By John Gill, Partner, Matheson Allison Dey, Principal, Allison Dey Solicitors

2 AGENDA Lifetime Planning Common Structures: Trusts. Family Partnerships. Loan Funding. Share planning for private companies. International Issues in Estate Planning US / UK. 2

3 ESTATE PLANNING The transition of value from one generation to the next, be it under Will or in lifetime. Objective is to preserve the wealth of one generation and allocate increases in wealth to the next generation. Key consideration is to ensure financial independence of the transferor. 3

4 ESTATE PLANNING CORE ELEMENTS Tax implications capital taxes CAT/CGT and SD. Legal implications- structures to use. Practicalities: Financial security of parents; Consider suitability of family beneficiaries (in laws). 4

5 FIRST STEP MAKE A TAX EFFICIENT WILL Tax efficient will review every three years. Budgets bring tax changes annually. Beneficiary circumstances change. By reviewing regularly you avoid: Persons not suitable inheriting; and Creation of unnecessary CAT liabilities. 5

6 CONSIDER ESTATE PLANNING VEHICLES / STRATEGIES Trusts. Limited Partnerships. Loan Funding. Share Planning for Private Companies. 6

7 TRUSTS Tend to be used for legal based planning concerns as opposed to tax benefits. Very valuable and flexible tool in estate planning. Robust and protective means of: Maintaining control; Protecting capital; and Protecting individuals by delaying the transfer of assets. 7

8 BARE TRUSTS Beneficial interest versus legal interest. Examples: Grandchildren education trust grandparents can gift in excess of 90,000 to a grandchild over ten years; Parents can gift circa 108,000 to a child on attaining 18 years without eroding CAT threshold. 8

9 FIXED TRUSTS / INTEREST IN POSSESSION TRUSTS Beneficiary entitled absolutely at a certain age (25/30). Useful for second marriages life interest. Provide certainty but inflexible. Example: Tom and Ann have three children, they wish to leave their assets under their Wills to them equally but feel anything under 25 is too young. They can provide for an IIP trust under their Wills on each child attaining 25. 9

10 DISCRETIONARY TRUSTS Flexible discretion lies with trustees; Defers CAT until benefit received; Very useful for beneficiaries who are: Minors; Incapacitated / immature/ addictions; Creditor challenged; Family law concerns. 10

11 DISCRETIONARY TRUSTS CONT Potential discretionary trust tax ( DTT ) Initial levy (6% / 3%) and annual levy (1%). DTT applies on death of testator/rix and where youngest child is 21. Exemption from DTT for incapacitated individuals. Example: Paul and Kate have three minor childrenyoungest child has learning difficulties establish a standalone Will trust for him separate from trust for other minor children. 11

12 DISCRETIONARY TRUSTS CONT Creditor protection/generation skipping trusts. Example: John and Ann have a family business they wish to leave to their four children equally. Their son David has significant personal debt. They can establish a lifetime trust to hold 25% of their business for the potential benefit of David and his children. Should David s banking issues resolve, the trustees can transfer the assets to him absolutely. 12

13 LIFETIME: FAMILY PARTNERSHIPS General Partner / Parent Limited Partner / Children Family Partnership Assets 13

14 FAMILY PARTNERSHIPS Can be a limited partnership or ordinary partnership. Parents can retain control of assets. Crucially, capital appreciation in hands of children (LPs). Children pay tax at today s market value. Can structure so no CAT or CGT on establishment. No CAT on death of general partner for limited partners. A partnership formed under the Limited Partnership Act 1907 with at least one limited partner and one general partner. 14

15 USING A LIMITED PARTNERSHIP FOR ESTATE PLANNING PURPOSES No Limited Partnership: Parent invests 100K Parent sells the investment for 1m CGT of 300K Parent gifts 700K to child six months later = 231K Net Benefit to Child = 469K Total Tax Cost = 531K Limited Partnership ( LP ): Parent and child set up LP (.01% & 99.99% partnership share interest split) Parent gifts 100K to LP = 33K CAT (no CAT-free threshold) Investments through the LP (Parent is the General Partner & holds the controlling interest) Interest grows to 1m & sale - no further CAT. CGT of 300K Total Tax Cost = 333K Loan instead of gift. 15

16 DISCRETIONARY TRUST V LIMITED PARTNERSHIP Discretionary Trusts Parent settles shares worth 1000 on discretionary trust No CAT as no interest in possession Shares increase to 1m Trustees appoint shares to son CGT for Trustees/CAT for son CAT/CGT offset no CAT but Trustees need resources to discharge CGT & 2 year clawback Parent relinquishes control Provides a flexible structure in terms of potential beneficiaries Limited Partnerships Parent gifts 1000 to the limited partnership (child is limited partner) - No CAT Shares increase to 1m No further CAT Child liable to CGT on a future disposal Parent retains control as GP Child absolutely entitled to interest in the partnership 16

17 LOAN FUNDING Deferred taxation CAT-free thresholds may increase Parties may become non-resident Tax: Free use of money taxable benefit. Highest price a prudent depositor/lender would get in the open market Use of small gift exemption of 3K per annum Example: deposit for child from parents of 60k eroded over ten years. 17

18 SHARE PLANNING Golden Shares voting control mechanism, often used where reliefs are available to transfer the value of ordinary shares tax efficiently and parent can retain control. Share Capping / Growth shares to capture future uplift in value. Can be used effectively where capital tax reliefs not available to transfer current locked in value. 18

19 OFFSHORE ASSETS Trusts or Companies established outside of ROI. If established an offshore trust/ shareholder in offshore company or receiving benefits from same- tax consequences. Includes living in a property rent free/ interest free loans. Exchange of information between the Revenue Commissioners and foreign revenues information available. 19

20 INTERNATIONAL ISSUES IN ESTATE PLANNING Internationally mobile clients Irish individuals holding assets in US and UK. DTA in place between Ireland and UK/US re inheritances and gifts (UK). Only gift and inheritance double taxation agreements Ireland has entered into to date. 20

21 INTERNATIONAL ISSUES THE UNITED KINGDOM AND IHT When does charge to UK Inheritance Tax ( IHT ) arise? Connecting factors are domicile of deceased and situs of assets Statutory concept of deemed domicile if resident for 15 of more of previous 20 years IHT at 40% rate above Stg 325,000 (Nil Rate Band NRB ) UK situs assets (even where disponer is non UK domiciled) within the charge to tax where such value exceeds Stg 325,000 21

22 INTERNATIONAL ISSUES THE UNITED KINGDOM AND IHT Mixed Domicile Couples Trap Generally full spousal exemption except where assets pass from a UK domiciled person to a non-domiciled UK spouse. Limited exemption of Stg 325,000 in that case plus NRB, i.e. Stg 650,000. Election possible will fall away after 4 years of nonresidence Post 6 April 2017 No situs blocking for UK residential property 22

23 INTERNATIONAL ISSUES THE UNITED KINGDOM AND IHT CONT. Double Tax Treaty Credit provided tax arises on the same event. Discretionary Trust Pitfall UK situs assets where Irish resident disponer. 23

24 DISCRETIONARY WILL TRUSTS DOUBLE TAXATION UK will trust and Irish resident beneficiary. UK IHT charged at 40% on date of death of UK domiciled. Irish CAT charged at 33% on receipt by resident beneficiary. Ireland/UK DTA provides relief from double taxation where inheritance tax arises on the same event. Death of testator (UK) and receipt by beneficiary (Ireland) not same event double taxation. 24

25 INTERNATIONAL ISSUES USA AND FEDERAL ESTATE TAX US citizens and US domiciliaries / US situs assets Federal estate tax charge at 40% US / Ireland Double Tax Treaty credit should be available No estate tax marital deduction available on US situs assets moving to a non-us citizen spouse Requirement for QDOT wills to avoid charge on first death QDOT is a qualifying life interest trust for a surviving non-us citizen spouse that has a US trustee 25

26 INTERNATIONAL ISSUES USA AND FEDERAL ESTATE TAX CONT. The Estate Tax exemption is only $60,000 for Non Domiciled Aliens Possible to transfer to non US entity, subject to managing Irish tax exposure 26

27 TAKE HOME THOUGHTS Clients should: Take advice early on. Be financially independent in order to pass value. Be aware of the constraints imposed by any structure. Understand the interaction between such a structure and their Will (e.g. passing of General Partner s interest under their Will). 27

28 John Gill Partner Private Client Matheson 70 Sir John Rogerson's Quay Dublin 2 T: F: E: john.gill@matheson.com W: Allison Dey Principal Allison Dey Solicitors Barna Galway M: +353 (0) D: +353 (0) E: allison@allisondeysolicitors.ie 28