In today’s evolving financial landscape, many Irish families are seeking effective ways to secure their children’s financial future. Bare trusts in Ireland have emerged as a popular and efficient solution, offering a structured approach to wealth transfer while maintaining tax efficiency. Whether you’re planning for education costs, a future house deposit, or general wealth building, understanding how bare trusts work in Ireland is essential for making informed decisions.
What is a Bare Trust and How Does It Work?
A bare trust, also known as a simple trust or naked trust, is a straightforward legal arrangement where a trustee holds and manages assets on behalf of a beneficiary. Think of it as a protected financial container where assets are held by a trusted guardian until the beneficiary is ready to take control.
Key elements of this structure are:
- The trustee legally holds the assets but has no discretionary powers
- The beneficiary has absolute ownership rights to both capital and income
- All decisions about the assets must be made in the beneficiary’s best interests
- The arrangement continues until the beneficiary reaches 18 years of age
How to Set Up a Bare Trust in Ireland
Establishing a bare trust requires careful planning and usually involves several key steps:
Choose Your Trustees
- Parents and grandparents often serve as trustees
- Multiple trustees can be appointed for added security
- Trustees must understand their legal responsibilities
Determine the Trust Structure
- Work with financial or legal professionals
- Decide on initial assets or investment strategy
- Set up necessary documentation
Establish Investment Accounts
- Many people combine the trust with life insurance savings plans
- Investment strategies can be tailored to long-term goals
- Regular contributions can be arranged
Investment and Tax Benefits of Bare Trusts
Understanding the tax implications is crucial for maximising the benefits of a bare trust in Ireland. The tax framework offers several advantages that make bare trusts particularly attractive for family wealth planning.
The Small Gift Exemption
One of the most valuable features is the Small Gift Exemption, which allows:
- Contributions up to €3,000 per year from each parent
- Tax-free gifts that don’t affect future inheritance allowances
- Parents, grandparents, and anyone else who wishes can make contributions to the child’s trust.
- A structured way to build significant wealth over time
Capital Acquisitions Tax (CAT) Framework*
The CAT system operates on a tiered structure based on relationships:
Group A: Parent to Child
- Threshold: €400,000
- Ideal for long-term family planning
- Includes stepchildren and foster children
Group B: Close Family
- Threshold: €40,000
- Applies to siblings, grandparents, nieces, and nephews
- Useful for extended family planning
Group C: Other Relationships
- Threshold: €20,000
- Covers all other gift-giving relationships
- Still offers significant tax-free potential
Any gifts exceeding these thresholds are taxed at 33% on the excess amount only.
* The Capital Acquisitions Tax (CAT) thresholds mentioned are not an exhaustive list and are subject to change. For the most up-to-date and comprehensive information we recommend visiting the Revenue Commissioners website: www.revenue.ie.
Strategic Uses of Bare Trusts
Bare trusts can serve multiple purposes in financial planning:
Education Planning
- Build funds for future education costs
- Allow for long-term investment growth
- Provide tax-efficient education funding
Property Investment
- Accumulate funds for future property deposits
- Create a structured savings approach
- Build significant capital over time
Succession Planning
- Facilitate smooth wealth transfer
- Reduce future inheritance tax burden
- Create clear ownership structures
Important Considerations and Limitations
Before establishing a bare trust, consider these key points:
Irrevocable Nature
- Once assets are placed in trust, they cannot be reclaimed
- The arrangement is permanent until maturity
- Careful planning is essential
Control Aspects
- Trustees have limited discretionary powers
- Beneficiaries gain full control at 18
- Investment decisions must align with beneficiary interests
Tax Planning*
- Regular review of tax implications is necessary
- Professional advice may be needed
- Long-term tax strategy should be considered
*Always consult a qualified professional for personalised tax advice.
Planning for Long-Term Success
While the structure of a bare trust is straightforward, successful implementation requires careful planning:
Set Clear Objectives
- Define specific financial goals
- Consider time horizons
- Plan contribution strategies
Regular Review
- Monitor investment performance
- Adjust strategies as needed
- Keep up with tax legislation changes
Future Planning
- Consider the beneficiary’s future needs
- Plan for transition at age 18
- Maintain clear records
At Fairstone, we specialise in helping families navigate the complexities of bare trusts while maximising their benefits. Our expert wealth management advisors can help you design appropriate trust structures, implement effective investment strategies, ensure tax efficiency* and plan for long-term success.
Whether you’re looking to secure your children’s financial future, plan for education costs, or create a structured wealth transfer strategy, our team can guide you through the process of establishing and managing a bare trust that meets your family’s needs.
To learn how we can help you create a secure financial future for your loved ones through strategic bare trust planning book a no-obligation financial planning consultation today. Our comprehensive approach ensures that your family’s financial planning goals are met while maximising available tax benefits and maintaining full compliance with Irish regulations.
*Always consult a qualified professional for personalised tax advice.
Let’s Talk
Source:
Revenue.ie
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