Parents want to help their children out financially in the future, especially with money for a deposit on their first home. They could just gift them the money at the time that their child needs the money. But any large gift that is given to a child should be declared to the Revenue and it is deducted from their future inheritance.
A parent can gift a child (or anyone else) €3,000 a year or €6,000 per couple and it is not deducted from a child’s future inheritance. The €3,000 a year total doesn’t have to be paid in a lump sum, it can be a monthly contribution into a savings plan or bank account if you wish. But there has to be a transfer of money from the parent to the child. You can’t just mind it for them.
If your child is under 18 years of age, there will be difficulties with setting up an account in their name. You will be limited to a bank account. But do you want to deposit €3,000 – €6,000 a year into a teenagers bank account? It won’t last long there!
Or you can set up a bare trust which sets up the account under trust for their benefit. It is a trust set up for their benefit and the child is the beneficial owner of the account.
Given the long term nature of these savings plans, we use investment plans with insurance companies, who have templated bare trust documents. If you would prefer to put the money in a bank account, you can do that too but will need to get a legally binding trust document written up that will apply to the account.
When the child turns 18, the trust falls away and the child has access to the fund. In our experience, we have not had a rush of 18 year old kid’s cashing out savings plans to go on their Leaving Cert holiday. Most are not even aware of the existence of the policy that is in their name. The ones that are understand that it is something that their parents are doing for them. Because they don’t have easy access to the money, they aren’t bothered with it.
If an investment policy with a life company is used, exit tax at 41% is payable as is deemed disposal every 8 years. This is looked after by the life company for you and no Revenue reporting is required. If the money is in a bank account, DIRT is payable.
But when the proceeds are paid out, the money is your child’s, so it does not come out of their future inheritance.
We also find that parents find this structure a great way of planning. Helping out their children financially is something they really want to do and setting up a bare trust structure is a way of segregating funds for this use. Because once it goes into the trust, it is now their children’s money and not theirs anymore so it can’t be spent on other things.
06 November 2023