Family business: Your paths to tax-smart business transfer
There are significant tax implications across the various options for the transfer of a business from one generation to the next. Always seek independent expert advice. Picture: iStock
There are several options when it comes to transferring a family business from one generation to the next, each with its own series of tax implications.
‘Your future — Our focus’ is the mission statement of ITC, an Irish-owned professional pension trustee company, established in 1994.
Based in Dublin city centre and employing over 70 staff, it is now one of the largest providers of self-administered pensions in Ireland.
Administering over €2 billion of client funds in over 5,500 pension structures, ITC acts as trustees of self-administered pensions schemes, which typically have one member.
“We also act as trustees to larger occupational schemes, which can have a large number of members, and private trusts,” explains Eoin Hassett, trustee services director with ITC. “Our clients are self-employed individuals, professionals, company directors, corporate clients, financial advisors and high net wealth Irish and international individuals and families.”
Intergenerational wealth is the transfer of wealth from one generation to the next, Eoin explains.
“It is a crucial, yet often ignored, issue for many families in Ireland. There are many elements to managing intergenerational wealth, and the first step remains to make sure that there is a will in place to regulate how the wealth is to be passed on. A will should be done with the guidance of a solicitor. However, in this article, we will look at some lesser-discussed areas and how trusts can be an effective tool.
“A family trust is a legal structure that allows family members to transfer assets while maintaining control and management of those assets. The trust creates a separate entity that holds the assets and distributes them according to the wishes of the disponer — the person who provided the gift or inheritance.”
Family trusts provide several benefits, Eoin points out.
“Firstly, if set up while the disponer is still alive (inter vivos) they enable the transfer of assets without going through the probate process, which can be lengthy, costly and stressful. This saves the family time and money and ensures that the assets are distributed according to the wishes of the grantor. Secondly, family trusts can provide tax benefits. By transferring assets to the trust, the grantor may be able to reduce their CAT liability.”
Additionally, any income generated by the assets held in the trust is taxed at the trust level, which may be advantageous depending on the grantor's overall tax situation.
“Thirdly, family trusts can protect assets from creditors and litigation. By transferring assets to the trust, the grantor may be able to prevent them from being seized in the event of a bankruptcy or lawsuit.”
Will Trusts are legal arrangements created by a person in their will. The aim is to ensure the proper distribution of their assets after their death.
“Inheritance laws dictate that a spouse is entitled to two-thirds of their spouse’s estate, and the remaining third is divided among their children equally. However, this only applies in the absence of a will. If a valid will is in place the wishes outlined in the will are followed.
"This has led to many disputes over inheritance, most commonly when a family-run business or farm is involved. The Will Trust sets up a separate entity, managed by a trustee or trustees, who hold the assets for the benefit of the beneficiaries named in the will. The use of a trust corporation rather than family members tends to reduce the potential for family members falling out over the implementation of wishes.”
Children or people with diminished capacity to make decisions can also be protected using a trust structure, he adds.
“Existing assets owned by the disponer or more commonly assets they are due to receive can be placed in a trust to ensure they are protected. This will ensure that the assets are managed correctly for the beneficiaries. Such trust can be established for a range of purposes, including care of vulnerable family members, providing financial support for beneficiaries and safeguarding property for future generations.
"Whether to set up the trust inter vivos or by way of a will is a complex question and it is crucial to make sure that the correct type of trust is created from the outset. It is important to note that trusts are subject to various legal requirements and regulations, and it is advisable to consult legal, tax and financial experts before creating such a trust.”
ITC are not financial or legal advisors. Individuals should speak with their financial advisor or solicitor for more information.
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