Trust funds for people that are permanently incapacitated

A trust fund is a legal agreement that allows someone, known as a trustee, to control and invest the money of someone else, known as the beneficiary. In some cases there may be more than one beneficiary for a trust.

Investments made by trust funds are usually subject to tax but a trust fund may be exempt from tax if the beneficiary is permanently incapacitated. This means that you are permanently unable to earn money to support yourself due to mental or physical illness or disability.

If a trust fund meets certain requirements, it can be exempt from:

• Income tax, PRSI and Universal Social Charge (USC) on income from the fund
• Capital Gains Tax on assets bought using the fund

To be exempt from tax, the trust fund must meet the following requirements:

• It is only for the benefit of one or more persons who are permanently incapacitated
• The money has all been raised through public subscriptions, for example, by public appeals or fundraising events, or from the investment of that money
• If more than €381,000 is raised, the most that can be from one person is 30% of the total
• The trustee who controls the trust cannot be directly related to or connected to the beneficiary
• If all beneficiaries have died and there is still money in the fund, it must be treated as part their estate or given to charity
• The money in the trust must give the beneficiary or beneficiaries their only source of income, except for:
  • Invalidity pension or benefits paid by the Department of Social Protection for the illness or disability that has made them permanently incapacitated
  • Income or gains from personal injury compensation payments

If a trust meets the requirements, it is exempt from tax on:

• Payments made from the trust to the beneficiary or beneficiaries
• Dividends from investments made by the trustee with the trust’s funds
• Capital Gains Tax on gains the beneficiary made from the sale or disposal of assets that were bought using the fund

For the beneficiary to qualify for these exemptions, the income and gains from these sources must be more than half of their total income and chargeable gains for the year. Total income and gains does not include:

• Income from personal injury compensation payments
• Invalidity pension or benefits paid by the Department of Social Protection for the illness or disability that has made them permanently incapacitated

Trustees and beneficiaries can also apply for exemption from Deposit Interest Retention Tax (DIRT).

You must make a tax return of total income, including income that is exempt from tax.

When you first claim tax exemption, you will need to send the following documents to Revenue:

• A medical certificate detailing the incapacity and confirming that the beneficiaries are permanently unable to support themselves
• A copy of the trust deed

Setting up a trust fund has complex legal implications. It is important to get advice from a qualified legal professional (for example, a solicitor). You may want to discuss the tax implications with an accountant or Revenue (or both).

It is also possible to get tax relief for payments made to incapacited individuals, through a deed of covenant.