Trust funds for permanently incapacitated people

Introduction

You can set up trust funds from the proceeds of public subscriptions to benefit those who are permanently and totally incapacitated. ("Permanently incapacitated" means the beneficiary of the fund is totally and permanently unable to maintain themselves as a result of physical or mental infirmity. Their incapacity may have occurred as the result of an accident, illness, progressive disorder or similar disability.)

Sometimes following an accident, illness, etc. the family, friends or colleagues of someone who is or has become permanently incapacitated may run some events to help raise money for the benefit of the disabled or incapacitated person. The money that is then raised from these events, may be held in trust for the permanently incapacitated individual and used for their benefit throughout their life. For example, funds may be used to pay for health treatment, a holiday, specialised equipment or a carer for the beneficiary.

Under Section 12 of the Finance Act 1999, certain trust funds established for the benefit of this person may be exempt from income tax.

Trust funds

A trust is a legally enforceable (agreement) that is established between the trustees of the fund and the beneficiary or beneficiaries. The trustees are the administrators (or custodians) of the fund and their role is to maintain and operate the assets of the trust for the benefit of the beneficieries. The beneficiary (or beneficiaries), is the permanently incapacitated person who benefits from the funds raised on their behalf. Trustees cannot have any connection with the beneficiary. (In other words, they cannot be family members or spouses of the beneficiary. They must remain independent and objective in decisions arising from the operation of the trust to ensure they act in the best interest of the beneficiary).

Rules

Public subscriptions

Funds raised from public subscriptions generally mean monies raised from a public appeal or a charitable event. To avail of the tax exemptions, the trust must be set up under specific conditions as follows:

  • The trust must only be for the benefit of the named individual(s) for the person's lifetime. The individual(s) must be permanently and totally incapacitated. In other words, the person must suffer from a physical or mental infirmity which results in them being unable to maintain themselves.
  • Trustees must have no connection with the permanently incapacitated individual
  • The funds of the trust must be created by public subscriptions. This means that a public appeal must be made inviting subscriptions. If the total subscriptons exceed €381,000, no single individual can contribute more than 30% of the total.
  • The trustees hold in trust for the individual, funds that are to be applied for the benefit of the named individuals
  • If the individual is to be exempt from tax the money from the trust fund must be their sole or main source of income. Income from social welfare payments is not counted when deciding if the trust fund is the main source of income.
  • Section 10 of Finance Act 2014 amended the Taxes Consolidation Act 1997 to allow the undistributed part of the trust funds on the death of an incapacitated person (or of the last surviving incapacitated person) to be part of the person’s estate if they have a surviving spouse, civil partner or child. Previously, the undistributed trust funds at the date of death had to be used for charitable purposes or appointed in favour of the trustees of charitable bodies. This still applies if there is no surviving spouse, civil partner or child.

Tax exemptions

Trust funds set up for the benefit of a permanently incapacitated person(s) allow both the trustees and the incapacitated individual(s) to avail of certain tax exemptions. The following is a summary of the tax exemptions:

  • The trustees of a qualifying trust are exempt from income tax in respect of income they receive from the investment of the trust funds.
  • The trustees are entitled to reclaim any Deposit Interest Retention Tax (DIRT) paid by them on or after 6 April 1997.
  • The incapacitated individual is exempt from tax in respect of payments made by the trustees to or for his/her benefit. They are also exempt from tax on income from the investment of payments.

Applying for tax exemption

The incapacitated person or persons receiving income and the trustees must declare this income to the Revenue Commissioners when making their annual tax returns. When a claim is first made for a tax exemption, the following documention is required:

  • A medical certificate detailing the person's incapacity
  • A copy of the trust deed
  • A declaration from the trustees declaring that the conditions regarding public subscriptions are met

How to apply

Setting up a trust fund has complex legal implications. It is important therefore to seek the advice of a qualified legal professional (for example, a solicitor). In addition, it is very important to discuss the tax implications with an accountant and the Revenue Commissioners.

It is also possible to obtain tax relief for payments made to incapacited individuals, through a deeds of covenant. Tax relief for payments made to incapacitated individuals can also be obtained through the investment income from personal injuries awards. More information is available about Personal Injury Compensation Payments and tax relief (pdf).

Page edited: 5 February 2015