Q&A

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.

Wills

My wife and I have a reasonable estate to bequeath and in our existing wills, completed some 15 years ago, it will be divided equally between our three children. As of now, they are all happily married and we have seven wonderful grandchildren.

However, given the present state of society in Ireland, we are concerned that at some time in the future one or other of our children may become separated or divorced. In such an eventuality, we are concerned to ensure that our estate would benefit our children and grandchildren only and not our children-in-law, most particularly if they were the offending party.

Our wills need to be revised now and we are anxious to know what options, if any, are open to us before discussing this with our solicitor.

Mr W.C., Cork

This is an area in which, as you acknowledge in your letter, you need to tread very carefully.

In technical terms, the solution you seek is almost certainly to be found in some form of discretionary trust. The area of trusts is a specialised one and I would suggest you need to talk to a solicitor well versed in that area, not necessarily one's local solicitor.

In general, however, your own solicitor will be happy to point you in the direction of people more specialised in such areas.

Under a trust, the trustees would have the discretion - within terms laid down in the trust documents - to allocate funds to certain people, including those not yet born. For instance, in your case, the permitted allocation might be to blood relatives or simply to your children and their current and future offspring, or for their care.

Discretionary trusts are taxed at the rate of 6 per cent on the death of the person creating the trust, and subsequently at the rate of 1 per cent per year for each year in which it operates after the year of death.

This assumes that the spouse of the person creating the trust and any children are over 21. Apparently, no tax is payable in respect of a disabled beneficiary and, if the trust is fully wound up within a short period of the death of the person who created it, a refund of some of the initial 6 per cent charge may be possible.

Of course, income from a trust would be liable to income tax in the same way as other income, and there is also the question of fees/charges within a trust - to trustees and on investments.

Leaving all that aside, I think you really do need to take advice on the best way to structure your will to benefit those whom you have decided should benefit without causing undue distress. No-one would argue that society has not changed but, in terms of control over one's assets, it has in many ways been for the better.

No longer is all the wealth of the family assumed to belong to the senior male figure. The law gives far more protection to all parties within relationships.

Of course, separation and divorce bring their own pressures, but I am not at all clear that putting your family's inheritance in a trust or some such device would take it out of the equation in assessing the financial well-being of the various parties in such a situation. Indeed, it might tie them in a tighter bind than might otherwise be the case. This is a new area and one in which you would need to take specific advice.

In any case, it is entirely possible that the creation of such a vehicle for your inheritance could, in itself, raise all sorts of pressures on the very people you want to help.

The "children-in-law" might feel under some cloud if they were so singularly removed from any access to family assets. Relationships are built on trust; you would need to be careful not to be seen to be breaking that trust.

In all the circumstances, I think it is imperative that you take advice - from people versed in trusts, divorce law and, possibly as important, from your family as well.

Unit funds

Would you please explain the implication of the tax changes with effect from January 1st, 2001, under the Finance Act 2000, in relation to unit fund investments and/or advise where one can read up about it? What is the effect on existing investments running prior to January 1st last, and how does the Act affect new investments? Can one add to old unit fund investments?

Mr J.W., e-mail

You will not be surprised to hear that one's perception of the changes to unit fund investments at the beginning of this year depends on where one stands in relation to the industry.

Essentially, those selling unit funds have been mixed in their reception. Some say the consumer will benefit, others that they will pay higher charges. From the consumer's point of view, however, it does seem clear that in most cases the new system will be of benefit. The major change from the point of view of most unit fund investors is the timing and nature of taxation of the funds. Under the old system, tax was deducted every year at the standard rate; with the new set-up, the growth in the fund will be taxed only once - at the point you withdraw the investment from the fund. The rate of taxation will be the base rate plus 3 per cent. The extra 3 per cent is supposed to compensate the Revenue Commissioners for the fact that they no longer receive the tax on an annual basis.

Given that one's entire investment "rolls up' without being diminished by tax charges along the way, the investment should perform better, all things being equal. Things are not always equal, however, and the suggestion among some offering unit fund investment of the need to raise charges on some investments gives the lie to the assertion that the charges deducted annually heretofore were simply those required to pay the tax authorities.

They were not. Because of the way the funds were structured, certain expenses could be hidden in these tax payments to the benefit of those offering the funds. In other words, the new funds will be more transparent. At least now, the investor will have a clearer idea of the real tax liability and the real cost of investing in the fund.

This applies only to new funds. The situation with older funds is less clear. First, you will not be allowed to contribute to the older funds because they will now be treated in a different manner for tax purposes. The funds that are already invested will continue to be treated in the same way as heretofore, and you should notice no difference.

One option open to you would be to transfer the current investment from the old-style fund to a new "gross roll-up" model. There are some issues you will need to consider in weighing up such an option.

While the new tax regime may be more beneficial, the investor needs to be careful that any transfer of investment from one type of fund to the other does not incur charges that may offset the benefit - either in the transfer itself or in the fund management fees levied on the new funds.

Some unit fund providers have committed themselves not to charge for transfer from one fund to another and not to increase fund management fees; others have not. You will need to check the situation with your unit fund office.