A bare trust is a simple trust in which the beneficiary has a total right to the trust’s capital and assets, as well as the income earned by these assets. Trust assets are kept in the name of a trustee, who is in charge of managing them responsibly to create maximum profit for the beneficiaries or as legally ordered by the beneficiaries or the trust’s creator. However, the trustee has no control over the distribution of capital or revenue. Bare trusts are often referred to as Simple trusts. In this article, what are Bare Trusts, we take a look at these issues in more depth.
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When would you use a Bare Trust?
Parents and grandparents can use bare trusts to leave assets to their children and grandchildren after death, especially if the beneficiaries are still minors.
However, the bare trust may be a good option for grandparents who wish to contribute to the education of their grandchildren. In this circumstance, a grandparent may open an investment account for their grandchild using a gift. The account will thereafter function as a default bare trust for direct fee payment.
How does a bare trust work?
When creating a Bare Trust, you name beneficiaries who have an absolute right to the trust’s income (typically interest) and capital. Typically, they are used for minors who lack the legal competence to accept ownership unilaterally.
A minor is a beneficiary under the age of 18 (in England and Wales) or 16 (in Scotland). Until your child reaches the age of majority, the trustees you’ve chosen are solely responsible for the trust’s assets.
Beneficiaries of Bare Trusts are frequently young children; however, anybody may be specified. Once beneficiaries have been designated, neither you nor your trustees can change them. Even if a beneficiary of a Bare Trust becomes the owner of the trust assets at age 18 (16 in Scotland), the Bare Trust does not terminate instantly. When the beneficiary is an adult, the trustee position is analogous to that of a nominee, and the trustee must adhere to the beneficiary’s asset instructions.
Setting up a Bare Trust
Parents typically use Bare Trusts when opening bank accounts for their children. A parent can act as a simple trustee and hold the child’s funds. At the age of 18, the child is entitled to the account’s earnings and underlying assets.
In discretionary trusts, beneficiaries do not have absolute rights to the trust assets, but in bare trusts, beneficiaries have absolute rights to the trust assets and the trustee is required to obey their instructions. Due to the beneficiaries’ absolute claim to the trust’s assets at age 18, these trusts are normally not used for significant holdings. Parents may want a discretionary arrangement so that all of their children’s property does not pass to them at age 18.
Establishing Bare Trusts is easier than establishing Discretionary Trusts. The lack of flexibility of a Bare Trust mandates that you completely understand the additional repercussions prior to following this course of action, so it is strongly urged that you obtain professional guidance beforehand (e.g. the obligations of the trustees when the beneficiary turns age 18).
What are the roles of the participants in a trust?
The parties to a trust are identified below:
The originator of a trust is often referred to as the “settlor”. They are the original owner of the assets that are being “settled” (transferred) to the trust.
A “trustee” is accountable for holding and administering the trust’s assets. They have the authority to manage the trust assets in particular ways, but they must always operate in the beneficiaries’ best interests. They may also have additional rights and responsibilities, depending on the rules of the trust. Theoretically, trustees have “legal ownership” of the trust’s assets.
“Beneficiary” – A beneficiary is a person who can or will get benefits from the trust. This may take several forms, and the beneficiary’s rights over the trust’s assets will vary depending on the trust’s terms. When a trust terminates, the assets are distributed to the beneficiaries. Theoretically, beneficiaries hold some form of “equitable ownership” over the trust assets.
An individual may fulfil more than one of these responsibilities in a trust; for instance, a trustee may also be a beneficiary.
What are the benefits of a Bare Trust?
Typically, grandparents who wish to begin saving for their grandchildren’s future but do not want them to have access to the funds until they reach the age of majority use bare trusts. Furthermore, they are advantageous from a tax standpoint. Your first gift to a Bare Trust is theoretically exempt (unless exempted), and there is no inheritance tax if you outlast the trust for seven years.
If the beneficiary had no other taxable income, as is typical for a minor, they might use all of their tax exemptions to offset any income or capital gains tax imposed by the trust assets. A Bare Trust has no continuing inheritance tax problems.
What is the downside of a Bare Trust?
While a Bare Trust is an uncomplicated form of trust, it does have a few drawbacks. The biggest disadvantage is that, due to the trust’s rigid structure, beneficiaries cannot be changed once the trust has been established. This could be problematic if subsequent children or grandchildren are refused access to the trust’s assets. In addition, the beneficiaries of the trust are permitted to acquire ownership of the trust assets at age 18 and use them as they see fit. Some parents and grandparents are concerned that this may lead to the sale of their assets and the misappropriation of the proceeds.
In addition, you can establish a Bare Trust without alerting the beneficiaries, which, while advantageous initially, could create complications if any of the beneficiaries has a significant income or capital gains tax liability. Nonetheless, the trustees are compelled to inform the beneficiaries of the existence of the trust when they reach the age of majority, which is 18. This places the assets of the trust in the potentially dangerous hands of teenagers.
Usually, however, it is possible to establish a trust to pay for college fees directly from the trust. This makes it simple to compute the amount needed for this purpose, leaving the beneficiaries with a smaller, less cumbersome sum of money.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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