What Is a Bare Trust? Simple Guide & Benefits

Learn what a bare trust is, how it works, and its benefits for simple asset management and tax planning in this clear, expert guide.

Introduction

Understanding trusts can be complex, but a bare trust is one of the simplest forms. If you want a straightforward way to hold assets for someone else, a bare trust might be the right choice.

In this article, we’ll explain what a bare trust is, how it works, and why it can be useful for managing assets and tax planning. You’ll get clear insights to help you decide if it fits your financial goals.

What Is a Bare Trust?

A bare trust is a legal arrangement where one person, called the trustee, holds assets on behalf of another person, the beneficiary. The trustee has no discretion and must follow the beneficiary’s instructions.

Key features of a bare trust include:

The beneficiary has an immediate and absolute right to both the trust assets and any income generated.
The trustee acts only as a custodian, not making decisions about the assets.
The trust is simple and transparent, often used for holding shares, property, or cash.

How Does a Bare Trust Work?

When you set up a bare trust, you transfer assets to the trustee, who holds them for the beneficiary. The beneficiary can demand the assets at any time, and the trustee must transfer them immediately.

Here’s how it typically works:

The settlor transfers assets to the trustee.
The trustee holds and manages the assets but cannot use them for personal benefit.
The beneficiary has full control and can instruct the trustee to transfer assets or income.

Example of a Bare Trust

Imagine a parent sets up a bare trust to hold shares for their child. The trustee holds the shares but the child, as beneficiary, can claim the shares or dividends whenever they want.

Benefits of a Bare Trust

Bare trusts offer several advantages, especially for simple asset holding and tax purposes.

Simple structure:
Easy to set up and manage without complex rules.
Tax transparency:
Income and gains are taxed directly in the beneficiary’s hands, avoiding double taxation.
Control for beneficiaries:
Beneficiaries have full rights to assets and income immediately.
Useful for minors:
Parents can hold assets for children until they are old enough to manage them.

When to Use a Bare Trust

Bare trusts are ideal when you want a straightforward way to hold assets for someone else without complicated conditions.

Common uses include:

Holding investments or property for children or young adults.
Passing assets to beneficiaries while retaining simple control.
Tax planning where income should be taxed at the beneficiary’s rate.

Limitations of Bare Trusts

While bare trusts are simple, they have some limitations you should consider.

No flexibility:
Trustees cannot decide how to use or invest assets; they must follow beneficiary instructions.
Immediate entitlement:
Beneficiaries have full rights immediately, which may not suit all estate planning goals.
Not suitable for complex needs:
If you want to impose conditions or delay access, other trust types are better.

Tax Implications of Bare Trusts

One key advantage is tax transparency. The beneficiary is treated as the owner for tax purposes.

Income and capital gains are taxed at the beneficiary’s personal rates.
If the beneficiary is a minor, income may be taxed at the parents’ rates in some jurisdictions.
This can help reduce tax bills if the beneficiary has a lower income.

How to Set Up a Bare Trust

Setting up a bare trust is straightforward but should be done carefully.

Choose a trustee who will hold assets responsibly.
Prepare a trust deed outlining the bare trust arrangement.
Transfer the assets to the trustee formally.
Register the trust if required by law.

Consulting a legal or financial expert is recommended to ensure compliance and suitability.

Conclusion

Bare trusts offer a simple, transparent way to hold assets for someone else. They give beneficiaries immediate control and clear tax benefits.

If you want straightforward asset management without complex rules, a bare trust might be the solution. Always consider your goals and seek expert advice to confirm it fits your needs.

FAQs

What assets can be held in a bare trust?

Bare trusts can hold various assets like cash, shares, property, or investments. The trustee holds these assets solely for the beneficiary’s benefit.

Who controls the assets in a bare trust?

The beneficiary has full control and can demand the assets at any time. The trustee only holds assets and follows instructions.

Are bare trusts taxed differently?

Yes, income and gains are taxed directly in the beneficiary’s hands, often resulting in tax advantages if the beneficiary has a lower tax rate.

Can a bare trust be changed or ended?

Since the beneficiary has immediate rights, the trust can usually be ended by transferring assets to the beneficiary. Changes require agreement from all parties.