Bare Trust: Definition, Advantages, vs. Other Trust Types

ByObeydul Haque Reading Time: 7 minutes

A bare trust, also known as a simple trust or naked trust, is a basic form of trust in which the trustee holds assets on behalf of a beneficiary, who has an absolute and immediate right to both the trust’s capital and income. Unlike more complex trust structures, a bare trust does not impose discretionary powers or conditions on the trustee. The trustee’s role is purely administrative: they hold legal title to the trust property but must act according to the beneficiary’s instructions, transferring the assets to the beneficiary upon demand once the beneficiary reaches the age of legal entitlement (typically 18 in many jurisdictions, such as the UK).

The defining characteristic of a bare trust is the beneficiary’s unequivocal ownership. The assets are essentially “bare” of any additional layers of control or stipulations beyond the trustee’s duty to safeguard them until the beneficiary claims them. This simplicity distinguishes bare trusts from other trust types that may involve ongoing management, conditional distributions, or discretionary decision-making.

Bare trusts are commonly used in scenarios such as:

  • Holding assets for minors until they reach adulthood.
  • Transferring property or investments to another person with minimal complexity.
  • Facilitating tax planning or inheritance arrangements.

For example, a parent might establish a bare trust to hold a savings account for their child. Once the child turns 18, they gain full control over the account, and the trustee’s role ends.

Key Features of a Bare Trust

  1. Absolute Beneficiary Rights: The beneficiary has an immediate and unrestricted right to the trust assets, subject to age or legal capacity restrictions.
  2. Limited Trustee Role: The trustee has no discretion over how the assets are managed or distributed; their job is to hold and transfer the property as directed.
  3. No Conditions or Restrictions: Unlike other trusts, there are no stipulations on how or when the beneficiary can use the assets once they are entitled to them.
  4. Legal vs. Beneficial Ownership: The trustee holds legal title, while the beneficiary holds beneficial ownership, meaning they are the true “owner” in practical terms.
  5. Simplicity: Bare trusts require minimal documentation and administration compared to more complex trust structures.

Advantages of a Bare Trust

Bare trusts offer several benefits, making them an attractive option for individuals seeking a straightforward way to manage or transfer assets. Below are the primary advantages:

  1. Simplicity and Low Cost
    • Bare trusts are easy to establish and maintain. They typically require only a basic trust deed or declaration, avoiding the need for extensive legal paperwork or ongoing management fees. This simplicity translates into lower setup and administrative costs compared to discretionary or irrevocable trusts.
  2. Transparency
    • Because the beneficiary has an absolute right to the assets, there is no ambiguity about ownership or entitlement. This clarity reduces the potential for disputes between trustees and beneficiaries, making bare trusts a reliable choice for straightforward asset transfers.
  3. Tax Efficiency
    • In many jurisdictions, such as the UK, bare trusts are tax-transparent. The income and capital gains generated by the trust assets are attributed directly to the beneficiary, not the trustee or settlor (the person who creates the trust). This can simplify tax reporting and, in some cases, allow the beneficiary to use their personal tax allowances, potentially reducing the overall tax burden.
  4. Flexibility for Minors
    • Bare trusts are particularly useful for holding assets for minors. For instance, a grandparent might place investments in a bare trust for a grandchild. While the trustee manages the assets until the child reaches 18, the child gains full control thereafter, ensuring the assets are preserved and transferred without complications.
  5. Ease of Termination
    • Once the beneficiary is entitled to the assets (e.g., upon reaching adulthood), the trust effectively dissolves when the assets are transferred. There is no need for ongoing trust management or complex dissolution processes, unlike some other trust types.
  6. Avoidance of Probate
    • Assets held in a bare trust are not considered part of the settlor’s estate upon their death, meaning they can bypass the probate process. This allows for quicker and more efficient transfers to the beneficiary.

Disadvantages of a Bare Trust

While bare trusts have clear advantages, they also come with limitations:

  • Lack of Control: Once the trust is established, the settlor relinquishes control over the assets. The beneficiary gains full rights upon entitlement, which may not suit individuals who want to retain influence over how the assets are used.
  • No Discretion: Unlike discretionary trusts, bare trusts do not allow trustees to adjust distributions based on the beneficiary’s circumstances or needs.
  • Tax Implications for Settlors: In some cases, if the settlor retains an interest (e.g., as a trustee), tax benefits may be reduced, and the assets might still be subject to inheritance tax.

Bare Trust vs. Other Trust Types

To fully appreciate the utility of a bare trust, it’s helpful to compare it with other common trust structures: discretionary trusts, interest in possession trusts, and revocable trusts. Each type serves different purposes and offers distinct features.

1. Bare Trust vs. Discretionary Trust

A discretionary trust gives the trustee significant control over how and when assets are distributed among a group of beneficiaries. The trustee can decide who receives what, when, and under what conditions, based on the settlor’s instructions (often outlined in a letter of wishes).

  • Control: In a bare trust, the beneficiary has absolute rights, while in a discretionary trust, the trustee has discretion, offering more flexibility to adapt to changing circumstances (e.g., protecting a beneficiary from poor financial decisions).
  • Complexity: Discretionary trusts are more complex and costly to administer due to the trustee’s decision-making role and ongoing management requirements.
  • Taxation: Discretionary trusts are subject to their own tax regime (e.g., inheritance tax exit charges in the UK), whereas bare trusts pass tax obligations directly to the beneficiary.
  • Use Case: Discretionary trusts are ideal for protecting vulnerable beneficiaries or managing large estates, while bare trusts suit simple, direct asset transfers.
2. Bare Trust vs. Interest in Possession Trust

An interest in possession (IIP) trust provides a beneficiary with an immediate right to the income generated by the trust assets (e.g., dividends or rent), but not necessarily the capital. A common example is a life interest trust, where one beneficiary receives income during their lifetime, and the capital passes to another beneficiary (e.g., a child) upon their death.

  • Rights: In a bare trust, the beneficiary has rights to both income and capital, whereas an IIP trust splits these rights, often between different beneficiaries.
  • Duration: IIP trusts can last for a specified period (e.g., a lifetime), while bare trusts typically end when the beneficiary claims the assets.
  • Taxation: IIP trusts may involve more complex tax rules, especially if income and capital beneficiaries differ, whereas bare trusts are straightforward for tax purposes.
  • Use Case: IIP trusts are useful for balancing the needs of multiple beneficiaries (e.g., a surviving spouse and children), while bare trusts are better for single-beneficiary transfers.
3. Bare Trust vs. Revocable Trust

A revocable trust allows the settlor to retain control over the trust assets and revoke or amend the trust at any time during their lifetime. This contrasts sharply with a bare trust, which is irrevocable once established.

  • Control: The settlor of a revocable trust can change terms or reclaim assets, while a bare trust settlor has no such power after creation.
  • Asset Protection: Revocable trusts offer less protection from creditors or legal claims because the assets remain tied to the settlor, whereas bare trust assets belong to the beneficiary and are separate from the settlor’s estate.
  • Complexity: Revocable trusts may involve more administration and legal oversight, especially if amended frequently, while bare trusts remain simple.
  • Use Case: Revocable trusts suit individuals who want flexibility and control, while bare trusts are for those committed to an irrevocable transfer.

Practical Applications of Bare Trusts

Bare trusts are versatile tools in various contexts:

  • Estate Planning: Parents or grandparents can use bare trusts to gift assets to children or grandchildren, ensuring the assets are held securely until the beneficiary matures.
  • Property Ownership: A bare trust can hold property for someone unable to take legal title (e.g., a minor), with the trustee managing it until transfer.
  • Investment Management: Bare trusts can hold shares, bonds, or savings accounts, providing a simple way to pass wealth to the next generation.

For instance, consider a scenario where an individual places £50,000 in a bare trust for their 10-year-old niece. The trustee manages the investment until the niece turns 18, at which point she can access the full amount—potentially grown through interest or dividends—without restrictions.

Legal and Tax Considerations

The legal and tax treatment of bare trusts varies by jurisdiction. In the UK, for example:

  • Inheritance Tax (IHT): Assets in a bare trust are treated as a “potentially exempt transfer” (PET). If the settlor survives seven years after creating the trust, the assets are exempt from IHT.
  • Income Tax: The beneficiary is liable for tax on income generated by the trust assets, using their personal allowance if applicable.
  • Capital Gains Tax (CGT): Gains are taxed in the beneficiary’s name, not the trustee’s.

In contrast, in the US, bare trusts are less formally recognized, and similar arrangements might fall under “custodial accounts” (e.g., Uniform Transfers to Minors Act accounts), with comparable tax and legal principles.

Conclusion

Bare trusts offer a straightforward, cost-effective, and transparent way to hold and transfer assets, particularly for minors or simple wealth transfers. Their lack of complexity and administrative burden makes them appealing for individuals who prioritize ease and clarity over control or flexibility. However, they are not a one-size-fits-all solution. Compared to discretionary trusts, interest in possession trusts, and revocable trusts, bare trusts lack the ability to adapt to changing circumstances or protect beneficiaries from themselves, making them less suitable for complex estate planning or vulnerable individuals.

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