Bare Trust

Bare Trust
Bare Trust
Full Overview Of Bare Trust

A bare trust, or a simple trust, is a fundamental concept within trust law that holds significant utility for various legal, financial, and estate planning purposes.

At DLS Solicitors, we understand that the simplicity and transparency of a bare trust make it an attractive option for clients looking to manage and protect their assets. This comprehensive overview will delve into the nature of bare trusts, their formation, advantages, legal implications, and practical applications, ensuring that you are well informed about this vital legal instrument.

Definition and Nature of a Bare Trust

A bare trust is a legal arrangement in which the trustee holds the trust property solely for the beneficiary’s benefit.

Unlike other types of trusts, a bare trust gives the beneficiary an immediate and absolute right to both the capital and income of the trust property. This means that the beneficiary can request the transfer of the trust assets at any time and instruct the trustee to manage those assets.

The simplicity of a bare trust lies in its straightforward structure. There are no complex terms or conditions, and the trustee’s role is purely administrative. The trustee must follow the beneficiary’s instructions regarding the trust property, and there are no discretionary powers that allow the trustee to make decisions about the distribution of assets.

Formation of a Bare Trust

The formation of a bare trust involves a few essential steps:

  1. Trust Deed or Declaration of Trust: A bare trust is typically established through a trust deed or a declaration of trust. This legal document outlines the relationship between the trustee and the beneficiary, specifying that the trustee holds the property on behalf of the beneficiary. It is crucial that this document clearly identifies the trust property, the trustee, and the beneficiary.
  2. Transfer of Property: The settlor (the person creating the trust) transfers the property to the trustee, who then holds it on behalf of the beneficiary. This transfer can involve various types of assets, including cash, securities, real estate, or other valuable items.
  3. Acceptance by Trustee: The trustee must accept their role and agree to manage the trust property in accordance with the terms set out in the trust deed. The trustee’s duties are limited to ensuring the proper administration of the trust and following the beneficiary’s instructions.
  4. Beneficiary’s Rights: The beneficiary must be clearly identified and have a vested interest in the trust property. This means the beneficiary has an immediate right to the trust’s capital and income and can demand the transfer of assets at any time.

Advantages of Bare Trusts

Bare trusts offer several advantages that make them an appealing choice for various situations:

  1. Simplicity and Transparency: The straightforward nature of bare trusts makes them easy to understand and administer. There are no complex terms or conditions, and the beneficiary’s rights are clear and absolute.
  2. Tax Efficiency: Bare trusts can provide tax benefits, particularly in terms of capital gains tax and income tax. Since the beneficiary is treated as the owner of the trust property for tax purposes, any income or gains generated by the trust assets are taxed at the beneficiary’s rate, which can be advantageous if the beneficiary has a lower tax rate than the settlor.
  3. Flexibility: The flexibility of bare trusts allows for easy transfer of assets to the beneficiary. This can be particularly useful in estate planning, where the settlor wants to ensure that assets are transferred smoothly and without complications.
  4. Asset Protection: Bare trusts can provide a level of asset protection, as the trust property is legally separated from the settlor’s personal assets. This can be beneficial in situations where the settlor wants to safeguard assets for the beneficiary from potential creditors or legal claims.
  5. Ease of Administration: The administrative burden on the trustee is minimal, as their duties are limited to holding and managing the trust property according to the beneficiary’s instructions. This can reduce costs and simplify the management of the trust.

Legal Implications of Bare Trusts

Understanding the legal implications of bare trusts is essential for both trustees and beneficiaries. Key legal considerations include:

  1. Trustee’s Fiduciary Duty: Although the trustee’s role in a bare trust is limited, they still owe a fiduciary duty to the beneficiary. This means the trustee must act in the best interests of the beneficiary, avoid conflicts of interest, and ensure proper management of the trust property.
  2. Beneficiary’s Rights: The beneficiary has an absolute right to the trust property, which includes the right to demand the transfer of assets and direct the trustee’s actions. The trustee must comply with the beneficiary’s instructions, provided they are lawful and within the scope of the trust deed.
  3. Taxation: The tax treatment of bare trusts is straightforward, with the beneficiary being treated as the owner of the trust property for tax purposes. This means the beneficiary is responsible for reporting any income or gains from the trust assets on their tax returns and paying any associated taxes.
  4. Transfer of Assets: The transfer of assets into and out of a bare trust must be conducted properly to avoid legal issues. This includes ensuring that the transfer is documented correctly and that the trust deed accurately reflects the intentions of the settlor and the rights of the beneficiary.
  5. Termination of Trust: A bare trust can be terminated at any time by the beneficiary, who can demand the transfer of the trust assets. This can occur when the beneficiary reaches the age of majority or at any other time specified in the trust deed.

Practical Applications of Bare Trusts

Bare trusts are versatile and can be used in various scenarios, including:

  1. Gifts to Minors: Bare trusts are commonly used to hold assets on behalf of minors until they reach the age of majority. This allows parents or guardians to transfer assets to their children while maintaining control over the management of those assets until the children are legally able to manage them themselves.
  2. Estate Planning: Bare trusts can be an effective tool in estate planning, allowing individuals to transfer assets to beneficiaries in a straightforward and tax-efficient manner. This can help to ensure that assets are distributed according to the settlor’s wishes and reduce the potential for disputes.
  3. Investment Holding: Individuals may use bare trusts to hold investments, such as shares or securities, on behalf of beneficiaries. This can simplify the management of investment portfolios and provide a clear legal framework for the ownership and transfer of investment assets.
  4. Employee Benefit Schemes: Companies may use bare trusts to hold shares or other assets on behalf of employees as part of an employee benefit scheme. This can provide employees with a direct interest in the company’s success while ensuring that the assets are managed in a transparent and straightforward manner.
  5. Charitable Giving: Bare trusts can be used to facilitate charitable giving by holding assets on behalf of a charity or specific charitable purpose. This can ensure that the assets are used in accordance with the donor’s intentions and provide a clear legal structure for the management and distribution of charitable funds.

Case Study

To illustrate the practical application of a bare trust, consider the following case study:

Scenario

John, a successful entrepreneur, wishes to transfer a portfolio of shares to his teenage daughter, Emily. John wants to ensure that Emily can benefit from the income generated by the shares but also wants to maintain control over the management of the portfolio until Emily reaches the age of majority.

Solution

John establishes a bare trust, with himself as the trustee and Emily as the beneficiary. The trust deed specifies that John will hold the shares on behalf of Emily and manage the portfolio according to her instructions. Emily has an immediate right to the income generated by the shares and can direct John on how to manage the investments.

Outcome

By using a bare trust, John achieves several objectives:

  • Tax Efficiency: Any income generated by the shares is taxed at Emily’s rate, which is lower than John’s, resulting in tax savings.
  • Control and Flexibility: John retains control over the management of the portfolio while Emily is a minor, ensuring that the investments are managed prudently.
  • Ease of Transfer: When Emily reaches the age of majority, she can demand the transfer of the shares into her name, simplifying the transfer process.

Conclusion

Bare trusts are a simple, flexible, and tax-efficient way to manage and transfer assets. They can be used for gifting to minors, estate planning, investment holding, employee benefit schemes, or charitable giving. Bare trusts provide a clear legal framework that protects the beneficiary’s rights and simplifies the trustee’s duties.

At DLS Solicitors, we understand the complexities of bare trusts and their practical applications. Our experienced team can help you establish and manage a bare trust, ensuring that your assets are protected and your legal obligations are met. If you have any questions or need assistance, please feel free to contact us.

Bare Trust FAQ'S

A bare trust, also known as a simple trust, is a trust in which the beneficiary has an absolute right to both the capital and income of the trust. The trustee holds the assets in their name but merely acts as a nominee for the beneficiary, who can demand the assets at any time.

Anyone legally capable of holding property can be a trustee of a bare trust. This includes individuals, companies, and professional trust corporations. The trustee’s role is to manage the trust assets on behalf of the beneficiary.

Trustees in a bare trust must:

  • Act in the best interests of the beneficiary.
  • Manage the trust assets prudently.
  • Follow the terms set out in the trust deed.
  • Transfer the assets to the beneficiary upon their request.

Any individual or entity can be a beneficiary of a bare trust. Beneficiaries are usually individuals, including minors, who may be unable to manage the assets themselves.

In a Bare Trust, the income and capital gains are taxed as the beneficiary’s income and gains. The beneficiary must include the trust’s income and gains in their tax return and pay applicable taxes.

A bare trust is set up by transferring assets to a trustee to hold on behalf of the beneficiary. This can be done through a trust deed, which outlines the terms of the trust and the beneficiary’s rights.

Yes, a bare trust can be revoked if the beneficiary, who has an absolute right to the trust assets, demands the return of the assets. Since the beneficiary has full control, they can terminate the trust anytime.

In a Bare Trust, the beneficiary has an absolute right to the trust assets and income, and the trustee has no discretion over distributions. In a discretionary trust, the trustees have the discretion to decide how and when to distribute income and capital to the beneficiaries.

Advantages of a Bare Trust include:

  • Simplicity and ease of administration.
  • Clear and absolute rights for the beneficiary.
  • Potential tax benefits if the beneficiary’s tax rate is lower than the settlor’s.

A bare trust can be used in estate planning to:

  • Transfer assets to minors who cannot legally own property.
  • Simplify the management and distribution of assets.
  • Potentially reduce inheritance tax liabilities by transferring assets from the settlor’s estate.
Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 11th July 2024.

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Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.

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