What Is a Bare Trust?
Let me explain what a bare trust is. It's a straightforward trust where you, as the beneficiary, have the absolute right to the capital and assets in the trust, plus any income they generate. In places like Canada and the UK, people use bare trusts as a tax-efficient method to pass assets to their children or heirs.
The assets are held in the trustee's name, and the trustee must manage them prudently to benefit you or follow directions from you or the trust's creator. But remember, the trustee has no input on how or when the capital or income gets distributed.
Key Takeaways
Bare trusts, sometimes called naked trusts, give you as the beneficiary—provided you're over 18—the absolute right to the capital, assets, and income. They offer tax advantages to the person setting up the trust, while you get taxed at standard rates or possibly with exceptions if your earnings are low. Once the beneficiaries are set, that's final—you can't change them.
Understanding Bare Trusts
You might know them as simple trusts or naked trusts, and they're popular among parents and grandparents for transferring assets to kids or grandkids. In the UK, if you're the beneficiary and at least 18, you decide when to access the assets. You can use the capital and income however you want.
Setting up a bare trust involves a deed of settlement or a declaration of trust. In its basic form, the assets are owned by both the trustee and you, the beneficiary. The trustee has no real responsibilities or powers—they just follow your instructions.
Bare trusts differ from other trusts in key ways. Income like interest, dividends, or rent from the assets is taxed to you because you're the legal owner. This can mean big tax savings if you're a low earner, since tax rules often favor individuals over trusts. You'll need to report this income and any capital gains over the annual exemption in your self-assessment tax return.
If you're under 18, the tax falls on the trust's creator or settlor. For instance, if a grandparent sets up a bare trust for a young grandchild, they pay taxes on the income until you turn 18.
Important Note
Once you set the beneficiary or beneficiaries for a bare trust, you can't reverse that decision.
Inheritance Tax Implications of Bare Trusts
As a beneficiary, you might have to pay inheritance tax if the settlor dies within seven years of creating the trust, since tax authorities treat bare trusts as potentially exempt transfers. But if the settlor lives beyond those seven years, no inheritance tax applies. The settlor faces no tax because they give up legal title to the assets upon transfer to the trust.
What Happens to a Bare Trust When You Die?
In the UK, if you're the beneficiary and you die, the assets and income become part of your estate. They can then pass to your own heirs and beneficiaries.
What Are the Advantages of a Bare Trust?
Where they're allowed, bare trusts give tax benefits to the grantor, and they're cheaper and simpler to set up than other trusts. Plus, if the beneficiary is under 18, it lets them hold assets like securities that they couldn't otherwise.
What Are the Disadvantages of a Bare Trust?
The biggest downside is that you can't change the beneficiaries after setup. Also, depending on where you are, the assets might face inheritance or capital gains taxes.
The Bottom Line
In the UK, Canada, and some other places, a bare trust is a legal tool for transferring assets and income to a beneficiary. It provides a tax-efficient way to hand down an inheritance.
Other articles for you
A gift causa mortis is a revocable transfer of personal property made by someone expecting imminent death, differing from wills and inter vivos gifts in revocability and tax treatment.
A waterfall payment structure prioritizes debt repayments to creditors in a hierarchical order, ensuring higher-tiered ones are paid first.
A 100% equities strategy allocates all investable cash solely to stocks, excluding other asset classes like bonds or derivatives.
Undivided profit refers to a company's accumulated earnings not distributed as dividends or transferred to surplus, often reinvested for growth.
This text provides comprehensive guidance on colleges and universities, including choosing institutions, financing education, key exams, and business schools for career advancement.
A bill of lading is a crucial legal document in shipping that serves as a receipt, contract, and proof of ownership for goods in transit.
The deposit multiplier shows how banks can expand the money supply by lending out a portion of their deposits based on reserve requirements.
Wage push inflation occurs when rising wages lead to higher prices for goods and services, creating a cycle of further wage demands.
This text explains overdrafts as bank-provided credit allowing transactions despite insufficient funds, covering fees, protection, and management strategies.
Valuation reserves are mandatory funds set aside by insurance companies to protect against investment value declines and ensure solvency for paying claims and annuities.