What Is a Bare Trust?

A bare trust is a basic trust in which the beneficiary has the absolute right to the capital and assets within the trust, as well as the income generated from these asset🦩s. In Canada and the U.K., bare trusts are used as a tax-efficient way of passing assets💯 to one's children or heirs.

Trust assets are held in the name of a trustee, who has the responsibility of managing the trust assets prudently so as to generate maximum benefit for the beneficiaries or as lawfully directed by beneficiaries or the trust's creator. However, the trustee has no say in how or when the tru🧜st's capital or income is distributed.

The United States does not allow the 澳洲幸运5官方开奖结果体彩网:creation of bare trusts, but they can be set up in Canad✱a or in th😼e United Kingdom.

Understanding Bare Trusts

Also known as simple trusts or naked trusts, bare trusts are widely used by parents and grandparents to transfer assets to their children or grandchildren. Bare trust rules allow beneficiaries to decide when they want to🧔 recover the trust's assets as long as they are at least 18 years of age in the United Kingdom. Beneficiaries can use the capita▨l and income they inherit from a bare trust any way they please. 

A bare trust is established using a deed of settlement or a declaration of trust. In the simplest form of a bare trust, the assets bequeathed by the individual who set up the bare trust are owned by the trustee and beneficiary. But the trustee, in a bare trust, has no responsibilities or powers. They act per the beneficiary's instructions.

There are key differences between a bare trust and other types of trusts. Income generated from trust assets in the form of interest, 澳洲幸运5官方开奖结果体彩网:dividends, and rent is taxed to theಌ beneficiary because they are the legal owner of these assets. This stipulation can offer beneficiaries substantial tax relief if they are low-earning individuals as tax policies typically favor individuals over trusts. Beneficiaries would have to report income generated by the trust assets as well as capital gains that exceed the annual exemption in their Self Assessment tax returns. 

This tax will be levied on the trust's creator or settlor, however, if the beneficiary is under the age of 18. For example, a grand🔴parent opening a bare trust for an infant grandchild would have to pay taxes on the income generated by trust assets until the infant beᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚneficiary turns 18.

Inheritance Tax Implications of Bare Trusts

Beneficiaries may also be responsible for paying inheritance tax if the trust settlor dies within seven years of establishing the trust because bare trusts are treated by tax authorities as potentially exempt transfers. No inheritance tax will be owed, however, if the settlor outlives those seven years. There is no tax implication for the individual who sets up a bare trust because they give up legal title to the assets when they are tr𝔉ansferred to the trust.

The Bottom Line

In the U.K., Canada, and certain other jurisdictions, a bare trust is a legal vehicle that allows assets and income to be transferred to a beneficiary, providing a tax-efficient way of passing down an inheritance.