Unlocking the Power of Bare Trusts: Key Benefits and How They Differ from Other Trusts

What Is a Bare Trust?

A bare trust is a straightforward legal arrangement popular in the UK and Canada, where the beneficiary has full and immediate rights to the trust's assets and any income they generate. The trustee holds the assets in name only and must follow the beneficiary’s instructions without discretion over distributions.

Unlike other trust structures, bare trusts grant beneficiaries absolute ownership, making them a favored method for passing wealth to children or heirs efficiently and with tax benefits.

Key Points to Know

• Beneficiaries aged 18 or older have complete control over the trust's capital and income.
• Tax benefits arise because income is taxed directly to beneficiaries, often at lower personal rates.
• Once established, the designated beneficiaries cannot be changed.

How Bare Trusts Work

Also called simple or naked trusts, bare trusts enable parents or grandparents to transfer assets easily. Beneficiaries can access and use the trust property freely once they reach adulthood. The trust is created through a deed of settlement or declaration, with trustees acting solely on the beneficiary's direction.

Income such as interest, dividends, or rent is taxed to the beneficiary, which can reduce tax liabilities if they have low income. However, if the beneficiary is under 18, the settlor or trustee may be responsible for taxes until the beneficiary reaches legal age.

Important Consideration

The choice of beneficiaries in a bare trust is permanent and cannot be altered after the trust's creation.

Inheritance Tax and Bare Trusts

If the settlor dies within seven years of establishing the trust, inheritance tax may apply, as bare trusts are treated as potentially exempt transfers. If the settlor survives beyond seven years, no inheritance tax is due. The settlor relinquishes legal ownership when transferring assets, so no immediate tax consequences arise at that point.

What Happens to a Bare Trust When the Beneficiary Passes Away?

In the UK, the assets and income of a bare trust become part of the beneficiary’s estate upon their death and can be passed on to their heirs accordingly.

Advantages of Bare Trusts

Bare trusts are cost-effective and simpler to establish compared to other trust types. They offer tax efficiency and allow minors to hold assets like securities that they otherwise could not own directly.

Disadvantages to Consider

The inability to change beneficiaries after setup is a key limitation. Additionally, depending on jurisdiction, trust assets may be subject to inheritance or capital gains taxes.

Conclusion

In jurisdictions like the UK and Canada, bare trusts provide a transparent, tax-efficient way to transfer assets and income to beneficiaries, ensuring clear ownership and control while simplifying estate planning.

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