Bare Trust

DEFINITION of 'Bare Trust'

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 assets. Bare trusts are widely used by parents and grandparents to transfer assets to their children or grandchildren.Trust assets are held in the name of a trustee, who has the responsibility of managing the trust assets in a prudent manner so as to generate maximum benefit for the beneficiaries. The trustee has no control over these assets and has no say or discretion in directing the trust's income or capital. Also known as a simple trust.

BREAKING DOWN 'Bare Trust'

Income generated from trust assets in the form of interest, dividends and rent is taxed in the hands of the beneficiary, making it a tax-efficient way of transferring assets to one's descendants. There is no tax implication for the individual who sets up a bare trust, since he or she gives up legal title to the assets when they are transferred to the trust.

One negative feature of a bare trust is that the beneficiaries cannot be changed once it has been set up. Another drawback is that there may be potential capital gains and inheritance tax implications in certain jurisdictions.

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