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 assets.

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 or as lawfully directed by beneficiaries or the trust's creator. However, the trustee has no say in how or when the trust's capital or income is distributed. 

BREAKING DOWN 'Bare Trust'

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 the capital and income they inherit from a bare trust any way they please. 

There are key differences between a bare trust and other types of trusts. Income generated from trust assets in the form of interest, dividends and rent is taxed to the beneficiary because he or she is 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 settler, however, if the beneficiary is under the age of 18. For example, a grandparent opening a bare trust for an infant grandchild would have to pay taxes on the income generated by trust assets until the infant beneficiary turns 18. 

Inheritance Tax Implications of Bare Trusts

Beneficiaries may also be responsible for paying inheritance tax if the trust settler 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 settler outlives those seven years. 

There is no tax implication for the individual who sets up a bare trust, because he or she gives up legal title to the assets when they are transferred to the trust.

Once a beneficiary or beneficiaries for a bare trust are set, the decision can't be reversed. 

Bare trusts are also known as simple trusts or naked trusts. 

RELATED TERMS
  1. Trust Company

    A trust company is a legal entity that acts as fiduciary, agent ...
  2. Active Trust

    An active trust is a trust in which the trustee is required to ...
  3. Beneficial Interest

    A beneficiary interest refers to an individual's right to benefit ...
  4. Charitable Lead Trust

    A trust designed to reduce beneficiaries' taxable income by first ...
  5. Authorized Investment

    Authorized investments are those that are permitted within a ...
  6. Prudent Investor Rule

    The prudent investment rule requires a fiduciary to invest trust ...
Related Articles
  1. Retirement

    How To Set Up A Trust Fund In Australia

    No, they're not just for the super-rich. But you need to know the rules.
  2. Financial Advisor

    Should You Put Your Faith In A Trust?

    Many institutions want a piece of your portfolio, but trusts can provide a one-stop shop.
  3. Managing Wealth

    Pick the Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  4. Managing Wealth

    Encouraging Good Habits With An Incentive Trust

    Money can be a powerful motivator - why not use it to teach your heirs positive lessons?
  5. Investing

    Establishing a revocable living trust

    This arrangement allows you to have more control over your estate — both before and after your death.
  6. Financial Advisor

    How Trust Funds Can Safeguard Your Children

    Certain types of trust funds can help to protect your assets from bankruptcies and civil actions, and can be established to safeguard your children and designated beneficiaries.
  7. Investing

    Unit Investment Trusts Market: 3 Trends in 2016

    Learn more about unit investment trusts (UITs), and discover some of the most common trends in the UIT market to date in the year 2016.
  8. Financial Advisor

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  9. Financial Advisor

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  10. Retirement

    Designating a trust as retirement beneficiary

    Designating a trust as your IRA beneficiary can be beneficial, but it requires proper planning to avoid problems.
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center