What is a 'Naked Trust'

A naked trust is a straightforward type of trust. The trustor transfers assets in the form of money or property into this trust as a method of passing them on to beneficiaries. This estate-planning tool is commonly used by parents or grandparents to transfer assets to children or grandchildren. Anyone thinking of establishing this type of trust must consider the potential implication this account could have for college financial aid eligibility for the children named as beneficiaries.

BREAKING DOWN 'Naked Trust'

A naked trust is also known by several other names, including a bare trust, dry trust or passive trust. Whatever specific name is used, this type of trust always follows a fundamental process and structure. The initial owner of the assets, who would be the trustor, loses all control over the assets once they are placed in the trust. The trustee has only nominal control of the assets in the trust. The trustee’s only responsibility with a naked trust is to ensure the transfer of the assets to the beneficiary at the designated time. After that task is completed, the trustee’s obligations are essentially done. Once the trust's beneficiary turns 18, they have absolute entitlement to the assets involved in the trust, along with any interest that may have been generated from the account and its assets.

Naked Trusts and Other Types of Trusts

There are quite a few different types of trusts. Many of these can be set up to be either revocable or irrevocable, depending on the wishes of the trustor. Some of the most common kinds of trusts include charitable trusts, special needs trusts, and constructive trusts. Then there is a spendthrift trust, which is set up for a person who wants to avoid overspending or going against their budget.

A blind trust, on the other hand, is a specific type of naked trust in which the trustors have no participation in, or control over, the assets and operation of the trust, and the beneficiaries often may not even have knowledge of the trust or the assets controlled by it. Blind trusts are frequently established when a wealthy person is elected to a prominent political office and must distance themselves from the management of their companies or business affairs to avoid any potential conflicts of interest.

With a naked trust, the trustee has a very basic role and minimal responsibilities. With other types of trusts, however, the trustee is often expected to invest the assets as the beneficiary’s representative.

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