What Is a Bare Trust?

Bare trusts are a popular choice for anyone wanting to set money aside for a loved one who is not yet old enough to manage their own financial decisions. This is often a child or grandchild, who will inherit the money once they reach the age of 18. A bare trust is a popular way to achieve this because the legal mechanism is generally easy to understand and manage. However, before setting up a trust, you need to be aware of the pros and cons of this legal tool and consider whether a bare trust is the right option to meet your needs.

Planning for the future can often seem daunting, especially when it comes to ensuring that our loved ones are taken care of after we are gone. One of the estate planning tools the solicitors at Percy Hughes & Roberts often discuss with our clients is a bare trust – a straightforward way to manage and pass on assets.

Simple and direct, bare trusts are an excellent way for anyone looking to give a financial gift to a child, grandchild, or anyone else. They allow you to set aside money and/or property until the time is right to pass assets to the beneficiary. At the same time, assets held in the trust are considered to be owned by the beneficiaries outright, which can mean that they are taxed differently than if they were part of your estate.

In this guide, our expert trust solicitors break down the essentials of what a bare trust is, the steps to set one up, and what you need to think about before creating one. If you have any questions we have not answered, our expert Wills, Trusts & Probate solicitors are happy to speak to you regarding your query and provide the legal services you need. You can contact us by completing the enquiry form below or by calling 0151 666 9090.

Bare Trusts Explained

A bare trust, also known as a simple trust or an absolute trust, is one of the most straightforward types of trust. It is a legal arrangement where assets are held by a trustee but are actually owned outright from the outset by the beneficiaries. Here is what you need to know about bare trusts:

• Beneficiary rights: The beneficiaries have an immediate and absolute right to both the capital and income generated by the trust once they are legally an adult – that is 18 in England and Wales, and 16 in Scotland.
• Transparency and control: The trustee’s role is to manage the trust until the beneficiary is of legal age, but they have no discretion over the trust's assets. The beneficiaries can take control of their assets at any time once they reach the legal age for their jurisdiction. If you would prefer that trustees manage distributions on behalf of the beneficiary, a discretionary trust may be a more suitable option.
• Taxation: For tax purposes, the assets and income of the trust are typically treated as belonging to the beneficiary. This means that any tax is generally payable at the beneficiary's rate, which can be advantageous if they have a lower income. If the assets held in the trust generate income, beneficiaries may need to pay income tax, for example.
• Simplicity: Bare trusts are relatively simple to set up and understand. They do not require the same level of administration as more complex trusts.
• Irrevocability: Once established, the beneficiaries of a bare trust cannot be changed, which means assets placed into a bare trust are a firm gift to the beneficiary.

There are many types of trust available, and a trust deed itself can provide specific provisions. As such, it is vital to consider these aspects of bare trusts to determine whether or not this is the right trust structure to meet your needs before moving ahead.

What Is a Trustee, Beneficiary and Settlor?

For clarity, we will use the following terms throughout this article:

• Trustee: The person or organisation that manages and holds the trust's assets on behalf of the beneficiary.
• Beneficiary: The individual or group who is entitled to the benefits from the trust's assets.
• Settlor: The person who creates the trust and places assets into it for the benefit of the beneficiary.

If you need support in understanding or creating a trust deed, or in fulfilling the duties assigned to trustees, contact our team today for support.

What Is the Process of Setting Up a Bare Trust?

Setting up a bare trust is a relatively straightforward process. Here is a simplified overview:

• Choose beneficiaries: Decide who will benefit from the trust. This person will have the right to the assets when they reach the age of 18 (in England and Wales) or 16 (in Scotland). This is often a child or grandchild. You can choose one or more people as beneficiaries.
• Select trustees: Appoint trustees who will manage the trust assets until the beneficiary is legally entitled to take control of them. This is usually a family member, a close friend or a professional, like a solicitor. The settlor can also be a trustee.
• Create the trust deed: While a formal deed is not always necessary for a bare trust, it is advisable to have a written document that outlines the trust's terms, the beneficiary's entitlement, and the duties of the trustees.
• Transfer assets: The settlor then transfers assets into the trust. This could be money, investments, property, or other assets.
• Register the trust: The trust may need to be registered with HM Revenue & Customs’ (HMRC) Trust Registration Service. 
• Manage the trust: The trustees oversee the assets and manage them in the best interests of the beneficiary until they come of age.
• Beneficiary takes control: Once the beneficiary reaches the age of majority, they can assume control of the trust assets.

It is always advisable to seek professional advice when setting up a trust to ensure that it meets legal requirements and is set up in a tax-efficient manner. Percy Hughes & Roberts can assist in ensuring all legal aspects are correctly addressed.

What Are the Benefits of a Bare Trust?

The benefits of a bare trust include:

• Bare trusts are straightforward to set up and understand, with less complexity in how they are managed compared to other types of trusts.
• The beneficiary has the absolute right to the assets and income of the trust once they reach the age of majority, giving them full control.
• The tax on the income and gains of the trust's assets is usually assessed based on the financial circumstances of the beneficiary, which can be more tax-efficient if they have a lower income or unused personal allowances. If the beneficiary has no other taxable income, which would usually be the case for a child, they would have their full tax allowance available to offset any income tax or capital gains tax liabilities that may result from inheriting the trust’s assets.
• The beneficiary is immediately entitled to the trust assets and income, which can be advantageous for long-term financial planning.
• If the settlor lives for seven years after placing the assets into the trust, the value of these assets is usually exempt from the value of their estate. This means that it is not factored into calculations of Inheritance Tax liability.
• Additional contributions can be made to the trust at any time, offering a certain degree of flexibility to the settlor.
• Until the beneficiary comes of age, the assets are protected within the trust structure and managed by the trustees.

These benefits make bare trusts an attractive option for gifting to minors or for straightforward asset transfers without the need for ongoing discretion or complex trust management.

What Are the Potential Drawbacks of a Bare Trust? 

The potential drawbacks of a bare trust include:

• Once the trust is established, the beneficiaries and their entitlements cannot be changed, even if circumstances change.
• Beneficiaries gain full control over the trust assets at age 18, which might be too young for them to manage substantial wealth responsibly. Young beneficiaries may not have the maturity to manage and preserve their inheritance responsibly once they gain control. Some other trust options allow the inheritance to be passed down at a later date, or at the discretion of trustees in the case of discretionary trusts. 
• While the assets are protected from third-party claims against the settlor, they may not be protected if the beneficiary encounters financial difficulties, such as bankruptcy or divorce.
• If the settlor dies within seven years of transferring assets into the trust, the value of those assets may still be considered part of their estate for Inheritance Tax purposes.
• The trust may need to be registered, which can be an additional administrative burden for the trustees.

There are other types of trusts that may be more suitable for your purposes. Call PHR Solicitors today to discuss your needs and find out more about the trust options we can offer.