TrustsWillsWhat are Bare Trusts?

One of the most common types of trust we see used in day to day life and in will planning is the bare trust. This type of trust commonly arises naturally after a testator dies leaving assets to their minor children, or other minor beneficiaries who cannot legally inherit until they are 18. This week’s article will cover what a bare trust is and what their advantages and disadvantages are.

Background: Vested and Contingent Interests

Before discussing what bare trusts are, it is important to understand the difference between vested and contingent interests.

If a will makes a gift to a person, they will have a vested interest if they do not need to meet any conditions. If a beneficiary needs to meet a condition (for example reaching a certain age or surviving by a number of days) they will not have a vested interest and will instead have a contingent interest. Once this condition is met, they will receive a vested interest.

What is a Bare Trusts

A bare trust is a trust in which the beneficiary has an immediate and absolute interest in the trust income and capital. They will have a vested interest but the trust assets are held in the names of the trustees. The trustees have no real active duties and hold essentially as a nominee, except where the beneficiary is a minor in which case they will have some duties to perform. Once the beneficiary is 18, the trustees must follow the instructions of the beneficiary, including transferring assets to the beneficiary if that is requested.

A bare trust would commonly be created where assets are left via a will to a minor beneficiary without any age conditions. In such a case the beneficiary has a vested interest and therefore is entitled to the trust assets but they cannot benefit until they have reached 18 and the trustees would hold on bare trusts for them. This may not always be the case and it is possible to create other bare trusts.

Bare Trust Advantages

Bare trusts have a number of advantages, they are simple for testators and trustees to understand and are straightforward to administer. The beneficiary of the bare trust is treated as owning the trust assets for most tax purposes, including inheritance tax, and the beneficiary is treated mostly as being the absolute owner. This means that anniversary and exit charges do not apply to a bare trust. Similar if an interest in the client’s main residence passes to a bare trust via their will and the beneficiary is a descendant, RNRB can apply.

Bare Trust Disadvantages

If the beneficiary of a bare trust dies before reaching 18, as they have a vested interest the trust assets are treated as owned by the beneficiary. This has two important consequences. Firstly, the trust assets are included in the beneficiary’s estate for IHT purposes and there may be an IHT charge due to this. Secondly, the trust assets will pass into the beneficiary’s estate. As most bare trusts will be benefiting minors, this would mean that the trust assets will pass via the beneficiary’s intestacy. This would not be the case if the beneficiary has a contingent interest in the estate and instead the trust assets would pass back into the testator’s estate and there would not be any IHT charge on the beneficiary’s death.

Beneficiaries of a bare trust are entitled to the take control of their share of the trust assets at 18 and if they demand that the trustees release assets to them the trustees cannot refuse this. This is the case even if the bare trust is written so that the trustees would hold on trust until a later age. Bare trusts are not suitable therefore where a testator wishes to delay a beneficiary’s inheritance later than 18. In exceptional cases, the trustees may be able to use a power of advancement (such as the one contained in S32 Trustee Act 1925) to prevent a beneficiary from taking control when they reach 18. Where a testator does wish to delay a beneficiary’s inheritance past the age of 18, other options such age contingent gifts or discretionary trusts should be considered.