A Beginner’s Guide to Bare Trusts 

The term “bare trust” has become increasingly familiar to many people. Don’t worry — bare trusts are actually quite simple! This blog will provide you with all the information you need about bare trusts in easy-to-understand terms. 

What is a Bare Trust? 

A bare trust (sometimes referred to as a simple trust or naked trust) is a legal arrangement in which one individual (the trustee) retains money, property, or investments for another individual (the beneficiary). While the trustee holds the assets, the beneficiary has full rights to the trust’s income and capital. To put it another way, the beneficiary owns the assets, and the sole job of the trustee is to manage them until the beneficiary reaches the age of 18. 

Key Features of a Bare Trust 

To make things clearer for you as to how a bare trust works, here are the key features explained: 

1. Full Beneficial Ownership: In a bare trust, the beneficiary has full entitlement to the assets. This means that while the trustee might legally hold the assets, they belong to the beneficiary in every practical sense.  
2. No Discretionary Power for the Trustee:One of the major differences between a bare trust and other types of trusts is that the trustee doesn’t have any decision-making power. The trustee cannot determine the manner and time of asset distribution–they must act according to the simple instructions given by the beneficiaries. This makes the structure of a bare trust straightforward. 
3. Taxation of a Bare Trust  In Ireland, assets held in a bare trust are treated as if they belong directly to the beneficiary. This means that the beneficiary is responsible for any taxes due on the assets, including income tax or Capital Gains Tax (CGT) on any profits made from selling assets. The trustee is not responsible for paying these taxes, the burden falls completely on the beneficiary. 

Exit Tax 

It is also important to note that an Exit Tax (currently 41%) applies to assets held in a bare trust. This tax is levied when assets are transferred or disposed of, and it is important to plan for this tax liability in advance. 

Irreversible Transfers 

Once assets are placed into a bare trust, they cannot be reversed. The assets belong to the beneficiary and cannot be reclaimed by the settlor. For instance, if you set up a trust for your child, those assets are irrevocably theirs once placed in the trust. 

Common Uses for Bare Trusts 

Due to them being uncomplicated and flexible, bare trusts are used frequently. The following are some instances when one is likely to encounter a bare trust: 

• Holding Assets for Minors: Parents or guardians often use bare trusts to hold assets (such as savings or property) for children until they turn 18. This ensures the assets are secure until the child is legally able to manage them. 

• Nominee Arrangements: Sometimes, a bare trust is used when someone holds shares or investments on behalf of someone else. This is especially common in investment portfolios, where the trustee holds assets but the real owner is the beneficiary. 

• Succession Planning: Bare trusts are also useful in estate planning, where assets are placed in a trust to make the transfer of ownership smoother after someone passes away. 

• Small Gift Exemption: Another common use for a bare trust is to hold assets under the small gifts exemption rule. For example, you can fund a bare trust for your child and give them up to €3,000 per annum without it eating into your inheritance tax threshold. This is a useful way to transfer wealth incrementally while taking advantage of tax exemptions. 

Why Choose a Bare Trust? 

Bare Trusts are one of the simplest ways to hold or protect assets for someone else. This type of trust is different than others because other types may contain complex stipulations about how the assets are administered by the trustee and a bare trust does not. It’s clear who controls the assets, and the rights of the beneficiary are fair and direct. 

In Summary 

A bare trust in essence, is very simple in its application; it allows one person to manage or hold assets on behalf of another person. The beneficiary has full control, and the role of the trustee is simply to safeguard the assets until the time the beneficiary decides to take the assets. 

Whether it’s for holding assets for children, simplifying succession planning, or handling investments, bare trusts provide simplicity, flexibility, and transparency in financial arrangements. 

If you’re looking for a simple and effective way to manage assets or transfer them to someone else, a bare trust could be the perfect solution!