Understanding Bare Trusts:
Should You Consider This Estate Planning Tool?
In the complex and often overwhelming world of estate planning, the term "bare trust" might not be the first tool that comes to mind. However, this seemingly niche legal arrangement can be an invaluable asset for certain situations, offering a myriad of advantages for those seeking to protect and manage assets for their beneficiaries.
What is a Bare Trust?
This type of trust is incredibly simple in its structure, often involving a single beneficiary and a single asset. Unlike other trusts which may have a more complex set of legal rules and tax implications, bare trusts provide a straightforward framework for asset management, especially when the assets are intended to be transferred to a beneficiary in a clear and uncomplicated manner. This makes them an attractive option for individuals who want to pass on assets to loved ones without the burden of complicated legal arrangements.
Advantages
Tax Efficiency
One significant advantage of a bare trust is its tax efficiency. For income tax purposes, the beneficiary is the only one who is taxed on the income from the trust. This often results in lower tax rates compared to the trustees of other trust types. It is particularly beneficial for minor beneficiaries who have little or no income tax allowances as it allows them to utilize their personal allowances, potentially reducing the overall tax liability.
Control and Flexibility
For those looking to pass on assets with minimal interference or complexity, this tool offers invaluable control and flexibility. The beneficiary is generally named within the trust and is known from the outset, permitting a more straightforward transfer of the assets when the time is right. Assets can be transferred into the trust during the settlor's lifetime or under the terms of their will upon their death.
Protection and Planning
A bare trust allows the settlor to plan and protect assets for a beneficiary without transferring legal ownership. This can be particularly crucial when the ultimate transfer of assets is delayed, such as when a beneficiary is not yet of age or in the presence of other restrictive covenants. Even in cases of the settlor's insolvency, as long as payment is not made with the intention of defrauding creditors, the assets in it are usually not vulnerable to the settlor's creditors.
Drawbacks and Considerations
While this tool has many advantages, it is not a one-size-fits-all solution, and there are important considerations to keep in mind.
Irrevocable Nature
Once assets are placed in it, the decision is largely irrevocable. This inflexibility can be a drawback for some, as it means the settlor must be confident that the selected beneficiary is the right one and that the decision is final.
Loss of Absolute Control
By setting up a bare trust, the settlor relinquishes a degree of control over the assets to the trustees, albeit to a lesser extent than with other trust types. Potential settlers should carefully consider the implications of this loss of control, albeit minor, and ensure that the terms of the trust align with their long-term goals.
Capital Gains Tax
While income tax considerations are relatively straightforward with a bare trust, capital gains tax can be more complex. The transfer of assets into a trust can be considered a disposal for capital gains tax purposes, triggering a potential tax liability. However, there are exemptions and reliefs available, and advice from a tax professional is crucial to manage this effectively.
How to Set it Up
The process of setting up a bare trust is more straightforward than with other trust types, but still requires careful consideration and professional guidance. It typically involves:
- Deciding on the trustee (usually a family member or friend).
- Drafting the trust document, which outlines the terms and conditions of the trust.
- Transferring legal ownership of the assets into the trust. This may involve drawing up deeds or making formal declarations to ensure the correct legal process is followed.
- Providing details of the trust to HM Revenue and Customs so that the trust is registered for self-assessment tax returns, if necessary.
- Informing the beneficiary that the trust has been established and of their right to the trust assets once they reach the specified age or circumstances.
For individuals looking to simplify the transfer of assets to their beneficiaries, a bare trust offers a comprehensive yet streamlined vehicle for doing so. With advantages in terms of tax efficiency, control, and protection, it can be a powerful tool in the toolbox of estate planning. However, it is essential to seek professional advice to ensure that this is the right fit for one's financial situation and goals. By weighing its advantages against the possible drawbacks and considering the setting up process, individuals can make an informed decision.