With a naked trust, the beneficiary has unrestricted access to the Trust's principal, any assets held by the Trust, and any income earned. The trustee is the party in possession of the assets in a trust and is responsible for prudently managing those assets for the benefit of the beneficiaries or as otherwise instructed by the beneficiaries or the Trust's founder. On the other hand, the trustee has no control over when or how the Trust's assets and income are dispersed.

The Basics of Bare Trusts

Parents and grandparents often utilize bare trusts to transfer assets to their offspring. If a trust's beneficiaries are over 18 in the United Kingdom, they can use the bare trust rules to select when they wish to access the Trust's assets. The assets and income of a bare trust are completely at the discretion of the Trust's beneficiaries.

A settlement deed or a declaration of Trust can be used to create a bare trust. A bare trust is the most basic type of Trust, consisting of the trustee and the beneficiary legally entitled to the assets left to them by the Trust's creator. However, the trustee has no duties and authority with a bare trust. They carry out the beneficiary's wishes.

How Do Bare Trusts Function?

If you set up a Bare Trust, the people you choose as beneficiaries will have an unrestricted claim on any profits or principal the Trust generates. They are typically used for underage children who lack the legal maturity to acquire property independently. Any recipient younger than 16 or 18 is considered a minor beneficiary.

The trustees you've chosen only keep an eye on the funds until your child is old enough to take them over. While children are the most popular recipients of gifts made through Bare Trusts, anybody can be designated as the Trust's beneficiary. When beneficiaries are identified, neither you nor the trustees may alter their status as beneficiaries.

Does A Trust Terminate When A Child Becomes 18?

When a beneficiary of a Bare Trust reaches the age of majority (or 16 in Scotland), they become legally responsible for managing the trust funds, but this does not mean that the Trust terminates. When dealing with an adult beneficiary, the trustee acts more like a nominee and is bound to carry out the beneficiary's wishes regarding the assets in their care.

Developing A Bare Trust

In comparison to discretionary trusts, bare trusts are easier to establish. However, it is strongly suggested that you first consult with a professional, as the lack of flexibility of a Bare Trust makes it crucial that you fully grasp the extra ramifications before proceeding down this path. We collaborate with a network of highly competent attorneys to guarantee that all of your plans are coordinated and accurately represent your intentions.

What Are The Advantages Of A Bare Trust?

Grandparents who wish to begin saving for their grandkids but do not want the latter to have access to the funds until they reach legal adulthood sometimes establish "Bare Trusts." From a tax point of view, they're helpful as well. A Bare Trust does not have any long-term effects on inheritance taxes.

What Are The Disadvantages Of A Bare Trust?

The benefits of a Bare Trust outweigh the disadvantages of this very straightforward trust structure. One major drawback is that the beneficiaries cannot be altered once a trust is created. Since new children or grandchildren born after the Trust was established would be excluded from receiving any of the Trust's benefits, this might create problems.

In addition, once they reach the age of majority, trust beneficiaries are legally allowed to access and manage the trust assets as they see proper. This concerns some parents and grandparents who fear their assets may be liquidated and the money wasted.

A Bare Trust may be established in secrecy as a bonus, but it could backfire if any beneficiaries have a substantial income or capital gains tax burden. Nonetheless, upon attaining the age of adulthood, the trustees are obligated to notify the beneficiaries of the Trust's existence.

Should I Set Up A Bare Trust?

Bare Trusts can be a more long-term tax-efficient choice than the majority of other UK trusts if you wish to set up a trust for a specific individual but are fine with taking full management of the assets once they reach adulthood when it comes to deciding who will receive trust assets and how trustees have more leeway under alternative trust arrangements. These trusts would need much more work to manage and would be taxed differently.