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What is a Bare Trust?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 November 2016
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    Conjecture Corporation
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Also known as a naked or simple trust, a bare trust is a type of trust fund in which the beneficiary has the right to draw on both the capital and any income generated from the trust. While trustees normally direct this type of trust, the beneficiary is able to instruct the trustees in how to manage the account, and change those instructions when and as desired. It is not unusual for the income from this type of trust to be disbursed annually, leaving the capital in the trust to begin generating additional revenue in the future.

The ability of the beneficiary to draw on all the assets of the bare trust is one of the ways this trust agreement is different from other types of trust funds. Often, a trust fund is established to create a source of income for loved ones, placing some restrictions on how much support they can receive during any given point in time. With a bare trust, no such restriction exists. The beneficiary may withdraw funds on some type of recurring basis or even drain the fund if that is what he or she wishes to do.

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It is important to note that with a bare trust, the beneficiary is responsible for paying taxes on all disbursements that take place. This is in contrast to other types of trusts in which trustees would be charged with the responsibility of paying taxes out of the resources found in the trust. When this is the case, tax agencies would work directly with the beneficiary to settle any outstanding tax liability rather than working with trustees.

There are a few benefits to establishing a bare trust. In most nations, the process makes it easy to avoid the need to probate assets and incur inheritance taxes, two common issues associated with wills and trusts of other types. At the same time, a beneficiary who is a good money manager will be able to utilize this type of trust to create some steady income, while resisting the urge to exhaust the assets in a short period of time. However, a bare trust is not ideal in every situation. Should the individual establishing the trust believe that the beneficiary will not be able to manage the money to best effect, going with some other type of trust in which the trustees have control of the assets and disburse them to the beneficiary according to the terms of the trust agreement would be a better option.

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Misscoco
Post 2

A bare trust really has an advantage when it comes to executing a will. Just the fact that the beneficiary doesn't have to put the funds of the trust through probate or pay estate taxes on it is a real plus. But, of course, they would have to pay taxes on any profits that came out of investment of the trust money.

I'm not sure if this kind of trust would be appropriate to set up for children. I don't think so. No one would want a 15 year old to know that he has unlimited access to a large amount of money.

Esther11
Post 1

I think that before anyone establishes a bare trust for a loved one, they would have to make sure that person is responsible enough that they wouldn't take out all the money and spend it foolishly. With a bare trust, the trustee couldn't do anything about it.

If I was the grantor of the trust, I would hope that the beneficiary would be resourceful enough to just take out what is needed and try the make the rest grow.

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