What is a bare trust?

A bare trust is generally known as a trust in which the person receiving property, the beneficiary, is entitled to the income and the capital of the trust. The income is the amount that the property earns while it is held in trust for the beneficiary. The capital is the amount of property in the trust. A bare trust is also called a simple trust or naked trust. In a bare trust, the beneficiary decides when he will come to own the property of the trust. A bare trust is the opposite of a discretionary trust. In a discretionary trust, the trustee, the person who holds the trust property for the beneficiary, determines when the beneficiary will come to own the property of the trust.

Complex Trusts

A bare trust is one of the most basic types of trusts. Trusts that are more complicated are called “complex trusts.” In a complex trust, the income and capital need not be distributed. The trust property and income can also be distributed in varying amounts. A trustor, a person who gives property through a trust, can set up a bare trust to take effect while he or she is living. This makes the trust an inter vivos trust. A trustor can also set up a bare trust by writing a will. This allows the trust to exist after the person’s death. This type of trust is a testamentary trust. Trustors typically create a bare trust to help their beneficiaries avoid the probate process. Beneficiaries still have to pay federal income taxes on property they receive from a bare trust. A bare trust has its own tax return. Beneficiaries use this return to determine their personal income tax.

U.S. federal tax law and state estate laws recognize a bare trust as a trust that distributes all of the income in the trust to the beneficiary. A bare trust does not give any of its income to charity. Tax laws specify that beneficiaries must receive the income of the trust during the year that the trust earned the income.

Bare Trust vs. Other Types of Trusts

A bare trust operates differently from a trust in which the income accumulates and becomes part of the capital of the trust. Trustors may set up a bare trust to make property available to beneficiaries who have an understanding of what they want to do with the trust property, but cannot immediately take possession of it. Beneficiaries of bare trusts may include teenagers and adults with medical, mental health, or substance abuse issues who are making progress towards a full recovery. Sometimes a trustor creates a bare trust to allow the beneficiary to mask his or her identity. For example, a trust may be sold a property without questions. An individual might be questioned and perhaps denied the opportunity.

A bare trust does not provide trust property with full legal protection from creditors. If creditors of the trustor learn about a bare trust before the trust property is distributed, the creditors can attempt to recover their debt through a lawsuit.

Case Studies: Understanding Bare Trusts and Their Applications

Case Study 1: Protecting the Future of a Minor Beneficiary

Emma, a single mother, has significant assets she wants to pass on to her 10-year-old daughter, Lily, in the event of her untimely demise. However, she is concerned about Lily’s ability to manage the inheritance at such a young age.

Emma consults with an estate planning attorney who recommends setting up a bare trust for Lily. In the trust, Emma appoints a trusted family friend as the trustee to manage the assets on Lily’s behalf until she reaches the age of 25. The bare trust ensures that Lily will receive the income and capital from the trust, providing for her needs while safeguarding the assets until she becomes a responsible adult.

Case Study 2: Privacy and Efficient Estate Planning

Michael, a successful entrepreneur, owns multiple businesses and valuable properties. He desires to keep the details of his estate private and avoid probate to ensure a smooth transfer of assets to his chosen beneficiaries after his passing.

Michael works with his estate planning team to establish a testamentary bare trust through his will. By using a bare trust, he ensures that the assets are held in trust for the beneficiaries, bypassing probate and maintaining confidentiality. The trust document is carefully drafted to provide clear instructions to the trustee, allowing for the efficient distribution of assets according to Michael’s wishes, without public scrutiny.

Case Study 3: Managing Assets for Beneficiaries With Special Needs

Susan and David, parents of a child with a disability, want to ensure that their daughter, Emily, is financially secure even after they are gone. They worry that leaving her a lump sum of assets directly could impact her eligibility for government assistance.

Susan and David establish a bare trust for Emily, designating a professional trustee who specializes in managing assets for beneficiaries with special needs. The trustee is responsible for distributing funds for Emily’s benefit while ensuring that she remains eligible for government programs. The bare trust allows Emily to receive financial support tailored to her needs, enhancing her quality of life without jeopardizing her access to essential services.

Case Study 4: Shielding Assets From Creditors

Mark, a successful entrepreneur, faces potential lawsuits and creditor claims due to the nature of his business ventures. He is worried that his assets might be at risk if creditors come after him.

Mark seeks the advice of a skilled estates and trusts attorney who recommends setting up a bare trust to protect some of his assets. By transferring the assets into the bare trust, Mark effectively places them beyond the reach of his personal creditors, as the trust’s property is legally separate from his personal assets. This strategic move helps shield a portion of his wealth from potential financial threats.

Getting Legal Help

If you have further questions about bare trusts, contact an estates and trusts attorney for advice.