Bare Trust

A bare trust (also called a naked or simple trust) is a basic trust arrangement in which the beneficiary has the absolute right to the trust’s capital, assets, and income. Trustees hold legal title but have no discretion over distributions; beneficiaries can demand assets and income when they become entitled to them.

How a bare trust works

• Created by a deed of settlement or declaration of trust.
• The trustee holds legal title to assets but must follow the beneficiary’s instructions.
• The beneficiary is the beneficial owner and has the right to income and capital.
• Once named, beneficiaries cannot be changed.

Jurisdiction notes

• Commonly used in the U.K., Canada, and a number of other jurisdictions.
• The raw text states that the United States does not allow creation of bare trusts; treatment and availability vary by country, so local law should be checked.

Tax treatment and reporting

• Income (interest, dividends, rent) and capital gains arising from trust assets are typically treated as belonging to the beneficiary and taxed at their personal rates.
• If the beneficiary is a minor (under 18 in the U.K. example), the settlor may be liable for tax on the trust income until the beneficiary reaches the specified age.
• Bare trusts can offer tax advantages when beneficiaries are low earners, since individuals are often taxed more favorably than trusts.
• For inheritance tax purposes, transfers into a bare trust may be treated as potentially exempt transfers: if the settlor dies within seven years of making the transfer, inheritance tax may apply; if they survive seven years, no IHT is due on that transfer.

What happens on death

• If a beneficiary dies, the trust’s assets and income are treated as part of that beneficiary’s estate and pass according to their will or intestacy rules.

Advantages

• Simple and inexpensive to set up and administer compared with discretionary or complex trusts.
• Beneficiaries have clear, absolute ownership and control once entitled.
• Can permit minors to hold assets (such as securities) through a legal owner until they reach the qualifying age.

Disadvantages and risks

• Beneficiaries are fixed and cannot be changed after creation.
• Assets may be exposed to the beneficiary’s creditors or relationship claims once they take beneficial ownership.
• Tax and inheritance implications depend on jurisdiction and can still apply (e.g., IHT, capital gains tax).
• Limited flexibility compared with discretionary trusts.

Key takeaways

• A bare trust gives beneficiaries absolute ownership rights while trustees hold legal title only.
• Taxation generally flows to the beneficiary, which can be beneficial for low‑income recipients but may create liabilities if beneficiaries are minors.
• Treatment and rules vary by country; check local law and consider professional advice when creating or using a bare trust.

Bottom line: A bare trust is a straightforward vehicle for passing assets directly to a named beneficiary with minimal trustee discretion. Its simplicity and potential tax benefits make it useful in appropriate circumstances, but its inflexibility and tax/estate consequences mean professional guidance is advised.