A bare trust is a legal arrangement wherein the trustee holds ownership of elements such as property, investments and money on behalf of a beneficiary. As the name implies, a bare trust offers the beneficiary minimal protection, meaning that they have direct access to the trust’s funds if they are over the age of 18.

For the individual who sets up the trust, one of the primary advantages of a bare trust is the potential tax savings. Owners of a bare trust may benefit by reducing their tax liability by declaring the trust income for their own personal benefit or by transferring some or all of the property to other family members with lower incomes or capital gains tax rates.

The beneficiary of a bare trust is essentially treated as the owner of the trust’s assets and is responsible for the reporting and taxation of its income. Depending on the size of the trust’s assets, if any, the beneficiary may be required to pay income tax on any funds they receive. Additionally, they may be subject to the capital gains tax upon disposal of the trust.

It is important to note that the beneficiary of a bare trust are not able to change once the trust is established. Therefore, it is essential to carefully consider who should be named as the beneficiary prior to setting up the trust.

As a result of the constraints associated with bare trusts, many investors opt to establish a discretionary trust which allows for more flexibility in relation to reporting, taxation and management of trust finances. It is important to speak with a legal professional when deciding on what type of trust is best for you.