What is a bare trust and what are its advantages and disadvantages? This is a question that can be difficult to answer for most people. In this article, we will discuss what a bare trust is and what its respective benefits and drawbacks are. We will explain when and why it may be useful to use a Bare Trust, and help you to understand more about this type of trust.
Defining Bare Trusts
Essentially, a bare trust is the simplest form of trust, and can be simply explained. A Bare Trust arises when a person holds a particular item of real estate property, simply as a “trustee nominee” for one or more specifically identified beneficiaries (people who benefit/receive the property). As an analogy, the Trustee is a puppet controlled by the puppet master, (the beneficiary). The trustee has no power to deal with the asset and the trustee has no power to make any decisions regarding the asset. The trustee only has the power to hold the asset for the beneficiary and must follow all instructions given by the beneficiary. This is important as the Trustee cannot withhold assets from the beneficiary.
Under a Bare Trust, the trustee (nominee) has no active duties to perform beyond conveying the property to the beneficiaries when instructed to do so by the beneficiary. The beneficiary is absolutely fully entitled to the trust property and the trustee has no claim on it. As such, a bare trust is not a reportable entity and does not require an Australian Business Number (ABN) or Tax File Number (TFN).
How is a Bare Trust Established?
A Bare Trust can be established by a formal deed known as a declaration of trust or a deed of settlement.
The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement (bare trust deed) involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.
When and Why Would you Establish a Bare Trust?
If you are feeling vulnerable and would prefer the public not to know you have a property, you can establish a Bare Trust to effectively hide your property from the general public. You can transfer your real estate to a Bare Trustee generally for no stamp duty or Capital Gains Tax. When someone does a Title Search on your property, your name does not appear anywhere as it is buried in a private document called a Bare Trust Deed.
If you’d like to surprise a person with a property or purchase a property for someone, you can also use a Bare Trust to purchase real estate and hold it on trust for that person.
Evaluating a Bare Trust: the Advantages of a Bare Trust
Now that we understand the elements and definition of a Bare Trust, we can now look into the advantages and disadvantages of a Bare Trust.
The main advantage of a Bare Trust is that a beneficiary rightfully owns the property and their ownership does not change when under a Bare Trust, unlike with other trust structures which typically transfer ownership.
Another benefit is that the trustee has no power to deal with the asset and the trustee has no power to make any decisions regarding the asset. The trustee only has the power to hold the asset for the beneficiary and must follow all instructions given by the beneficiary. This is important as the Trustee cannot withhold assets from the beneficiary.
Evaluating a Bare Trust: the Disadvantages of a Bare Trust
Some disadvantages of establishing a Bare Trust are that:
- Bare trusts do not prevent creditors from accessing the property under the Bare Trust.
- The bare trust and individual ownership without a mortgage do not provide any significant asset protection.
- As a bare trustee you must follow the instructions of the beneficiary.
Is a Bare Trust Right for You?
As we have briefly discussed, a Bare Trust is a trust structure allowing you to have a Trustee act as a nominee for property. It has its respective advantages and disadvantages, which can be difficult to navigate. If you’re considering whether to use Bare Trusts, talk to us. The Quinn Group have expertise in establishing Trusts, including Bare Trusts, and we can help you navigate the process of establishing one. We can provide tailored, personalised advice for your circumstances and advise you on the best steps forward.
If you are considering using a Bare Trust or would like advice or assistance with establishing one, contact our team of experienced lawyers by submitting an online enquiry, calling us on 1300 QUINNS or alternatively, +61 2 9223 9166 to arrange a teleconference or appointment.