When looking to develop a trust-based strategy you will find that there are numerous options on how to go about doing this. There are many different ways you can set up a trust. Also, each type of trust will have its own pros and cons that you should take into consideration. One common type of trust that can be effective is a bare trust. 

How does a bare trust work? 

With a bare trust the beneficiary is granted absolute rights over the assets in the trust, including any income earned. The trustee will hold legal title over the trust assets but will not have any power over decisions on how capital is distributed. 

Why choose a bare trust? 

There are several benefits which make a bare trust attractive for many people. One of the reasons people commonly select this type of trust is because it allows beneficiaries to decide when they want to take possession of the trust’s assets. Bare trusts also give beneficiaries the power to manage trust assets in any manner they desire. 

How do you set up a bare trust? 

A deed of settlement or declaration of trust are the two types of legal documents utilized to initiate a bare trust. A professional family financial planning advisor can help you in creating a bare trust. 

What are the tax implications with a bare trust? 

Those who choose to use a bare trust should understand the tax implications of doing so. With a bare trust any income generated from the assets held in the trust will incur tax liability for the beneficiary, as long as he or she is at least 18 years of age. This includes interest, dividends, rental income, and any other type of income from these assets. 

Not only does income from trust assets need to be reported on a beneficiary’s tax return, but capital gains also need to be reported on the Self Assessment tax return. However, a beneficiary only needs to report capital gains above the annual exemption. 

On the other hand, if the beneficiary is still a minor and is under the age of 18, the settlor or creator of the bare trust will be taxed. For instance, if grandparents create a bare trust for their infant grandchild, they will pay the related taxes until the beneficiary reaches 18 years of age. 

Inheritance tax rules 

If the trust settlor passes away within seven years following the establishment of the bare trust, the beneficiary will be required to pay inheritance taxes. However, if the settlor does not die within the first seven years after creating the trust, the beneficiary will not be hit with an inheritance tax charge. 

Designing the best estate plan for you 

Whether you decide to use a bare trust or some other type of trust or even a will instead, it is necessary for you to design an estate plan that is customized for your particular situation. Speaking with a personal finance expert can provide you with the insight you need to make the best family financial planning decisions for you and your loved ones.


Any opinions are those of the author and not necessarily those of RJFS or Raymond James.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Raymond James and its advisors do not offer tax or legal advice.  You should discuss any tax or legal matters with the appropriate professional.