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A bare trust allows the beneficiary to draw on both the capital and income generated by the trust, with no restrictions on how much support they can receive. The beneficiary is responsible for paying taxes on disbursements, but the process makes it easy to avoid inheritance taxes. A good money manager can create a steady income, but if the beneficiary cannot manage the money well, another type of trust may be better.
Also known as a bare or simple trust, a bare trust is a type of trust fund in which the beneficiary has the right to draw on both the capital and any income generated by the trust. While trustees normally direct this type of trust, the beneficiary is able to instruct the trustees on how to manage the account and change those instructions when and as desired. It is not unusual for income from this type of trust to be disbursed annually, leaving the capital in the trust to start generating additional income in the future.
The ability of the beneficiary to draw upon all of the bare trust assets is one of the ways this trust arrangement is different from other types of trust funds. A trust fund is often set up to create a source of income for loved ones, placing some restrictions on how much support they can receive at any given time. With a bare trust, no such restriction exists. The beneficiary can withdraw funds on some type of recurring basis or even drain the fund if that is what he or she wishes to do.
It is important to note that with a bare trust, the beneficiary is responsible for paying taxes on any disbursements that occur. This is in contrast to other types of trusts where the trustees would be held responsible for paying taxes on the assets found in the trust. When this is the case, tax agencies will work directly with the payee to resolve any outstanding tax debts rather than working with trustees.
There are some benefits to establishing a bare trust. In most countries, the process makes it easy to avoid having to test assets and incur inheritance taxes, two common problems associated with wills and other trusts. At the same time, a beneficiary who is a good money manager will be able to use this type of trust to create a steady income while resisting the temptation to run out of assets in a short period of time. However, a bare trust isn’t ideal in every situation. If the person setting up the trust believes that the beneficiary will not be able to manage the money well, opt for another type of trust where the trustees have control of the assets and disburse them to the beneficiary under the terms of an agreement trust would be a better option.
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