What is a bare trust?
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A bare trust is generally known as a trust in which the person receiving property, the beneficiary, is entitled to the income and the capital of the trust. The income is the amount that the property earns while it is held in trust for the beneficiary. The capital is the amount of property in the trust. A bare trust is also called a simple trust or naked trust. In a bare trust, the beneficiary decides when he will come to own the property of the trust. A bare trust is the opposite of a discretionary trust. In a discretionary trust, the trustee, the person who holds the trust property for the beneficiary, determines when the beneficiary will come to own the property of the trust.
A bare trust is one of the most basic types of trusts. Trusts that are more complicated are called “complex trusts.” In a complex trust, the income and capital need not be distributed. The trust property and income can also be distributed in varying amounts. A trustor, a person who gives property through a trust, can set up a bare trust to take effect while he or she is living. This makes the trust an inter vivos trust. A trustor can also set up a bare trust by writing a will. This allows the trust to exist after the person's death. This type of trust is a testamentary trust. Trustors typically create a bare trust to help their beneficiaries avoid the probate process. Beneficiaries still have to pay federal income taxes on property they receive from a bare trust. A bare trust has its own tax return. Beneficiaries use this return to determine their personal income tax.
U.S. federal tax law and state estate laws recognize a bare trust as a trust that distributes all of the income in the trust to the beneficiary. A bare trust does not give any of its income to charity. Tax laws specify that beneficiaries must receive the income of the trust during the year that the trust earned the income.
Bare Trust vs. Other Types of Trusts
A bare trust operates differently from a trust in which the income accumulates and becomes part of the capital of the trust. Trustors may set up a bare trust to make property available to beneficiaries who have an understanding of what they want to do with the trust property, but cannot immediately take possession of it. Beneficiaries of bare trusts may include teenagers and adults with medical, mental health, or substance abuse issues who are making progress towards a full recovery. Sometimes a trustor creates a bare trust to allow the beneficiary to mask his or her identity. For example, a trust may be sold a property without questions. An individual might be questioned and perhaps denied the opportunity.
A bare trust does not provide trust property with full legal protection from creditors. If creditors of the trustor learn about a bare trust before the trust property is distributed, the creditors can attempt to recover their debt through a lawsuit.
Getting Legal Help
If you have further questions about bare trusts, contact an estates and trusts attorney for advice.