What is a bare trust?
It is usual for a Will to state an age that beneficiaries need to reach before they inherit an estate. For example, ‘The Trustees shall hold the Trust Fund for such of my grandchildren as survive me and attain the age of 18 and if more than one in equal shares absolutely.’
However, if you leave your estate absolutely to your children or grandchildren without stipulating a certain age they have to reach before receiving their inheritance and any of them are under 18 when you die, your Will creates a bare trust for them automatically.
A bare trust is a type of trust where the beneficiary becomes absolutely entitled to the capital in the trust at the age of 18. At that age, the beneficiary can ask for the assets to be handed over to them and they can do what they want with them. Until they reach 18, the trustees have no active powers except the duty to hold the legal title to the trust assets and invest them appropriately.
Before the child reaches 18, both capital and income from the trust can be used for the child’s benefit, but not for the benefit of any other beneficiaries in your Will.
Who is the owner?
For tax purposes, the beneficiary is treated as the owner of the trust assets. This means that a bare trust arrangement is tax efficient from an income and capital gains tax perspective as they are applied at the child’s marginal rates. There is no inheritance tax while the trust exists or when the assets pass to the beneficiary at age 18.
However, the trust assets become part of the child’s estate for inheritance tax purposes, so if the child were to die before reaching 18, the assets would pass via the intestacy rules (because a child under the age of 18 cannot make a Will). In that case, inheritance tax may be charged if the value exceeded the child’s tax-free allowance.
The risk of the assets passing under the intestacy rules is one of the main reasons people often do not want to create a bare trust under a Will and instead choose to stipulate an age when minors are entitled to receive their benefit. For example, if your Will states that a beneficiary has to reach the age of 18 before they are entitled to their inheritance and they die before that age, the assets will pass according to the terms of your Will rather than via the intestacy rules.