What is a Bare Trust?
Bare trust arrangements can help some investors re-organize their affairs in a way that reduces probate and makes it easier to transfer assets in the future. This post describes what a bare trust is and how it might be used.
What is a Bare Trust?
A bare trust occurs when a trustee is vested with the legal title to property and has no other responsibilities to carry out their duties as trustee in relation to the property vested.
A bare trustee will not have any independent power, discretion or responsibility pertaining to the trust property. With bare trusts, the beneficial owner retains the right to control and direct the trustee in all matters relating to the trust property.
To qualify as a bare trust, the following conditions must be met:
- the trustee has no significant powers or responsibilities and can take no action without instructions from the settlor regarding any aspect of the trust;
- the trustee’s only function is to hold legal title to the property; and
- the settlor (or settlors) is the sole beneficiary and can cause the property to revert to them at any time.
Why use a Bare Trust?
A bare trust is commonly in a variety of situations including:
- to minimize property transfer taxes and fees in real estate transactions;
- to hold securities and funds in trust, including publicly-traded shares, bonds, or options, legally registered in a broker’s name;
- to administer joint ventures and partnerships where a nominee holds legal title to a property on behalf of a group of owners;
- to facilitate corporate reorganizations where the legal ownership of property may otherwise need to be transferred and registered through multiple entities;
- to enable the immediate transfer of beneficial ownership between parties where legal or regulatory impediments prevent a contemporaneous transfer of legal title; and
- in estate planning, to minimize the fees, costs and time associated with probate.
Real Estate Examples
If a real estate property is owned nominally by a corporation in bare trust, then the shares and capital structure of the corporation can be exchanged or re-organized without having to re-register title to the underlying property (thereby avoiding paying land transfer taxes and other real estate fees). For example, someone could sell a property by selling shares in the corporation instead of selling the property itself.
If someone holds real estate in a bare trust owned by a corporation they control, when they die, and their secondary will deals with corporately owned assets, the real estate held nominally in a bare trust by a corporation would help their estate avoid probate.
Reporting Requirements
The beneficial owner of the property in a bare trust reports the property for financial purposes and tax obligations. For example, if your house is held nominally by a holding company in a bare trust, you will still be responsible for paying the maintenance, property taxes, etc from your personal account as beneficial owner. The asset will be listed on the balance sheet of the beneficial owner in other words.