When it comes to managing and protecting assets for future generations, a bare trust fund offers a simple and effective solution.
Whether you’re a parent planning for your child’s future, a grandparent looking to provide a financial gift, or a guardian managing funds for a dependent, these trusts can provide a straightforward way to ensure that assets are securely held until a beneficiary is ready to take ownership.
In this blog post, we’ll discuss what a bare trust fund is, how they work, who might benefit from setting one up, and their key advantages in comparison to other types of trust funds.
What is a bare trust fund and how do they work?
A bare trust fund is a legal arrangement in which a trustee holds assets on behalf of a beneficiary until they reach adulthood.
The trustee’s role is primarily administrative, meaning they are responsible for managing the assets held in the trust in accordance with its terms.
This includes safeguarding the assets, ensuring any income or gains are properly accounted for, and handling any necessary paperwork or legal obligations.
Trustees must always act in the best interests of the beneficiary, ensuring the assets are preserved and accessible when the beneficiary becomes entitled to them.
In contrast to other types of trusts, trustees have no say over how the assets are distributed. Everything is held in the beneficiary’s name and must eventually be transferred to them when they reach the legal age.
Who should consider setting up a bare trust fund?
Here are some examples of who might benefit from setting up a bare trust:
- Parents: To safeguard assets, such as cash or investments, for their children until they reach adulthood.
- Grandparents: To provide financial gifts or inheritance for grandchildren while maintaining oversight until the time is right.
- Relatives: Including aunts, uncles, or siblings who wish to pass on assets to younger family members.
- Guardians: To manage finances on behalf of children or dependents under their care.
- Family friends: Those who want to contribute toward a child’s future, such as funding their education or other significant milestones.
What are the benefits of bare trust funds?
Below, we’ve outlined some of the key advantages of setting up a bare trust fund over other types of trust funds.
Simplicity
One of the primary benefits of bare trust funds is their simplicity, both in setup and operation. As touched on earlier in the blog post, a bare trust fund lacks discretionary powers and intricate rules for managing and distributing assets, with the beneficiary having complete ownership over how the funds are used.
This clear division of responsibilities helps to reduce confusion and ensures that the trust operates transparently.
Furthermore, bare trust funds typically have minimal administrative requirements, making them easier to manage over time than discretionary trusts or other more complex arrangements.
Tax efficiency
Bare trust funds are often favoured for their tax efficiency, especially in situations involving gifting or estate planning.
Since the income and capital gains generated by trust assets are taxed directly as if they belonged to the beneficiary, the tax liability is calculated using the beneficiary’s personal tax rate.
This can result in significant tax savings, particularly if the beneficiary has little or no other income and qualifies for personal allowances or lower tax bands.
Additionally, assets placed in a bare trust fund are classified as a Potentially Exempt Transfer (PET) for inheritance tax (IHT) purposes. If the settlor lives for seven years after transferring the assets into the trust, it is usually no longer considered part of their estate, lowering IHT liability.
Straightforward transfer of assets
A bare trust fund makes the process of transferring assets to beneficiaries easier, providing a smooth and direct mechanism for gifting or inheritance.
Assets placed in a bare trust are held by the trustee but ultimately belong to the named beneficiary.
This eliminates the need for probate after the settlor’s death, allowing beneficiaries to access the assets faster and with less administrative complexity.
Cost-effectiveness
Bare trust funds are highly cost-effective, making them an appealing choice for financial arrangements.
They are typically less expensive to establish than more complex trust structures, which frequently necessitate extensive legal and financial arrangements.
Furthermore, their reduced administrative burden, which includes fewer ongoing compliance requirements and simplified management, helps to keep operational costs low over time.
Beneficiary protections
A bare trust fund provides strong protections to beneficiaries by allowing trustees to manage assets until the beneficiary reaches the age of entitlement.
During this time, the assets are carefully managed and safeguarded to prevent the beneficiary from overspending, misusing the funds, or making poor financial decisions.
Additionally, the trust structure protects the assets from external claims, such as creditors or other third parties, ensuring their security and preservation for the intended purpose.
How Peter Ross can help
At Peter Ross, we specialise in providing tailored advice on trusts, including the establishment and management of bare trust funds.
Our dedicated team is committed to helping you control and protect your family assets and ensure that your loved ones benefit according to your intentions.
We understand that each client has unique needs, and we work closely with you to develop bespoke solutions that align with your specific circumstances and desired outcomes.
Our services include assisting with the creation of trusts to manage assets for minors, safeguarding the interests of individuals unable to handle their own affairs.
By choosing Peter Ross Solicitors, you can be confident that your assets are managed with the utmost care and professionalism, ensuring they are preserved and distributed in line with your wishes.
For confidential advice on setting up a bare trust fund, contact a member of our team today.