What is a Bare Trust?

Also known as a naked 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 from the trust. While trustees normally direct this type of trust, the beneficiary is able to instruct the trustees in how to manage the account, and change those instructions when and as desired. It is not unusual for the income from this type of trust to be disbursed annually, leaving the capital in the trust to begin generating additional revenue in the future.

The ability of the beneficiary to draw on all the assets of the bare trust is one of the ways this trust agreement is different from other types of trust funds. Often, a trust fund is established to create a source of income for loved ones, placing some restrictions on how much support they can receive during any given point in time. With a bare trust, no such restriction exists. The beneficiary may 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 all disbursements that take place. This is in contrast to other types of trusts in which trustees would be charged with the responsibility of paying taxes out of the resources found in the trust. When this is the case, tax agencies would work directly with the beneficiary to settle any outstanding tax liability rather than working with trustees.

There are a few benefits to establishing a bare trust. In most nations, the process makes it easy to avoid the need to probate assets and incur inheritance taxes, two common issues associated with wills and trusts of other types. At the same time, a beneficiary who is a good money manager will be able to utilize this type of trust to create some steady income, while resisting the urge to exhaust the assets in a short period of time. However, a bare trust is not ideal in every situation. Should the individual establishing the trust believe that the beneficiary will not be able to manage the money to best effect, going with some other type of trust in which the trustees have control of the assets and disburse them to the beneficiary according to the terms of the trust agreement would be a better option.