There are many types of trusts commonly used for commercial dealings, asset protection, privacy, tax efficiency or for succession planning. The type of trust appropriate for you will depend on the type of transaction or asset you are dealing with. In this series, we explore three different types of trusts: a bare trust, a unit trust and a discretionary trust. This week, we explore a bare trust arrangement.
What is a Bare Trust?
A bare trust is the simplest type of trust structure. In a bare trust, a trustee holds an asset on trust for one or more beneficiaries in defined portions.
The trustee has no discretion and no active duties other than to distribute the asset to the named beneficiaries when instructed by them to do so.
A bare trust is a popular structure where the ultimate beneficiary seeks to keep the asset in the name of a different entity for privacy or for asset protection reasons.
For example, if real estate is purchased in a bare trust, the registered proprietor listed on the certificate of title will be the trustee of the bare trust, not the beneficiary. On an initial glance of a title search for the property, the bare trust arrangement will not be apparent, and third parties will be unaware who the ultimate beneficiary of the property is.
Of course, in circumstances where a beneficiary is required to disclose their assets or financial interests, the beneficial interest in the property held should be disclosed.
A bare trust is also a popular structure when purchasing a single asset for the benefit of a self-managed superannuation fund (SMSF). A bare trust arrangement can be used to allow a SMSF to borrow funds from a third party in order to acquire a single asset and still be in satisfaction of the Superannuation Industry (Supervision) Act 1993 (Cth). This is referred to as a limited recourse borrowing arrangement.
It is important to recognise and understand your obligations as a trustee and beneficiary when opting for a bare trust arrangement and whether this type of structure is best suited for the asset or assets you want protected.