That got your attention, didn’t it? Well, we all know what sells these days.
Now that your listening, today’s topic is actually about a specific type of legal trust: the “naked” or (as we’ll call it) a “bare” trust. Don’t look so disappointed, just “bare” with us, it might be worth your while.
If you’re new to the world of legal trusts, a “trust” is an arrangement where someone is appointed to hold assets for the sole benefit of one or more designated beneficiaries. Anyone can have a trust set up – just make sure you consult a lawyer and accountant before doing so.
Bare trusts are widely used by parents and grandparents to transfer assets to their children and grandchildren. When setting up this type of trust, you would first appoint one or more trustees to hold the assets, and one or more beneficiaries as the beneficial owners of the assets. The trustees’ sole job would be to hold the asset until instructed by the beneficiary to transfer the property to them.
You might be thinking – what is the point? Why not just transfer ownership directly to my kids or leave them the asset or property in my Will? Why transfer property through a bare trust? Well, if done correctly and in the right situations, it can limit your tax obligations.
Perhaps an example is in order.
Say you want your kids to have the family cottage after you pass away. The traditional way of going about it would be to leave this property to your kids in your Will, so that when you die, the property gets transferred in their name. Here’s the catch – if you do it this way, not only can it take forever to complete the transaction, but also your estate has to pay tax on the value of your property. If your estate is worth a lot, this tax can be painfully high and reduce what you leave to your beneficiaries.
If you use a bare trust instead to transfer this property, you can limit how much tax ends up getting paid.
Say you opted to leave your cottage to your kids in a bare trust, you would appoint trustees (usually family members or close friends) and have them sign a simple trust agreement. The agreement would say that they are holding the property for your kids. You would then register the trustees as joint owners of the cottage, with a right of survivorship. That means that whenever you pass away, title to the property will automatically flow to your trustees and would not pass through your estate attracting estate tax.
We know what you’re thinking: can you avoid tax entirely by using a bare trust? Let’s put it this way, ever heard the expression: “nothing in this world is certain but death and taxes?” Well, it’s true. Tax is an inescapable reality of the world we live in, but it just won’t be your problem.
The capital gain and any income generated by the bare trust is taxed in the hands of your beneficiaries. The silver lining is that if your beneficiaries are in a lower tax bracket, the tax won’t hurt as much. This may be the only time where under achieving by your child pays off.
Obviously the above is a highly simplified explanation of a bare trust. Okay last pun, we swear – if you can “bare” it, we’d be happy to discuss whether this type of trust would be right for you.
Robin K. Mann, Associate Lawyer