Understanding Bare Trust Agreements
Anna Dunaeva April 14, 2022
A bare trust is the primary form of trust in which property is legally owned by someone (a bare trustee) for the benefit of a third party (a beneficiary). In a bare trust, a bare trustee holds nominal title to the assets in their name while the beneficiary retains equitable ownership. Essentially, there are two owners for the same property in a bare trust agreement – a legal owner who is listed on the title, and a beneficial owner. A bare trust is also known as a naked trust or a simple trust.
A bare trust is a relationship involving three parties. These parties are a settlor, a trustee, and a beneficiary. Depending on the purpose of a trust, one and the same person wear two different hats there. For example, a settlor can also be a beneficiary or a trustee of the same trust.
A settlor establishes a bare trust by giving a trustee the right to hold nominal title to an asset for a beneficiary. A bare trustee is responsible for managing a bare trust in the best interests of its beneficiary in accordance with the instructions of the beneficiary. A beneficiary of a bare trust retains absolute control and rights to the property and capital of the trust, along with the income earned from it.
There is still no single legal opinion on the nature of the relationship between the trustee and one who holds beneficial ownership in a bare trust. In many instances, a bare trust is very close to an agency relationship because the trustee in a bare trust has no discretionary powers and strictly follows the settlor’s instructions. Bare trustees in a bare trust have no right to control or enjoy the property or personal responsibility for claims against the trust property.
For this reason, the existence of a trust is a question of law and fact and requires a review of the trust’s written legal agreement, its documents and the circumstances of the case.
A bare trust requires three items to be valid: the settlor’s intention, the beneficiaries, and the trust property. Specifically, the settlor should be clear about their intention to create a trust. Further, they should identify the beneficiaries in the trust relationship. Finally, the settlor should identify the trust property and transfer it to the bare trustee for the benefit of the beneficiaries.
Although a trust can exist without supporting documentation, it is prudent to have paperwork in place. Where a trust involves such assets as real estate or bank accounts, supporting paperwork simplifies and clarifies the transfer of legal title and who holds legal title of an asset.
A bare trust is usually established by way of a declaration of trust or a trust deed which, among other things, names the beneficial owner, the trustee and the settlor, sets out the terms and purpose of the trust, responsibility pertaining to the duties of the trustee and instructions of the settlor. A bare trust documentation should also be clear that the trustee shall act in strict compliance with the directions from the beneficiary.
Although the general public often associates trusts with the privileged and wealthy, trusts can be very useful for ordinary people. Trusts are incredibly versatile tools for a variety of purposes. More often, bear trusts are used in estate planning and real estate.
Bare trusts provide a shield and legal protection for the settlor’s assets, ensure the settlor’s wishes are respected, save time, and reduce paperwork. However, bare trusts cannot be used to avoid taxes. On occasions, bare trusts can have tax advantages. Still, it is vital to discuss your plan with a lawyer and to get tax advice from an advisor to avoid tax consequences and to ensure it meets your goals within the legal ownership framework.
A bare trust can be used in real estate transactions. For example, a trust can hold real property for the benefit of another person to preserve anonymity on the legal title to property. Consider that the title to the land lists the trustee as the nominal owner, and the actual (beneficial) owner is not disclosed.
While maintaining anonymity is one of the purposes of a trust, trusts can also simplify the relationship when there is more than one owner of the property. For example, consider that a single trustee can hold the legal title for several beneficiaries where land has more than one beneficial owner of the property. For this reason, bare trusts are often used where two or more investors wish to acquire real estate together as a joint venture.
Alternatively, real estate investors often hold their investments in a holding company to enjoy the benefits of incorporating.
A bare trust is also an estate planning tool, although its benefits in Alberta are minimal considering low probate fees. At most, a bare trust can save some time by avoiding a probate application, which can take several months. However, trust paperwork is expensive. In light of this, bare trusts are rarely used for estate planning in this province.
At DLegal, we keep clients at the center of our work. Our lawyers offer the benefit of extensive experience in estate planning law and real estate to assist you with your trust arrangement effectively. We will help find solutions tailored for you to ensure your interests are protected.
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