Trusts are the greatest thing to come out of England – the sandwich is 2nd. Bare trusts, in particular, are very good, but they are not understood very well and under utilised. A bare trust is a trust relationship where one person owns an asset for another person, without any discretion. An example is a parent holding a bank account for a 2 day old baby. The parent is the trustee, the baby is the beneficiary, and there is no ability to distribute income or capital elsewhere as the trustee has no discretion. The beneficiary can compel the trustee to transfer title to it at any point if they are not ‘legally disabled’. Upon the baby reaching the age of 18 the baby, now adult, can demand the money from the bank account and any interest. See: Legal Tip 83: What is a Bare Trust? Legal Tip 83: What is a Bare Trust? Here are some of the things possible with Bare Trusts: a) Secrecy Hide your ownership from others. Get that brothel you always wanted to buy or get that property next door owned by the neighbour that hates you and said they would never ever sell to you! b) Avoid stamp duty Stamp duty could be avoided, or minimal, where title is transferred from the bare trustee to the beneficiary. c) Avoid CGT CGT may be avoided completely when title is transferred from the trustee to the beneficiary. Similar going the other way too – someone could appoint a trustee and transfer title to them. d) Asset protection Someone contemplating a development of a property they already own could appoint a company to act as trustee, transfer title, and then have the company do the development and contract with relevant 3rd parties such as builders. e) Allows minor children to own asset Bare trusts are common in wills – a person may die and leave property to their 2 year old son, but held by a trustee until the son reaches 18 or 25. This is possible outside of wills too. f) Financing A person may want to buy a property but cannot qualify for finance, so they may appoint someone else to hold the property on their behalf and to take out finance. Later as circumstances change finance can be applied for in the beneficiary’s name and title transferred. Note that if the lender knows about the trust relationship they will likely not lend to the bare trustee. g) Asset protection on bankruptcy Often a trust is not formally in place, but when the owner of the property ends up bankrupt it will be argued that they were only bare trustee as the property was really owned by other family members in full or in part. This often happens in families where other people pay the loan and deposit of the property. I wrote about one such case in this thread: Legal Tip 137: Arguing a Trust on Bankruptcy Legal Tip 137: Arguing a Trust on Bankruptcy h) Vest a trust without transferring assets Sometimes the beneficiaries and trustee of a discretionary or unit trust will want to vest the trust in full or part, but for various reasons the title to the asset may not be able to be transferred. This can be done without transferring assets and if that happens the trustee of the trust will then become bare trustee for the beneficiary – with their discretions removed. An example of this is where a beneficiary of a fixed unit trust is moving into the trust property as their principal place of refinance. Under NSW law they could gain a land tax exemption if the trustee of the trust was an individual, but due to finance reasons they cannot change the trustee. The solution may be to change the trustee of paper so that XX Pty Ltd was initially trustee of the unit trust is now bare trustee of Mr Smith who has been appointed as trustee of the unit trust (with the units held by Mrs Smith. i) Hold a UPE on Subtrust Where a trust makes a company presently entitled to the income of that trust that income is often not transferred. It becomes a Unpaid Present Entitlement (UPE). This is similar to a loan from the company back to the trust – but it is not. To avoid having a UPE taxed as a dividend, under certain circumstances, it may be possible for the trustee to hold that income on a sub-trust, which is a bare trust, for the company (or person). This will mean the trustee is acting in 2 capacities, one as trustee with discretion, one as bare trustee for a particular beneficiary.