Legal Tip 306: Bare Trusts and Asset Protection Part 1

Discussion in 'Legal Issues' started by Terry_w, 15th Sep, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A bare trust is a trust where X holds assets for Y with no discretion involved. Y is absolutely entitled to both the asset and the income from the asset.

    See Legal Tip 83: What is a Bare Trust? Legal Tip 83: What is a Bare Trust?

    Where the trustee of a bare trust becomes bankrupt the asset will not fall into the hands of creditors.

    Where the beneficiary of a bare trust becomes bankrupt the asset will fall into the hands of their creditors – because they are the beneficial owner of the property and absolutely entitled to it.

    Where the trustee of a bare trust dies the asset they hold does not pass via their will as they are not the beneficial owner. A New trustee would be appointed – who and how will depend on the circumstances. The beneficiary would usually appoint if they have capacity.

    Where the beneficiary of a bare trust dies the asset held on trust for them will pass via their will.

    Example

    Homer is appointed by Bart to hold a property for Bart as trustee of a bare trust. This is because Bart wants to buy a particular property, but the owner is an enemy of Bart and would never deal with him again.

    Homer is the legal owner of the property. Homer dies. The property cannot pass via Homer’s will. Homer because bankrupt after resuscitation. The property cannot pass to Homer’s creditors because Homer is just the legal owner. Bart is the beneficial owner.

    Soon after Bart becomes bankrupt – the property will pass to Bart’s creditors, but Homer steps in and pays them off only to have Bart die on the day his bankruptcy is annulled. Homer must transfer the property under direction of Bart’s executor – to the executor and then to the beneficiaries under Bart’s will
     
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  2. thatbum

    thatbum Well-Known Member

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    What sort of disclosures would Homer need to make to the seller of the property about being a bare trustee? Any?
     
  3. Trainee

    Trainee Well-Known Member

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    And would it have to be operated with bart as beneficiary. Eg net rent has to be paid to bart, even though it is taxed in the name of the trustee?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    None I believe. I have had a client actually do this.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The beneficiary is the one that is taxed on the income - or the trustee on their behalf if under a legal disability.
     
  6. thatbum

    thatbum Well-Known Member

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    What about to the land titles office? Probably straight away after the fact so that land tax and stuff gets calculated properly?

    I always wondered if there was any material difference in 'owning' something under a bare trust compared to legal ownership.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Only legal ownership is recorded. No need to disclose the trust to the land titles office - but I think this can be done in QLD.

    But you must convince the revenue commissioner that it is held on trust to avoid duty when you transfer it to the beneficial owner.