What is a Bare Trust?
Here is an example of a ‘bare trust’. When your son is born you opean a bank account in trust for him. You are the trustee. The trust’s beneficiary is your son. You hold the bank account in trust for your son. Your name appears on the bank account merely as the ‘legal owner’. The ‘true’ or ‘beneficial’ owner is your son. It is your son that pays tax on the bank account interest. When your son is 18 years of age he can remove you as trustee – and instead place you with another trustee or himself as the ‘legal owner’.
Beneficiaries of trusts are protected. For example, if you, as the trustee, go bankrupt or get a divorce then the trust asset, being the bank account, is not lost. The bank account is preserved for your son, who, as beneficiary, is the ‘true’ owner of the asset. The courts and the ATO ‘look through’ the trust to see who the ‘true’ owner of the assets are. In this case the ‘true’ owner is your son – not you.
Most people when they own an asset hold both the legal and beneficial interest in the asset. There is no trust if you hold both the legal and beneficial ownership. In contrast, in a trust the legal and beneficial interests are held by different people. One person is the legal owner – trustee. The other person is the beneficial owner – beneficiary. A trust automatically exists when you separate the ‘legal’ and ‘beneficial’ ownership.
If your son, at 18, removes you at trustee and puts himself in as the legal owner, then the trust is finished – it is extinguished. This is because your son now holds both the ‘legal’ title and ‘beneficial’ interest. The split of the ownership has gone and the trust relationship no longer exists.
The trust asset can be anything, including real estate, shares, artwork, cars, bank accounts and cash.
One great strength of Trusts is that they are unregulated and private. These are four types of trusts you can build on our website:
Acknowledgement of Trust (‘AFTER the Trustee buys’)
Sometimes, in the heat of the moment, you forget to sign a Declaration of Trust BEFORE You Buy. While your trustee proceeds to buy the asset for you, there is no deed yet to document that trust relationship. Trust relationships exist whether they are in writing or not. They are just a lot easier to prove if everything is in writing.
Whether there is a deed or not the trustee still ‘owns’ the asset merely as a trustee for another person being the beneficiary.
The Acknowledgement of Trust is drafted after the above purchase by the trustee. The Acknowledgement of Trust does nothing other than document what has happened in the past. It isn’t trying to rectify or change anything, it is merely recording what actually happened in the past.
It would have been better to have documented this trust relationship BEFORE the trustee acquired the asset. Before the trustee acquired the asset you should have built and signed a Declaration of Trust BEFORE You Buy. But you didn’t. So you are now documenting what you did in the past with an Acknowledgement of Trust. It is better late, than never.
The Acknowledgement of Trust merely sets out the facts that took place in the past. As an example you may say:
‘Yes, as a trustee, I acquired the asset, but it was, at all times, for the benefit of the beneficiaries. I have no interest in the asset other than as the trustee. The money to pay for the asset came from the beneficiary, not from me. And I have plenty of evidence like cheque butts and emails to prove this.
All the Acknowledgement of Trust is doing is recording, by way of Deed, the trust relationship that already exists.
There is a real risk that the state stamp duty office or the ATO may not believe you and seek to inflict stamp duty and CGT on the Acknowledgement of Trust Deed. Be careful. Make sure you have plenty of evidence that at all times the beneficial owner was and remains the beneficiary (cheque butts, bank statements, emails etc…)
You need to prove that this Acknowledgement of Trust changes nothing. You were always the trustee of the asset for the beneficiary. You need evidence it has always been the case.
Why did the beneficiary want you, as trustee, to acquire the asset as trustee in the first place? There are many reasons – both personal and private. For example, the beneficiary may have wanted you to buy the asset as trustee because the beneficiary didn’t want the vendor, the public or a spouse to know what the beneficiary was up to.
Other types of trusts you may be interested in:
- Declaration of Trust BEFORE You Buy - 'secretly buy'
- Gifting Trust - 'death bed declaration'
- Bare Trust Deed - 'hide assets you own'
Please telephone us if you need more legal advice in answering the questions. We are a law firm.
Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
39 Stirling Highway, Nedlands, WA (Post Office Box 5169, Dalkeith, WA 6009)
Direct: 08 6389-0400
Reception: 08 6389-0100