What is a Bare Trust?
Firstly, what is a ‘trust’? Trusts became fashionable when King Henry VIII was on the throne. So much so that he attempted to reduce their tax benefits – without success.
Here is an example of a ‘trust’. When your son is born you open 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. Even after 500 years we are coming up with new and exciting ways to use them. For example, these are four types of trusts you can build on our website:
- Declaration of Trust BEFORE You Buy (‘hide from the next door neighbour’)
Let’s say that you own 7 out of 8 of the units in the same block. The last unit finally comes onto the market. The vendor knows that you own all the other units and is going to hold out for a lot of money. But you never approach the vendor. Instead you get a friend to sign a Declaration of Trust BEFORE You Buy. Your friend is the trustee. You are the beneficiary.
You, as a Trustee, sign the Declaration of Trust BEFORE You Buy first. Only then does your friend offer to buy the unit. The vendor sells the home to your friend – unaware that you are the true purchaser. Your friend delivers the contract of sale to you and using the Declaration of Trust BEFORE You Buy the property settles in your name for no additional stamp duty or any CGT. The vendor is furious, but there is nothing he can do.
Your friend was just the ‘trustee’ of the asset. You, as the beneficiary, own the asset in equity – you are the ‘true’ owner. At any time, the beneficiary can direct, the Trustee, to transfer the asset to the beneficiary. There is generally no stamp duty or CGT for the transfer from the Trustee to the Beneficiary.
- Acknowledgement of Trust (‘better late than never’)
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.
- Gifting Trust Deed ‘death bed declaration’
Before this trust is created the ‘owner’ holds both ‘legal’ and ‘beneficial’ interest in the asset. When the Gifting Trust Deed is signed, from that point forward:
- The ‘owner’ retains ‘legal’ ownership only, as trustee
- The beneficiary named in the Declaration is now the beneficial or ‘true’ owner
In other words, the ‘owner’ now holds the assets as bare trustee for another person, being the beneficiary. The legal title remains with the ‘owner’: only the beneficial interest is transferred. Therefore, there is no change of ownership at the local titles office but there is still full stamp duty and Capital Gains Tax on the ‘disposal’ of the equitable or beneficial interest to the beneficiary.
In other words, the asset remains in the ‘owner’s’ name, but stamp duty and CGT apply because the deed transfers the beneficial ownership to another person – being the beneficiary.
The stamp duty and CGT is the same amount as if you transferred both the legal and equitable interest. The taxation regimes inflicts stamp duty and CGT when the beneficial interest in an asset changes – not when the legal ownership is changed.
These are often call ‘death bed declarations’. For example, Dad, knowing he will die shortly, through a Gifting Trust Deed declares that he now holds all his assets in trust for his oldest son. After his death, the other children challenge his Will – but there are no assets in his Will. Therefore, there is nothing challenge.
The other children are mortified. They scream: ‘all these properties are in his name. He owned them.’
That is true, but Dad owned them merely as trustee. At death he had no beneficial interest in the assets because, before he died, he signed a Gifting Trust Deed.
‘But Dr Brett Davies said the “Lang Hancock clause” in a Will does not work. He said that you can’t stop the court from challenging your Will’
Dr Brett Davies is right, nothing can usurp the court’s power to rewrite your Will – but dad had no assets that he beneficially owned in his Will. He had given them away via a Gifting Trust Deed before he died.
At death, Dad was only the ‘legal’ owner. The ‘true’ owner or beneficial owner was his oldest son. The son got the asset ‘inter vivos’, that is, while dad is still living. Dad held the assets in trust for his son.
From that point on the son pays tax on income from the asset. The assets may still be in dad’s name but the courts and the ATO look through the trust to the ‘true’ owner, and that is the oldest son.
Why wouldn’t dad just transfer both the legal and equitable interest to his son? There are two reasons:
- It takes time to transfer an asset. If it was a house then he would have to instruct his lawyers to prepare transfers, dig out the title deeds, sign everything and lodge it with the local titles office; and
- Dad may not have wanted anyone to know how he has benefited the son – until after he has died
Before the Bare Trust is created the beneficiary is both the legal and equitable owner. Therefore, there is no trust in existence since the ‘legal owner’ and ‘beneficiary owner’ are the same person. In other words, the beneficiary, before this Bare Trust is signed owns both the ‘legal’ and ‘equitable’ interest in the asset.
In the Bare Trust the beneficiary transfers to the trustee legal ownership only. Under the Bare Trust the beneficiary retains the beneficial interest in the asset. The Trustee only takes on the legal ownership. Neither before nor after the Bare Trust Deed does the Trustee have any beneficial interest in the asset. The beneficial owner remains the beneficial owner.
The ATO and stamps office look through the trust and see that the ‘true’ owner, the beneficial owner has not changed. Therefore, there is generally no stamp duty or CGT implications. The beneficial owner (not the legal owner) continues to pay tax on any income generated by the asset. The beneficial owner continues to be liable for the costs of maintaining the asset.
Nothing changes except that the asset is now in the hands of another person – the trustee. For example, if it was land your lawyer would prepare a transfer and transfer the property, pursuant to the Bare Trust, to the trustee, generally, without any CGT or stamp duty.
Why would you do a Bare Trust?
You may feel vulnerable in the public and reporters knowing what land you own. It is no one’s business, other than you own, and the ATO, of course. You transfer your real estate to a bare trustee for no stamp duty or CGT. When someone does a search at the local titles office your name does not appear anywhere.