What is the difference between a “Bare Trust” and a “Trust”?

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.
  • Trustee: Your name appears on the bank account. But merely as the ‘legal owner’.
  • Beneficiary: The ‘true’ or ‘beneficial’ owner is your son. For example, it is your son that pays tax on the bank account interest.
  • Trust Asset: the money in the bank account
• A trust’s existence requires 3 things: Trustee, Beneficiary and Trust Assets.
• When your son is 18 years of age he can remove you as Trustee. And instead replace you with another Trustee. Or he can just make himself the ‘legal owner’:
  • Your son, at 18, walks into the bank and directs the bank to change the name of the account from your name to his name.
  • At that exact moment in time the trust ceases to exist.
  • This is because the trust no longer has those 3 requirements of a trust.
  • When your son (as the sole beneficiary) takes the legal ownership of the asset the trust ceases to exist.

Beneficiaries of trusts are protected if the Trustee goes bankrupt

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.

Legal vs beneficiary ownership – the essence of a trust

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 as the 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. The trust relationship no longer exists.

“Trust assets” can be anything

After the Trustee and Beneficiary, the third requirement for a trust to exist are the Trust Assets.

The trust assets can be anything. Trust assets may be real estate, shares, artwork, cars, bank accounts and cash.

Australia’s four types of trusts: Discretionary, Unit, SMSF and Bare Trusts

The four most common trusts in Australia are:

1. Discretionary Family Trust
2. Unit Trusts
3. Self-Managed Superannuation Funds – SMSF
4. Bare Trusts

Australia has 4 types of Bare Trusts

Consider the four most popular ‘bare’ trusts in Australia:

1. Declaration of Trust Before Purchase – ‘hide from the next-door neighbour’

You sign a Declaration of Trust BEFORE you make an offer to buy something:

• Your are the Beneficiary
• Your friend is the Trustee
• The Trust Asset is the thing you want to buy

Example of how a Declaration for Trust BEFORE you buy operates:

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. He smugly 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 Purchase. Your friend is the Trustee. You are the beneficiary.

• Build the Declaration of Trust Before Purchase Deed on Legal Consolidated website.
• You, as a Beneficiary, sign the Declaration of Trust Before Purchase first.
• Your friend signs the Declaration of Trust Before Purchase as the Trustee.

Armed with the duly signed Declaration of Trust the Trustee presents an offer to purchase the unit to the vendor.

Upset that you never made an offer to buy the flat the vendor sells the flat for ‘nothing’.

The vendor sells the home to your friend. The vendor is unaware that you are the true purchaser.

No double stamp duty or CGT for a Declaration of Trust Before Purchase

Your friend delivers the contract of sale to you. Using the Declaration of Trust Before Purchase 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 Capital Gains Tax (CGT) for the transfer from the Trustee to the Beneficiary.

Build Declaration of Trust Before Purchase the property here.

Stamp duty on a  Declaration of Trust Before Purchase

Each State has its own Transfer (Stamp) Duty rules:

• ACT Revenue Office
• NSW Revenue taxes and duties – as to change of NSW trustee see here
• NT Government stamp duty
• QLD Treasury transfer duty
• Revenue SA stamp duty
• State Revenue Office Tasmania
• State Revenue Office Victoria land transfer duty
• WA State Revenue

2. Acknowledgement of Trust – ‘better late than never’

Sometimes, in the heat of the moment, you forget to sign a Declaration of Trust Before Purchase.

While your Trustee proceeds to buy the asset for you, there is no deed yet to record that trust relationship. Trust relationships can 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.

But without a Deed you face an up hill battle ‘proving’ that you are the trust owner (beneficiary). And that your friend (trustee) is a mere trustee of the asset. These 4 people will call you a liar to your face. It is your job to have evidence to prove them wrong:

1. Family Court v’s bare trusts

‘Nice try. But only after your precious son decides to get a divorce do you, as his parents, try some feeble argument that the property in your son’s name actually belongs to you.’

sarcastically states the Family Court judge.

• • • You, as the parents, claim, after the fact, that you are the beneficiaries of the home. Sure the property is in your son’s name. But you argue he is merely a bare trustee.
    • Parents also argue that they ‘lent’ the money to the son. But there is no Child Loan Agreement. Is this another lie?

You can not argue both a bare trust and a loan.

The parents should have had their son sign the above a Declaration of Trust Before you Purchase. But you didn’t. So now you are building the second best document. You build the Acknowledgement of Trust.

(Alternatively, you could have lent the money to your son. But again you should do that before you actually lent the money.)

What about Family Trusts vs the Family Court?

2. Bankruptcy Court v’s bare trusts

Your business is going under. Hang on a minute. You hold the family home as bare trustee. After all, the money for the home came from your wife’s bank account.

Well that argument may or may not work. You should have signed a Declaration of Trust Before you Purchase (or a Spouse Loan Agreement). But you didn’t. So now you have to build the poor cousin: Acknowledgement of Trust.

You will need more evidence of the bare trust, than the fact, that the money for the home came from your wife.

3. Australian Tax Office v’s bare trusts

You told your accountant 9 years ago that while the farm is in your name you are just a bare trustee. This is for your dad. You, the son, are the bare trustee. Your dad is the true owner. Your dad is the sole beneficiary.

There are 3 requirements for a bare trust. They are:

1. 1. 1. Trustee: Son
      2. Beneficiary: Dad
      3. Trust Asset: farm land

So you claim a bare trust. But you have to prove that. What evidence do you have? Where are the letters, emails, cheque butts, transfers of money to prove the trust relationship?

The ATO audits your bare trust

The ATO does a random audit. The ATO hears your story. Not a problem says the ATO. Just show me the Declaration of Trust Before Purchase. You and your dad never did one.

It is never to late to now build an Acknowledgement of Trust. It may not work. But it is the best you can do.

What if you cannot prove that dad is the true owner? Then the farm’s income is put on your personal tax return. The ATO amends your old tax returns, accordingly. The ATO adds interest on this ‘late’ tax. (This is called the General Interest Charge – GIC.) The ATO also imposes a 200% penalty. Unable to pay the ATO bankrupts you and sells the farm.

4. State Revenue, Stamp Duty Office v’s bare trusts

You have been holding the block of flats in Double Bay, Sydney on behalf of your brother.

Thankfully, your brother now directs, as the beneficiary, for you to transfer the property into his name. As the sole beneficiary he has the absolute right to do this. And you must comply under trust las.

You turn up to have the transfer ‘stamped’ at the local State Revenue Office. There is no transfer duty when trustees transfer property to the sole beneficiary.

“That’s right” states the stamp duty man. “Just show me your Declaration of Trust Before Purchase. And I will stamp your transfer for free.”

When is it too late to build an Acknowledgement of Trust AFTER you buy?

If you don’t have a Declaration of Trust Before Purchase then you should build an Acknowledgement of Trust.

It is never too late to build a Acknowledgement of Trust AFTER you buy.

Obviously it is better to sign an Acknowledgement of Trust BEFORE the ATO, stamp duty office, family court and bankruptcy Court start their attack.

The Acknowledgement of Trust may not work. But it is the best you can do.

How do Acknowledgement of Trusts work?

The Acknowledgement of Trust is drafted after the 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 merely records 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 Purchase. 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.

An Acknowledgement of Trust merely records past activity

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.

What evidence do you have that there was a bare trust started all those years ago?

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. These are 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.

Build the Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’ here.

Acknowledgement of Trust – ‘AFTER the Trustee buys’

3. Gifting Trust ‘death bed declaration’

Before the Gifting Trust is created the ‘original owner’ holds both:

• ‘legal’; and
• ‘beneficial’

interest in the asset.

For bare trust you need three things: Trustee, Beneficiary and Trust Asset. The Trustee and Beneficiary must be different persons. Therefore, before you sign the Gifting Trust there is no trust. This is because the person holds both the ‘legal’ and ‘beneficiarl’ interest in the property.

When the Gifting Trust is signed, from that point forward:

1. The ‘original owner’ retains ‘legal’ ownership only, as Trustee
2. The beneficiary named in the Declaration is now the beneficial or ‘true’ owner

In other words, the ‘original owner’ still holds the assets. But now the ‘original owner’ only holds the asset as bare trustee for another person. This lucky person is the beneficiary.

• The legal title remains with the ‘owner’ – Bare Trustee
• Only the beneficial interest is transferred – Beneficiary

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 (beneficial interest) to the beneficiary. The taxes are levied on the Gifting Trust Deed.

The asset remains in the owner’s name. But transfer (stamp) duty and CGT apply. This is 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 inflict stamp duty and CGT when the beneficial interest in an asset changes – not when the legal ownership is changed.

These are often called ‘death bed declarations’. For example, Dad, knowing he will die shortly, using a Gifting Trust 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 to challenge.

The other children are mortified. They scream: ‘all these properties are in Dad’s name. Dad owns them.’

That is true. But Dad owned those assets (now Trust Assets) merely as a Bare Trustee.

1. Once Dad signed the Gifting Deed he lost (or rather gave away as a gift) all interest in the assets.
2. Similarly, at death, he continues to have no beneficial interest in the assets. This is because, before he died, he signed a Gifting Trust.

‘But Professor 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’.

Except for a Considered Person Clause in your Will, Professor Brett Davies is right, nothing usurps the court’s power. This is to rewrite your Will. But Dad has no assets that he beneficially owns in his Will. He gave them away via a Gifting Trust . This is before he died.

• At death, Dad is only the ‘legal’ owner. Bare Trustee
• The ‘true’ owner or beneficial owner was his oldest son. Beneficiary
• The son got the asset ‘inter vivos’.
• That is, while dad is still living. Dad holds the assets, a bare trust, in trust for his son.

From that point on the son pays tax on income from the asset. The assets are still in dad’s name. But the courts and the ATO look through the trust. This is to the ‘true’ owner. And that is Dad’s oldest son.

Why wouldn’t dad just transfer both the legal and equitable interest to his son?

There are two reasons:

1. It takes time to transfer an asset. For a house, Dad prepares transfers, digs out the title deeds, signs everything and lodges it with the local titles office; and
2. Dad may not have wanted anyone to know how he benefited the son. Until after Dad dies.

Gifting Trust Deed – ‘death bed declaration’

4. Bare Trust Deed – ‘hide what you own’

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 does the Trustee have any beneficial interest in the asset. The beneficial owner remains the beneficial owner.

ATO & Stamp Duty on a Bare Trust Deed – ‘hide what you own’

The ATO and State stamp duty office look through the trust. They see that the ‘true’ owner. The beneficial owner is not changed. Therefore, there is generally no CGT or stamp duty.

The beneficial owner (not the legal owner) continues to pay tax on 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 you transfer the property, pursuant to the Bare Trust, to the Trustee, generally, without any CGT or stamp duty.

Why use a Bare Trust Deed – ‘hide what you own’?

You feel vulnerable in the public and reporters knowing what land you own. It is no one’s business, other than your own, and the ATO, of course. You transfer your real estate to a bare Trustee generally for no stamp duty or CGT. When someone does a search at the local titles office your name does not appear anywhere. The ‘true’ owner is now buried in a private document called a Bare Trust. Build a Bare Trust here.

Bare Trust Deed – ‘hide assets you own’

Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australia wide law firm
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