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:
Gifting Trust ‘death bed declaration’
Before this trust is created the ‘owner’ holds both ‘legal’ and ‘beneficial’ interest in the asset. When the Gifting Trust 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 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.
‘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 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
Other types of trust deeds we have available:
Declaration of Trust BEFORE You Buy - 'secretly buy'
Acknowledgement of Trust - 'AFTER the Trustee buys'
Bare Trust Deed - 'hide assets you own'
Please contact me for further legal advice on your document.
Dr Brett Davies
39 Stirling Highway, Nedlands
(08) 63890100 or 0477796959