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Bare Trusts

In the realm of Canadian trust law, a Bare Trust stands out as a unique legal arrangement with distinct characteristics and applications. This legal concept holds significant importance in various financial and estate planning contexts, offering flexibility and specific benefits for individuals and families. In this article, we delve into the key aspects of Bare Trusts, shedding light on their nature, purposes, and potential advantages.

What is a Bare Trust?

A Bare Trust, also known as a Simple Trust or a Naked Trust, is a type of trust arrangement where the legal title of the trust property is held by a trustee, but the equitable interest belongs entirely to the beneficiary. This means that the trustee has the authority to manage the trust property, but they must follow the instructions of the beneficiary, who enjoys the ultimate economic benefits of the trust.

Key Components of a Bare Trust:

  1. Legal Title vs. Equitable Interest: The legal title refers to ownership recognized by law, while the equitable interest is the right to enjoy the benefits of the property. In a Bare Trust, these two interests are distinctly separated.
  2. Limited Trustee Powers: Unlike other types of trusts, a Bare Trust grants limited powers to the trustee. The trustee’s role is primarily administrative, and they must act in accordance with the beneficiary’s instructions.
  3. Absolute Rights of the Beneficiary: The beneficiary of a Bare Trust holds absolute rights to the trust property. This ensures a high degree of control over the assets, allowing for more direct management of investments or other financial decisions.

Common Uses of Bare Trusts:

  1. Real Estate Transactions: Bare Trusts are commonly employed in real estate transactions, allowing for efficient property management while preserving the beneficial ownership rights of the individual.
  2. Investment Management: Individuals who wish to grant someone else the authority to manage their investments may utilize a Bare Trust. This structure allows for professional management while maintaining the individual’s ultimate control over the assets.
  3. Estate Planning: Bare Trusts can be a valuable tool in estate planning, providing a means to pass on assets to beneficiaries while allowing for specific conditions or instructions to be carried out by the trustee.

Advantages of Bare Trusts:

  1. Flexibility: The separation of legal and equitable interests offers flexibility in managing and controlling assets.
  2. Direct Beneficiary Control: Beneficiaries enjoy direct control over trust assets, streamlining decision-making processes.
  3. Efficient Real Estate Transactions: In real estate, Bare Trusts can simplify the transfer of property without affecting the beneficial owner’s rights.

Bare trusts are commonly used in various financial and estate planning scenarios. Here are a few examples to illustrate how bare trusts can be applied:

1. Real Estate Ownership:

Scenario: John, a father, wishes to purchase a property for his daughter, Emily, who is currently a minor. However, he wants Emily to have direct control and ownership of the property once she reaches the age of majority.

Bare Trust Structure: John sets up a bare trust where he is the legal owner (trustee), but Emily is the beneficial owner. The trust deed specifies that, upon Emily turning 18, the legal title of the property automatically transfers to her. In the meantime, John manages the property for her benefit.

Scenario: John wishes to purchase a property in Manitoba and hold it for the benefit of his adult daughter, Sarah. However, he wants Sarah to have direct control and ownership of the property.

Bare Trust Structure: John sets up a bare trust with himself as the legal owner (trustee) and Sarah as the beneficial owner. The trust deed specifies that, upon completion of the purchase, legal title automatically transfers to Sarah. John, as the trustee, manages the property according to Sarah’s wishes.

2. Investment Portfolio Management:

Scenario: Sarah, an investor, wants her financial advisor, Mark, to manage a portfolio of stocks and bonds on her behalf. However, she wants to retain ultimate control and decision-making authority over her investments.

Bare Trust Structure: Sarah establishes a bare trust naming Mark as the trustee. The legal title of the investments is held by Mark, but the beneficial ownership remains with Sarah. Mark follows Sarah’s instructions for buying, selling, and managing the portfolio, while Sarah enjoys the economic benefits of any returns generated.

Scenario: Emily, a resident of Manitoba, wants her financial advisor to manage a portfolio of investments on her behalf. However, she wants to retain ultimate control over her investments.

Bare Trust Structure: Emily establishes a bare trust with her financial advisor as the trustee. Legal ownership of the investments is held by the advisor, while Emily remains the beneficial owner. The trust deed outlines that all decisions regarding the investment portfolio must align with Emily’s instructions.

3. Estate Planning for Minors:

Scenario: Tom and Lisa, parents of two young children, want to set aside funds for their children’s education. However, they are concerned about the children gaining unrestricted access to the funds before reaching a certain age.

Bare Trust Structure: Tom and Lisa create a bare trust for each child, with themselves as trustees. The trust funds are invested, and the children are named as beneficiaries. However, the trust deed specifies that the children only gain full access to the funds upon reaching a specified age, ensuring that the funds are used for educational purposes.

4. Gifts with Specific Conditions:

Scenario: David wants to gift a valuable piece of art to his niece, Amanda, but he wishes to ensure that she does not sell it or transfer it without his consent.

Bare Trust Structure: David places the artwork in a bare trust with Amanda as the beneficiary and himself as the trustee. The trust deed outlines conditions for the use and transfer of the art. While Amanda is the beneficial owner and can enjoy the art, David maintains control to ensure it is not sold or transferred without his approval.

5. Family Wealth Management:

Scenario: The Thompson family has significant wealth, and they want to ensure its smooth transition to the next generation while minimizing tax implications.

Bare Trust Structure: The family establishes bare trusts for each family member, designating family members as both trustees and beneficiaries. This allows for the seamless transfer of assets within the family, providing each member with control over their share of the family wealth.

Scenario: The Thompson family in Manitoba wants to distribute family assets among its members while maintaining individual control over each member’s share.

Bare Trust Structure: The family establishes separate bare trusts for each family member. Each family member becomes both the trustee and beneficiary of their trust. This structure allows for the equitable distribution of family wealth while allowing each member to manage their assets independently.

These examples demonstrate the versatility of bare trusts in addressing specific needs and objectives within the realms of real estate, investments, estate planning, and family wealth management. Considerations and Compliance:

While Bare Trusts offer notable advantages, it is crucial to ensure compliance with Canadian trust laws. Proper documentation and legal advice are imperative to establish a valid Bare Trust, and any deviations from legal requirements may have implications on the effectiveness of the arrangement.

In conclusion, Bare Trusts in Canada provide a powerful mechanism for managing and distributing assets while offering beneficiaries a unique level of control. As with any legal structure, individuals considering a Bare Trust should seek professional advice to navigate the complexities and ensure that their objectives are met within the bounds of the law.

DISCLAIMER: This article is written for informational purposes only and does not constitute any legal advice. The views expressed are solely authors and should not be attributed to any other party, including PPD LAW OFFICE. If you need legal advice, please call our office at 204-540-0414

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