The term bare trust refers to an arrangement where the beneficiary has immediate access to the assets and capital placed in the trust, as well as any income generated by those assets. Bare trusts are oftentimes used by grandparents and parents to transfer assets to a grandchild or a child.
Also referred to as a simple trust or mandatory trust, a bare trust is an arrangement where a donor provides assets to a trust. A trustee is responsible for managing the assets on behalf of the beneficiary. Other than its fiduciary responsibility to the beneficiary to make prudent investment decisions, the trustee has no other control over the trust's assets. In fact, the beneficiary has the right to ask that all of the income and assets in the trust be immediately transferred to their name.
While the assets are being actively managed by the trustee, bare trusts require all income generated by the assets to be distributed to the beneficiary in the same tax period in which it is earned. Bare trusts are considered a tax-efficient means of transferring assets to relatives. Once placed into the trust, the donor gives up all legal ownership rights to the assets.