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A trust is a commonly used and effective method of planning for the administration of an estate. However, there are various types of trusts you can choose to utilize when creating an estate plan. You should be aware of the advantages and disadvantages of the different types of trusts before making a decision. One of the most popular ways to create a trust-based estate plan is through the use of a bare trust. 

What is a bare trust? 

When setting up a bare trust you will be giving your beneficiary complete rights over trust assets which also includes income earned from these assets. The trustee will not be able to make decisions regarding how to manage assets in your trust or how funds are distributed. The title to the assets will be held by the trustee. 

Why set up a bare trust? 

One of the main reasons why people decide to go with a bare trust for their estate plan is to give the beneficiary the ability to choose when to actually take possession of estate assets. Also, your beneficiaries will be able to decide how trust assets should be managed. 

How do you create a bare trust? 

To implement a bare trust, you will need to draft the necessary legal documentation. Usually, the two types of legal documents for initiating a bare trust are a deed of settlement or a declaration of trust. 

Understanding tax implications 

There are certain tax implications of choosing to use a bare trust for your estate plan. If your beneficiary is 18 years of age or older, he or she will have to pay taxes on any income produced by assets held in the trust. This might include rental income, interest payments, dividends or possibly even a small business that is held in the trust. 

Along with income, capital gains will also be required to be included on your beneficiary’s tax returns. However, this only includes capital gains exceeding the amount exempted by current law. 

Now, if your beneficiary is under the age of 18 years, you will be responsible for paying taxes on income and capital gains generated by trust assets. 

Inheritance taxes 

Your beneficiary will be required to pay inheritance taxes if you happen to die before seven years after establishing a bare trust. On the other hand, if you do not pass away during these first seven years your beneficiary will not face inheritance tax liabilities. 

Designing your customized estate plan 

Of course, a bare trust is only one option available to use for the central legal document of your estate plan. There are many other types of trusts you can consider, each with their own benefits and drawbacks. You may even decide to not use a trust-based estate planning strategy and opt for a will instead. Either way, a knowledgeable expert in personal finance can help guide you in making these critical decisions to ensure your estate plan is specifically designed for you.


Opinions expressed in this blog post are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. The material presented herein is not a recommendation of any kind.  Raymond James Financial Services and its advisors do not offer legal or tax advice. You should discuss any tax or legal matters with the appropriate professional.