Definition and Meaning
Bare Trust is defined as the basic trust in which the beneficiary has the complete right to the assets within the trust, along with the income generated from these assets. Bare trusts are extensively used by parents and grandparents for handing over the assets to their children or grandchildren. Trust assets are alleged in the name of the trustee, who has the duty to manage the trust assets in a sensible way so as to create maximum profit for the beneficiaries. The trustee does not have any control over these assets and has no say in directing the trust's revenue or capital. It is also known as a simple trust.
Income produced from trust assets in the method of interest and bonuses is taxed in the hands of the beneficiary, making it a tax-efficient method of shifting the assets to one's descendants. There is no tax and excise implication for the specific individual who sets up a bare trust since he or she gives up legitimate title to the assets when they are moved into the trust. One harmful characteristics of a bare trust is that the recipients or beneficiaries are not allowed to be altered once it has been set up. Another disadvantage is that there may be likely capital gains and inheritance tax implications in some jurisdictions.
Mandatory trust is a trust in which the interest of the beneficiary in income is compulsory. It is a restrictive way of faith where the trustee has no discretion. But must allocate its income according to an agenda fixed by the trust document. It is generally for a restricted lifetime because the trustee must allocate income according to a fixed formula. One of the disadvantages of mandatory or compulsory trust is that this trust pays out the money irrespective of the needs of the beneficiary and their tax or credit situation. Mandatory trusts are also called simple trusts.
Examples of Bare Trust
Mr. A left the residue of his estate to her grandchildren who were alive at the time of his death. He directed that the assets should not be paid to the grandchildren till they individually attain the age of 21 years. All the grandchildren who were alive when Mr. A died are allowed to an equal portion in the residue of the estate or land. There are no additional conditions that they must fulfil before they become eligible. The direction about payment does not upset this basic position. The beneficiaries have a vested interest, and this trust is a bare trust.