What is a bare trust in Ireland?

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A bare trust is a simple way to transfer wealth, inheritance, or financial gifts, giving the beneficiary full ownership once they reach legal age. While it offers transparency and control, it also comes with tax obligations and legal considerations. This guide explains how bare trusts in Ireland work, how to set them up, and whether they’re the right choice for managing assets.

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In Ireland, a bare trust – also referred to as simple or naked trust – is a special type of trust where the trustee (the person managing the assets) holds assets on behalf of a beneficiary (the person who is entitled to the assets). The beneficiary has full ownership rights, meaning they can access the bare trust assets at any time, as long as they are legally entitled to do so. Typically, a bare trust account is used for transferring wealth, inheritance, or gifts, often from parents or grandparents to a child. Unlike other trusts, a bare trust does not have any restrictions on how the beneficiary uses the money or property once they reach the age of 18.

A bare trust is a straightforward way to manage and transfer assets while ensuring that the beneficiary gains full ownership at a later date. It is commonly used for financial and estate planning purposes, particularly for children or long-term investments.

Common uses of a bare trust:

• Saving for a child’s future: Parents or grandparents in Ireland may set up a bare trust account to hold savings until the child turns 18, helping with education costs or other financial needs.

• Holding investments: A bare trust can be used to manage investment assets, such as stocks or property, with the trustee acting on behalf of the beneficiary.

• Inheritance planning: To transfer wealth efficiently, individuals may use a bare trust to gift money or assets to a beneficiary, potentially benefiting from tax exemptions.

• Property ownership: A bare trust may be set up to hold property on behalf of a beneficiary, ensuring that ownership is clear and legally protected.

• Managing gifts: Large financial gifts can be placed in a bare trust to safeguard them until the beneficiary is legally allowed to take control.

In Ireland, a bare trust is often used to transfer wealth or manage assets for a child until they reach a certain age. Two common examples of a bare trust in Ireland could be illustrated as follows:

Example 1: Setting up a bare trust for a child

Grandparents want to gift their grandchild €10,000 for their future financial planning, but the child is still underage. Since the grandchild cannot manage the money yet, the grandparents set up a bare trust account in the grandchild’s name. One of the grandparents acts as the trustee. The grandchild is the beneficiary. This means the money legally belongs to them. The funds are held in a bare trust, and once the grandchild is 18, they gain full control over the trust assets. Until then, the trustee manages the funds but cannot use them for anyone else. Once the beneficiary reaches adulthood, they can withdraw the money or use it however they wish, without needing permission from the trustee.

Example 2: Holding property in a bare trust

A parent purchases a property on behalf of their child and places it in a bare trust until the child turns 18. Although the trustee holds legal ownership, the beneficiary has full entitlement to the property. The trustee ensures that the property is maintained and that any related financial obligations, such as taxes or upkeep costs, are covered. The trustee cannot sell, rent, or alter the property without the beneficiary’s consent once they reach the legal age. When the beneficiary is 18, they get full ownership and can decide to live in, sell, or rent the property without any restrictions from the trustee.

A bare trust has several defining characteristics that differentiate it from other types of trusts. These are the typical key features of a bare trust in Ireland:

• Full beneficiary ownership: The beneficiary has complete ownership of the trust assets and can access them once they meet the legal age requirement.

• Trustee’s role is limited: The trustee can’t decide how the assets are used and must act in the best interest of the beneficiary.

• No restrictions on asset use: Once the beneficiary gains control, they can use the money, property, or other assets as they choose.

• Common for tax planning: A bare trust may help reduce inheritance tax liabilities, depending on tax thresholds and exemptions.

• Often used for minors: Many bare trusts are set up for children, ensuring that financial gifts or investments are protected until they reach adulthood.

• Taxation falls on the beneficiary: In Ireland, all income tax or Capital Gains Tax (CGT) due on the trust assets is the responsibility of the beneficiary, not the trustee.

A beneficiary can only withdraw money from a bare trust once they reach the legal age of 18 in Ireland. Until then, the trustee manages the trust assets but cannot access or use them for personal purposes. Once the beneficiary comes of age, they have full control and can withdraw or use the money as they wish.

The main difference between a bare trust and other types of trusts or trust funds is that the beneficiary has an absolute right to the trust assets. Unlike discretionary trusts or other structured trusts funds, a bare trust does not allow the trustee to make decisions about how or when the assets are distributed. The trustee holds and manages the assets but must transfer full control to the beneficiary once they reach the legal age.

Other key differences include:

• Fixed entitlement: In a bare trust, the beneficiary’s rights are fixed, whereas in discretionary trusts, the trustee decides how to distribute the assets.

• Taxation: In Ireland, a bare trust’s assets are taxed as if they belong directly to the beneficiary, while other trusts may be taxed differently.

• Flexibility: Other types of trusts allow trustees to manage assets for multiple beneficiaries or set conditions for access, while a bare trust has no such restrictions.

Setting up a bare trust in Ireland is a simple process. Here’s a step-by-step guide:

1. Decide on the assets: Choose what will be placed in the bare trust, such as money, property, or investments.

2. Appoint a trustee: Often a parent, grandparent, or solicitor who will manage the trust assets on behalf of the beneficiary.

3. Identify the beneficiary: The beneficiary must be clearly named in the trust agreement, as they have full entitlement to the assets once they turn 18.

4. Draft a trust deed: A trust deed is a legal document outlining the terms of the bare trust, including the trustee’s responsibilities and confirmation that the beneficiary has full rights to the assets.

5. Open a bare trust account: If the trust involves money, a bare trust account can be opened in the beneficiary’s name.

6. Transfer the assets: The chosen assets, such as money, property, or investments are placed into the bare trust, with the trustee responsible for managing them.

7. Understand tax obligations: The beneficiary is responsible for any income tax or Capital Gains Tax (CGT) on the trust assets, so tax planning may be necessary.

8. Maintain records: The trustee should keep clear records of the trust assets and any transactions to ensure proper management and compliance with Irish property law.

Before setting up a bare trust in Ireland, it is important to consider both its advantages and disadvantages. While it can be a simple way to transfer assets and provide long-term financial support, it may not always be the best option, depending on individual circumstances. Factors such as tax implications, control over assets, and future financial planning should be carefully evaluated to determine whether a bare trust is the right choice.

If you're considering setting up a bare trust, it's best to consult an independent financial adviser. They can help you understand the legal and tax implications, and ensure the trust structure aligns with your financial goals.

A bare trust offers several benefits, particularly for estate planning and wealth transfer. Here are some of the key advantages:

• Simple legal structure: A bare trust is easy to set up and manage compared to other types of trusts.

• Full ownership for the beneficiary: The beneficiary has an absolute right to the trust assets, ensuring transparency and legal clarity.

• Potential tax benefits: Depending on individual circumstances, a bare trust may help reduce inheritance tax liabilities or benefit from tax exemptions.

• Common for financial gifts: It allows parents, grandparents, or other relatives to transfer money or investments securely for a child’s future.

• No restrictions on asset use: Once the beneficiary reaches the age of 18, they can use the assets however they choose, without additional legal barriers.

While a bare trust has benefits, there are some key drawbacks to consider:

• No flexibility in beneficiaries or entitlements: Once the bare trust is set up, the named beneficiary and their entitlement cannot be changed, even if circumstances change.

• Young beneficiaries may lack financial responsibility: At 18, the beneficiary gains full control over the trust assets, which may be too early for managing substantial wealth responsibly.

• Potential tax obligations: Any income or capital gains generated from the trust assets are taxed in the beneficiary’s name, which may lead to unexpected tax liabilities.

• Assets may not be fully protected: If the beneficiary faces financial difficulties such as bankruptcy or divorce, the trust assets may not be safeguarded.

Now that you understand how a bare trust works and what its potential benefits and drawbacks are, you may want to explore alternative ways to manage your savings. While a bare trust can be an easy way to transfer wealth, some may prefer a flexible savings option without the legal restrictions. Opening a bank account with Raisin Bank provides access to high-interest fixed-term and demand deposit accounts, helping you grow your savings while keeping your finances organised. With a simple online registration process, you can choose from a variety of deposit accounts offered by partner banks across Europe, allowing you to earn competitive interest rates on your savings.