Bare Trust vs Discretionary Trust: Which Is Better for Your Children’s Inheritance?
By Georgia Holmes
Learn how bare and discretionary trusts differ when passing wealth to children, including who controls the assets, when children can access their inheritance and the tax considerations for each option.
If you want to pass wealth to your children, choosing how to hold and transfer the assets can be just as important as deciding how much to give them.
A trust can allow you to set money or investments aside for your children while trustees look after the assets. However, not all trusts work in the same way. Two common options are bare trusts and discretionary trusts, which offer very different levels of control over when and how children receive their inheritance.
A bare trust gives a child a direct entitlement to the assets, even if a trustee manages them while the child is young. A discretionary trust gives trustees greater flexibility to decide how and when the assets are distributed among the beneficiaries.
The right arrangement depends on your family circumstances, your children’s ages, how much control you want to retain and the potential tax implications.
What is a bare trust?
A bare trust is an arrangement in which assets are held by a trustee for a named beneficiary. The trustee looks after the assets, but the beneficiary has an absolute right to the trust capital and income.
Parents or grandparents might use a bare trust to hold money, shares or other investments for a child until they are old enough to manage the assets themselves.
The key feature is that the trustee does not have discretion to change who ultimately owns the assets. The beneficiary is entitled to them, even if they cannot yet take control of them personally.
Advantages of a bare trust
Bare trusts can be relatively straightforward to understand and administer compared with more complex trust structures. They can also be useful when you want to make an outright gift to a particular child while allowing someone responsible to manage the assets in the meantime.
For example, a grandparent might place £50,000 into a bare trust for a grandchild. A trustee could invest the money on the child’s behalf, but the assets would belong beneficially to the grandchild.
Gifts into a bare trust are generally treated as potentially exempt transfers for Inheritance Tax purposes. If the person making the gift survives for seven years, the gift will normally fall outside their estate, subject to the usual rules, including the treatment of gifts where the donor retains a benefit.
Disadvantages of a bare trust
The main drawback is the lack of long-term control. In England and Wales, a beneficiary can generally take control of the assets at age 18. In Scotland, the relevant age is generally 16. Once the beneficiary is legally entitled to the assets, a trustee cannot simply decide to keep them invested until a later age because they believe the child is not ready.
This can be a concern if you want your children to receive substantial wealth at a more mature age, or if you are worried they might spend the money unwisely.
A bare trust also offers limited flexibility if your family circumstances change. You cannot normally redirect the assets to…