Bare Trust vs. Living Trust

Attribute	Bare Trust	Living Trust
Legal ownership	Trustee	Trustee
Beneficial ownership	Beneficiary	Beneficiary
Control	Trustee	Trustee
Revocability	No	Yes
Privacy	Less private	More private

Definition

A Bare Trust, also known as a simple trust, is a type of trust where the beneficiary has an absolute right to both the capital and income of the trust property. The trustee holds the legal title to the assets but has no discretion over how the assets are managed or distributed. On the other hand, a Living Trust, also known as a revocable trust, is a type of trust created during the grantor's lifetime and can be changed or revoked at any time. The grantor typically serves as the trustee and beneficiary during their lifetime, with the trust assets passing to designated beneficiaries upon the grantor's death.

Control

In a Bare Trust, the beneficiary has complete control over the trust assets, including the right to sell, transfer, or use the assets as they see fit. The trustee's role is limited to holding legal title to the assets on behalf of the beneficiary. In contrast, a Living Trust allows the grantor to retain control over the trust assets during their lifetime. The grantor can make changes to the trust, add or remove assets, and designate new beneficiaries as needed. However, once the grantor passes away, the trust becomes irrevocable, and the successor trustee must follow the terms of the trust document.

Privacy

A Bare Trust offers little privacy protection since the beneficiary's ownership of the trust assets is publicly known. The trustee's role is mainly administrative, and the beneficiary's rights are clearly defined in the trust document. On the other hand, a Living Trust provides a higher level of privacy since the trust assets are not subject to probate and do not become part of the public record. The terms of the trust document, including the identity of the beneficiaries, remain private and confidential, making it a popular choice for individuals who value discretion.

Probate

One of the main advantages of a Bare Trust is that it avoids probate, as the trust assets pass directly to the beneficiary upon the trustee's death. This can save time and money, as probate can be a lengthy and costly process. However, a Living Trust also offers probate avoidance, as the trust assets are held outside of the grantor's estate and pass directly to the designated beneficiaries upon the grantor's death. This can provide a seamless transfer of assets and avoid the delays and expenses associated with probate court.

Asset Protection

While a Bare Trust provides the beneficiary with direct access to the trust assets, it may not offer the same level of asset protection as a Living Trust. Since the beneficiary has absolute control over the assets, they may be vulnerable to creditors or legal claims. In contrast, a Living Trust can provide a layer of asset protection by keeping the trust assets separate from the grantor's personal assets. This can help shield the trust assets from creditors or legal judgments, providing added security for the beneficiaries.

Tax Implications

From a tax perspective, a Bare Trust is typically treated as a pass-through entity, with the income and capital gains of the trust assets attributed to the beneficiary for tax purposes. This means that the beneficiary is responsible for reporting and paying taxes on the trust income. On the other hand, a Living Trust is considered a grantor trust during the grantor's lifetime, with the grantor responsible for reporting and paying taxes on the trust income. Upon the grantor's death, the trust assets may be subject to estate taxes, depending on the size of the estate and applicable tax laws.

Flexibility

While a Bare Trust offers simplicity and direct access to the trust assets, it may lack the flexibility of a Living Trust. The terms of a Bare Trust are typically fixed and cannot be changed without the beneficiary's consent. In contrast, a Living Trust allows the grantor to make changes to the trust document as needed, including adding or removing assets, changing beneficiaries, or updating distribution instructions. This flexibility can be valuable for individuals who want to adapt their estate plan to changing circumstances.

Conclusion

In conclusion, both Bare Trusts and Living Trusts have their own unique attributes and advantages. A Bare Trust provides the beneficiary with direct control over the trust assets and can help avoid probate. However, it may lack the privacy, asset protection, and tax benefits of a Living Trust. On the other hand, a Living Trust offers flexibility, privacy, and probate avoidance, making it a popular choice for individuals who want to maintain control over their assets during their lifetime and provide for a seamless transfer of assets to their beneficiaries upon their death.