Is a Family Trust a Bare Trust? The quick answer is no, a family trust and a bare trust are fundamentally different legal structures under Australian trust law. While they may occasionally share some characteristics, they serve distinct purposes and have different operational frameworks.
Understanding Bare Trusts
A bare trust is characterized by:
- The trustee holding legal title to property
- Having no active duties except to transfer the property as directed by the beneficiary
- The beneficiary having absolute entitlement to the trust property
- No discretionary powers vested in the trustee
Understanding Family Trusts
A family trust (typically structured as a discretionary trust) features:
- Active trustee duties and responsibilities
- Discretionary powers to distribute income and capital
- Multiple potential beneficiaries within a defined class
- Complex trust deeds with various administrative provisions
- Extensive trustee powers regarding investment and management
Why Family Trusts Are Not Bare Trusts
Family trusts cannot be classified as bare trusts for several crucial reasons:
Discretionary Powers
- Family trust trustees have substantial discretionary powers
- They actively decide which beneficiaries receive distributions
- They determine the timing and amount of distributions
- This discretion is incompatible with bare trust characteristics
Trustee Duties
- Family trust trustees have ongoing active duties
- They must make investment decisions
- They are required to consider beneficiaries’ circumstances
- They must exercise discretion in good faith
Beneficiary Rights
- Family trust beneficiaries have no fixed entitlements
- They cannot demand distributions
- Their interests are merely expectancies
- This contrasts with bare trust beneficiaries’ absolute entitlement
Tax Treatment Implications
The distinction has significant tax implications:
- Bare trusts are generally tax-transparent
- Family trusts require active tax planning
- Family trusts can access various tax advantages
- Different CGT events apply to each structure
Wrap Up
A family trust is definitively not a bare trust. While both are trust structures, they serve different purposes and operate under different legal principles. Family trusts involve active trustee duties and discretionary powers that are fundamentally incompatible with the passive nature of bare trusts.
