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SIMPLIFY INVESTMENTS WITH BARE TRUSTS.
A small number of sophisticated or wholesale investors can use a bare trust to access investments. They’re convenient as a ‘single-investor’ model, where each asset needs to be separately identified and held on trust for a specific beneficiary.
That’s why a bare trust works well for things like shares, options and convertible notes. They’re also good for speculative investments like crypto or digital currencies or foreign investments.
How do bare trusts work?
The assets in a bare trust are held in the name of a trustee. The trustee legally holds the assets on trust for each beneficiary. Sometimes, the trustee is an investment manager who has helped find and access the investment. In other situations, the investors may have decided to invest without any advice.
In a bare trust:
- The trustee has no say on how the capital or income of the trust is distributed.
- The beneficiary can call for the capital, assets and income of the trust whenever they want.
- The trustee must distribute the profits or returns and transfer the assets to the beneficiary if they ask.
To set up a bare trust, each investor signs a separate trust deed with the trustee. The investor’s funds are not pooled to purchase the investment.
Once set up, you can use the bare trust for other future investment opportunities.
What does a bare trust cost?
Bare trusts are simpler and cheaper to operate than a unit trust. The costs of a bare trust include:
- Trustee fees - Trustees or investment managers may charge a fee for their services. Beneficiaries can deduct this fee from the returns or dividends they are paid.
- Stamp duty - Stamp duty is paid when the trust deed is executed. The amount of stamp duty depends on the state where the trust is set up. It’s not possible to ‘jurisdiction-shop’ for the best stamp duty rate though. The trust should be set up in the state where it has the most real and substantial connection. For example, if the trustee, beneficiaries and investment asset are all located in New South Wales, the trust deed should be stamped there.
- Capital gains tax (CGT) - Beneficiaries should seek advice to see if they have to pay CGT.
Other regulatory requirements
The trustee and investment manager may need to hold an Australian financial services licence (AFSL) if they are giving advice about the investment. They may also need to be licensed if the asset is a financial product.
If the trustee or investment manager doesn’t hold an AFSL to provide custodial services the bare trust cannot have more than 20 investors.
If you think a bare trust might work for you or would like help establishing one, contact Charmian Holmes or Lydia Carstensen. We’d be happy to help.
Author: Lydia Carstensen
March 2018
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