Can the settlor be a beneficiary of a bare trust?

I have come across a situation which is very peculiar where the professional wishes to transfer BPR assets into a bare trust where the beneficiary is also the settlor. From an IHT perspective clearly this achieves nothing and the reasons for doing this are spurious but I am wondering if there is actually any legislation preventing this course of action?

Any thoughts would be gratefully received.

Anne Slater-Brooks

I can see no tax benefits in the proposal, if the settlor is the only beneficiary.

It may be there are non-tax reasons for transferring the BPR assets into trust. This could be for political or commercial purposes - blind trusts can be used to avoid/mask a conflict of interest.

If the settlor is only “the beneficiary” during their lifetime, I wonder if this might be intended to be a US “living will” arrangement, primarily designed to avoid probate formalities on the settlor’s death.

In any event, if you are involved in advising any of the parties involved, you should ensure that you have satisfactory evidence of the purpose for the creation of such a trust.

Paul Saunders

1 Like

Thanks Paul. They do have another motive other than IHT

Anne Slater-Brooks

possibly also attempting to hide assets from creditors, divorce proceedings or even divesting assets for domicile purposes

Balkrishna Patel
Stennett & Stennett

As Paul Saunders indicates, a trust with a single beneficiary who is also the settlor is not impossible or prohibited as such.
There is also authority that a trust with a single beneficiary cannot be a discretionary trust for tax purposes, obviously enough. Arguably such a trust is always effectively revocable under the rule in Saunders v Vautier but the extent of the powers given to the Trustee/Protector may need to be considered. The effect of such a trust may be to give powers of management to the Trustee so the beneficiary can claim to be uninvolved in the management of the trust assets (which is the rationale behind “blind trusts” to which Paul refers). How realistic that claim is and how consistent, if true, with the duties of the Trustee in such a case is another matter. In England a trust which is in substance a will but created by an instrument which does not comply with the formalities required for a will is likely to be invalid. Depending on the motive, there may well be a better way of doing things than the kind of trust you mention.

Mark Hubbard
New Square Chambers

There appears to be no reason why the bare trust beneficiary cannot also be the settlor.

However, I’m not convinced that this would avoid the need for probate.

Whilst, of course, the legal title is not vested in the deceased but in the trustee(s), and hence the trustee(s) can realise the trust property, such property is then held for the benefit of the deceased’s estate in which case probate would still be necessary before the property could be distributed per the will?

Malcolm Finney

Malcolm Finney has raised a good point – the need for a grant of representation on the death of the sole beneficiary of a bare trust.

Once the grant has been seen the trustee(s) of the bare trust should normally account to the grant holder, for them to distribute the estate as the beneficiary of the trust.

If the trustee(s) proceed to distribute direct to the estate beneficiaries (even if at the direction of the grant holder): (i) can they charge for that work, which is outside the scope of their duties, and (ii) they may get caught up in any disputes that may arise between the beneficiaries or in connection with their dealings with the trust fund. In the latter case, it may be preferable to just have to answer queries from the grant holder rather than, perhaps, deal with queries raised by individual beneficiaries.

Paul Saunders

While it seems you guys on the UK ground seem not very sure of the question. Under China Trust Law, a settlor can and often is the sole beneficiary under a trust. In order not to confuse you, China trusts are most used for financial investment purposes as a way of short term wealth management tool (not in the sense of trusts you talk about).

I am interested to pursue the question because I have the impression that foreigners (like people from China) can use bare trusts to purchase properties in Australia, New Zealand and UK whereby the Chinese buyer is the only beneficiary of the trust holding the property. I guess somehow this is a way to circumvent purchase restriction imposed on foreign buyers of local properties, such as the recent restriction of this kind declared by New Zealand government.

So my question is: is this bare trust really helpful for foreigner to purchase properties in a restrictive police environment?

Jason Tian
Dentons Shanghai

As a New Zealand practitioner, I can clarify that the impending
restrictions to ban foreign owners of New Zealand residential real
estate look through all structures and nominee arrangements to
identify the ultimate beneficial owners - similar tests as used
to identify beneficial owners under AML/ CFT benefit and control
tests are applied.

  A foreign beneficiary who is the sole beneficiary of a trust

holding the real estate will therefore be captured by the Overseas
Investment Amendment Bill, and the trustees of the trust will be
prohibited from purchasing New Zealand residential real estate.
From 23 October 2018, the general rule is that neither foreigners
nor structures that they control or hold more than a 25% interest
in will be able to buy New Zealand residential property, and,
where an exception does exist, neither they nor their associates
will have the right to use it. Lawyers acting on the conveyancing
for the purchaser will need to ascertain the ultimate beneficial
owner’s situation, and failure to exercise due care will carry a
fine of up to NZD 20,000.00.

  There will be some exemptions available under the Overseas

Investment Act that remain in place, including the ability to
devise property owned prior to the 23 October 2018 to non-resident

Lee Harris TEP

Foley Hughes, New Zealand

Hi Mr. Lee, thanks a lot for the clairification on the issue. However I still need to further understand the legal consequence if, say, a Chinese buyer uses the trust to purchase without being initially discerned, but later on caught by government after the purchase is done. I notice that you mentioned the trustees will be prohibited from purchasing as one of the legal consequence of breach of the rule, but will the trust be invalidated and therefor the Chinese buyer beneficiary be denied its equitable in the property in question? What about the title to the property now?

There has been a hot debate in China regarding whether the actual money contributor who use a nominee to purchase property in restricted cities like Shanghai, Beijing or Shenzhen should be protected with regard to the title to the property registered in the name of the nominee. In China, such nominee arrangement is not considered as a bare trust, just nomineeship. One school of thought thinks the actual money payer shall not be given the title of the property in case of dispute between them and have only credit against the nominee owner, and the other school thought the law shall not deprive the actual money payer title to the property in noninee’s name because the property is just another form of the money from the actual purchaser, and therefore shall be recognized as having full title to the property, though the title may not be registered if the actual buyer is not qualified to purchase under local restriction policies.

Jason Tian
Dentons Shanghai

The New Zealand Overseas Investment Act applies at any given
moment, so if circumstances change so that a foreign person
acquires the requisite interest in NZ residential real estate at a
later date, the trust will be immediately captured upon that
change of circumstances, and the real estate would need to be
disposed of. Any attempt to circumvent the Act, by either the
trustees or their advisers, would be dealt with harshly. The
default expectation should be that no profit - in any sense of the
word - can be obtained, whether directly or via the means of any
form of structure.

Lee Harris

Foley Hughes, New Zealand

Happen to work on the topic bare trust again and bumped into this thread.

In response to BaIP message, I wondered if the bare trust of this type is found by the settlor’s creditors or divorcing spouse, will the bare trust serve the purpose of asset protection at all? I doubt it.

Further to this topic, analyzed from the perspective of three certainties, a bare trust under which the beneficiary is the settlor, does seem to run against the certainty of intention, as the donative intent is missing when there is no third party beneficiary.

This question has haunted me for long.