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General, Trusts

A bare trust by any other name

A bare trust arises where property is held by a trustee who can only act on the direction of the trust’s beneficiary.  Bare trusts can arise inadvertently or by design.  The recent decision in Mudgway v Tetra House Trustee Limited, which considers the sustainability of a caveat involves some consideration of whether the trust in question was a bare trust.   See paragraphs 48 to 68.

It can be important to recognise a bare trust when it arises, say where the correct basis for the ownership of assets needs to be determined.  However, as highlighted in Mudgway the practice sometimes of settling trusts labelled bare trusts can obscure the trustee’s duties and obligations, and by corrolary, the beneficiaries’ rights. 

Although there is no legal definition of bare trust, the Income Tax Act has limited provisions where the interests held by the trustee are deemed to be held by the beneficiary directly.  In this way the legislation provides support for the proposition that a bare trustee is to be disregarded, or perhaps to be considered, to be barely there.  Care must be taken with this analogy as not all bare trustees are created equal and while some can do no more than act on directions, others have powers that empower the trustee to act independently of the beneficiary.

References:

  • Re Brockbank [1948] Ch 206
  • Burns v Steel [2006] 1 NZLR 559

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