DRAFT LEGISLATION CLARIFYING NEW BARE TRUST RULES SET TO PASS

AUGUST 21, 2024

After what could charitably be called an uneven rollout, recent draft legislation on bare trusts brings significant changes and clarification. The draft legislation will eliminate the need for many small trusts to file by introducing new broader exemption filing criteria.

Filing Exemptions for 2024: If the draft legislation is enacted, bare trusts will not be required to file for the 2024 tax year. This change addresses previous confusion over last-minute filing requirements imposed for the 2023 tax year.

Filing Requirements for 2025: Fewer trusts will have to file returns due to the following exemptions:

1.     Where the beneficiaries and trustees are related, the trust holds assets with less than  $250,000 of fair market value and the assets consist solely of public company stocks and GICs.

2.     Where the beneficiaries and trustees are not related and the trust holds assets with less than $50,000 of fair market value.

3.     An exemption for certain types of bare trusts that hold real estate that is the principal residence of one or more of the legal owners, thereby eliminating the need for parents who are on title with their child to allow the child to have a mortgage;

4.     An exemption for certain types of bare trusts that hold real estate that is used for the benefit of a partnership, where by each legal owner is a partner (other than a limited partner) and a partnership information return is filed.

Future Reporting Requirements: Starting with the 2025 tax year, bare trusts will need to file returns unless they meet the new exemptions. Late filed bare trust returns will result in a penalty of up to $2,500 with an additional penalty of up to 5% of the value of the property where a failure to file was made knowingly or due to gross negligence.

Ongoing Complexity: Despite these updates, taxpayers and advisors will still face complexity in determining if a bare trust is subject to filing requirements. The new rules continue to involve detailed reporting on beneficiaries, trustees, and other trust details.

As a reminder it’s also important to remember that the most common bare trusts often arise in straightforward scenarios such as holding property for minor children or managing assets for individuals who are not able to manage their own affairs. For more details on what constitutes a bare trust, you can refer to our earlier article.

If you have any questions, please reach out to your RMR representative.