Bare Trust vs. Formal Trust in Ontario: What's the Difference?

The word "trust" gets used loosely in everyday conversation — someone says a parent "holds the cottage in trust" for the kids, or an account is "in trust" for a grandchild. But in Ontario law, not all trusts work the same way, and the differences matter enormously for who actually controls an asset and how it is taxed.

The most important distinction is between a bare trust and a formal trust. A bare trust is little more than a legal name on title, with the trustee having no real decision-making power. A formal trust, by contrast, gives the trustee genuine authority and discretion over the property. Confusing the two — or setting one up when you meant the other — is a common source of family disputes and unexpected tax consequences.

This article explains how the two arrangements differ and why the label you put on paper matters less than how the arrangement actually functions.

What Is a Bare Trust?

In a bare trust, the trustee holds legal title to an asset, but has no independent powers over it. The trustee cannot decide when to sell, how to invest, or who benefits — they simply hold the asset and must deal with it exactly as the beneficial owner instructs. The beneficiary has full control in substance, even though their name is not on title.

A classic example: a parent is added as joint owner on a bank account or piece of property purely for administrative convenience — say, to help an aging parent pay bills — with everyone understanding the account still belongs, in substance, to the original owner. In that scenario, the person added to title may be holding their interest as a bare trustee for the true owner, not as a genuine gift recipient.

Why the "add a name to the account" scenario gets complicated

Simply adding a second name to an account or property does not automatically create a bare trust, and it does not automatically create a gift, either. Ontario law recognizes a rebuttable presumption of resulting trust in many of these situations — meaning the law's starting assumption can be that the added person holds their interest for the original owner, unless there is clear evidence a gift was actually intended. This is precisely the kind of fact pattern that leads to estate disputes after death, when family members disagree about what a parent actually meant.

What Is a Formal Trust?

A formal trust — sometimes called a discretionary trust — is a genuine legal arrangement where the trustee holds real, independent decision-making power over the trust property, governed by a trust document (or, for a testamentary trust, the terms of a will). The trustee decides, within the boundaries set by the trust document:

• Whether and when to make distributions to beneficiaries
• How trust assets are invested
• How to balance the interests of multiple beneficiaries, if there is more than one
• When the trust terminates and final assets are distributed

Beneficiaries of a formal discretionary trust typically have no automatic entitlement to receive anything at a particular time — that is the point. The trustee's discretion is the mechanism that makes the trust useful for purposes like protecting a beneficiary who cannot manage money responsibly, or preserving eligibility for means-tested government disability benefits (a fully discretionary trust used for this purpose is often called a Henson-type trust).

Side-by-Side: How the Two Differ

Why the Distinction Matters After Death

When someone dies, how their assets were actually held — not just how they looked on paper — determines what happens next. If an asset was held under a genuine bare trust arrangement, it generally belongs, in substance, to the true owner and should be dealt with according to that person's wishes (through their will or the intestacy rules), not simply handed to whoever's name happened to be on title.

This is exactly the kind of question an estate trustee has to sort through carefully, often with legal advice, before distributing assets — because getting it wrong can mean distributing property to the wrong person, or exposing the estate trustee personally to a claim from someone who was shortchanged.

A formal trust survives the settlor's death by design

A properly drafted formal trust — for example, one set up in a will for a beneficiary who cannot manage an inheritance directly — is designed to keep operating exactly as intended after the person who created it has died. The trustee named in the will (who may or may not be the same person as the estate trustee) continues to exercise the discretion the trust document gives them.

Getting the Structure Right From the Start

Whether you are setting up an arrangement now or trying to untangle one after a death, the safest approach is to be explicit about intent in writing, rather than relying on an informal understanding:

1. Decide what you actually want. Do you want the other person to have real ownership, or are you only adding them for convenience or future administration?
2. Document it. A short written declaration of trust, or clear wording in a will, removes ambiguity about whether a bare trust or a gift was intended.
3. Get tax advice before adding names to title. Adding a joint owner or changing how an asset is held can trigger tax consequences, including a deemed disposition, depending on the circumstances.
4. Review beneficiary designations and trust terms together. A formal trust and a beneficiary designation can interact in ways that surprise people if they are not reviewed as part of one overall plan.

Frequently asked questions