Trusts Jargon Decoded
Trusts are an important legal and financial tool. They form an intrinsic part of many people’s estate and inheritance planning, but can also be used for asset protection, charitable endeavours, and a wide variety of other purposes.
However, trusts can be confusing. There is a vast lexicon surrounding trust and other related instruments, and it is vital that you understand this vocabulary if you are considering making use of trusts. We give a quick run-down of some of the most important bits of trust jargon that you might come up against as follows:
5. Trust instrument
6. Testamentary trust
7. Fiduciary duty
1. TrustWhat is a trust? Broadly speaking, a trust occurs when the legal title to property is held by one party (known as the trustee) for the benefit of another. This latter party is known as the beneficiary.
2. SettlorThis is the individual that establishes the trust. Depending on the type of trust the settlor may also be the trustee or beneficiary.
3. TrusteeThe individual or entity charged with managing the trust for the benefit of the beneficiary. There may be more than one trustee for a trust.
4. BeneficiaryThe individual or entity for whose benefit the trust is managed. Depending on the type of trust the beneficiary may also be the settlor or trustee.
5. Trust instrumentThis is the document used to establish the trust. For example, in inheritance tax trusts the trust instrument is often a will. The trust instrument will set out the manner in which the trust will be operated, and will give details of the trustees and beneficiaries, as well as the property that is to be settled – that is, placed in trust.
6. Testamentary trustA testamentary trust is a trust established through the will of a deceased individual.
7. Fiduciary dutyTrustees are said to owe a fiduciary duty to the trust’s beneficiaries. This means that the trustee is obliged to act for the sole benefit of the beneficiary at all times. Problems can therefore arise if the interests of the trustee and the interests of the beneficiary are at odds. In these cases it would generally be thought that another trustee should be sought.
8. AppointmentThis phrase has a number of distinct meanings in trust law. To begin with you can be said to ‘appoint’ a trustee. However, an ‘appointment’ is also taken to mean the transfer of property from the trust to a beneficiary. Confusingly, an ‘appointment’ is also the document authorising this transfer. Finally, an individual with the power to transfer assets from the trust is said to have ‘power of appointment’. This power can be conferred on individuals other than the trustees; for example to the settlor if this individual is not a trustee.
While these are the most common terms you will encounter while investigating trusts, it is important to remember that this is a small sample of the jargon you may be required to understand. As a result, it is vital that you take independent expert advice when considering establishing and managing a trust; the process must be carried out in a legally valid way, and you may well need a professional to guide you through it.