Important Terms Associated With Trusts
As with many legal or financial topics, the apparently large amount of jargon concerning trusts can be confusing. In reality, however, while trust law can be complex, there is no reason why knowledge of them should not be accessible to the layman. This article looks at some of the terms and phrases that you may come across while investigating trusts.
Settlors, beneficiaries, and trustees are covered in detail in another article in this section. These are the three most important terms concerning trusts: the first term describes the individual who actually initiates the establishment of the trust; the second term describes those individuals who should ultimately benefit from the assets placed in trust; and the final term describes those individuals who assume the responsibility for managing the trust in order that this happens effectively.
Trust InstrumentThere are, however, a number of other important terms that may require explanation. First amongst these is the ‘trust instrument’. This term describes a document, executed (but not necessarily written) by a settlor, with the intention of establishing a trust. This is a far more effective method of constituting a trust than, say, a spoken declaration, as it dramatically reduces the potential for legal misunderstanding after the fact.
In order to validly constitute a trust, a trust instrument must demonstrate an intention on the part of the settlor to do so; it must also define the assets that are to be placed in trust, and the beneficiaries thereof.
Trust PropertyIt is also important to define ‘trust property’. Perhaps self-explanatorily, this refers to the property that is transferred by the settlor into the ownership of the trust. Clarification is required, however, regarding the nature of property that can be transferred.
In reality, a settlor can transfer any type of property; this might include money, shares, property or land. However, it should be noted that the method of constitution may vary depending on the type of property being transferred; a trust into which land is being transferred, for example, must be constituted by way of a trust instrument.
Avoidance and EvasionIt should be remembered that one of the most common reasons for the establishment of a trust is to minimise a tax liability, either for the settlor or for their dependants after their death. As such, it is useful to make the distinction between tax evasion and tax avoidance.
Both evasion and avoidance are methods by which individuals attempt to reduce their tax bills; the difference, however, is that avoidance is legal while evasion is not. Methods of tax evasion might include, for example, a failure to declare income. Trusts, however, can provide an effective means of tax avoidance, as is outlined in more detail elsewhere this site.
There can also be confusion regarding the distinction between the terms ‘settlement’ and ‘trust’ itself. According to the Inland Revenue, settlement and trust can be used interchangeably, apart from for tax purposes – in these instances, settlement has a broader meaning. The confusion arises, however, as some individuals use ‘settlement’ interchangeably with ‘trust instrument’. All of the articles on this site use the Inland Revenue’s definition.