Knowing Trust “Jargon”

With the rise in use of trusts comes “jargon” that is peculiar to trusts. Increasingly, clients ask about trusts and how they operate. Simple explanations follow for words and phrases that are part of trust jargon.

  • Trust — a legal relationship where a person or persons (the trustees), holds property for the benefit of another person or persons (the beneficiaries).
  • Trustee — the person or persons appointed to look after the assets that belong to the trust. The trustee’s powers are outlined in the Trust Deed.
  • Settlor — the person who creates a trust.
  • Discretionary beneficiaries — a group of people who have been nominated to share in the trust income, and where specified in the Trust Deed, also in the trust’s capital. The trustees decide who gets what from the trust.
  • Final beneficiaries — a group of people nominated to share in the assets left in the trust at the time the trust is wound up.
  • Settlement sum — This can be a nominal amount, say $10.
  • Trust deed — the document creating a trust. Its contents indicate who created the trust (settlor), who the trustees are, what the settlement sum is, the powers of the trustees, the group of people who may be able to share in the income and capital earned by the trust, and the group of people who are to share in the trust assets on wind up.

The creation of a trust can be explained as follows: A person (the settlor) creates a document (the trust deed) which entrusts the management of certain assets (the settlement sum, to begin with) to a person or persons (the trustees) for the benefit of people (the beneficiaries) that the settlor nominates within the trust deed. The ability of the trustees to “grow” the trust is defined within the powers given to them by the trust deed.

The main reason for creating a trust is to set aside and maintain assets for specific people (the beneficiaries). The assets may generate an income that can also be allocated to the beneficiaries.

Another area which creates some confusion is the difference between an estate and a trust.

  • Estate — when someone dies, all their assets and liabilities go into an estate. An estate is a trust which administers the assets of a deceased person. The estate has a trustee (referred to as an executor) appointed (usually by the will) to administer the estate. The estate is a special type of trust that is created only at the time of a person’s death.
  • Trust — usually an entity that is created by a living person who contributes a sum (settlement sum) to start the entity.

Who “owns” the trust’s assets? All the assets of the trust are legally held in the joint names of all the trustees. If “A” and “B” are the trustees, then any shares owned by the trust will be in the name of “A & B”, however, the assets do not belong to the trustees. The trustees are holding the assets for the beneficiaries until the time those assets are distributed to the beneficiaries.

Trustees must act with diligence and prudence. This means that they must act in a manner that any prudent person would if dealing with his/her own assets. Trustees are personally liable for their actions.

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