ACCA Advanced Taxation (ATX) Practice Exam

What is a trust (settlement)?

1. An arrangement where a person transfers property into a trust and nominates trustees

2. A legal document that defines the powers of a shareholder

3. A type of business partnership

4. An arrangement for loaning money to beneficiaries

The correct answer is: An arrangement where a person transfers property into a trust and nominates trustees

A trust, often referred to as a settlement, is fundamentally an arrangement in which a person, known as the settlor, transfers property or assets into a trust. This action is done with the intention of having trustees manage these assets on behalf of designated beneficiaries. The trustees are responsible for overseeing the assets according to the terms set out by the settlor, ensuring that the beneficiaries receive the benefits in accordance with the trust deed. The essence of a trust is its capacity to separate the legal ownership of the property from its beneficial ownership. The trustees hold legal title to the assets but are bound by fiduciary duties to act in the best interest of the beneficiaries, managing the trust's resources responsibly and transparently. In contrast, the other choices do not accurately depict the nature of a trust. A legal document defining the powers of a shareholder pertains to corporate governance, while a type of business partnership suggests a collaborative business arrangement without the asset management focus of a trust. Similarly, an arrangement for loaning money to beneficiaries does not capture the fundamental purpose and structure of a trust, which is primarily about managing and distributing assets rather than lending. Thus, the definition correctly identifies the key characteristic of a trust as an arrangement involving the transfer of property into a trust with