ACCA Advanced Financial Management (AFM) Practice Exam

What is a characteristic of trusts?

1. They are subject to corporate taxation

2. They typically engage in multiple asset management

3. They serve as passive owners of a single asset

4. They require active management by beneficiaries

The correct answer is: They serve as passive owners of a single asset

Trusts are often structured to serve specific financial and estate planning purposes, and one of their primary characteristics is that they act as passive owners of assets. When assets are placed in a trust, the trust does not actively manage those assets in the way that a business would; instead, the trust exists to hold and protect these assets on behalf of the beneficiaries. The trustee, who administers the trust, is generally responsible for managing the assets and ensuring that they are distributed according to the terms of the trust agreement, rather than the beneficiaries directly engaging in that management. In contrast, the other options highlight aspects that do not typically apply to trusts. For instance, trusts are not usually subject to corporate taxation—they may be taxed differently depending on their structure and the type of income they generate. Additionally, trusts can vary in structure; while some might manage multiple assets, many are indeed established to hold specific types of assets. Lastly, while beneficiaries have interests in the trust, they are generally not required to actively manage the assets within the trust; that responsibility typically lies with the trustee.