In this blogpost, Divya Kathuria, Student of Raffles University, Neemrana, and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about what is a private trust and the procedure for registration of  a private trust.

Introduction

A private trust is created and governed by the Indian trusts Act of 1882.  Under this Act,  a settler can create a trust with his own personal property. As per section 3 of Indian Trust Act 1882 “A Trust is an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.”

 In other words, it is indirectly transferring property for the benefit of a third person to another person to allow him to hold that property but, not for himself. The settler of the trust can designate one or more person that is, trustees by laying down conditions and terms that would benefit the beneficiary identified by him who can be his own child as well. Any person who under the law is capable of holding property can be a trustee. One of the main advantages of forming a trust is that it has a simple process of registration with simple regulations.

What one must know before creating a private trust

A trust can be created by any person who is competent to contract under Indian Contracts Act. It can even be created when authorized by any competent Court with respect to any transferable property. It is not a contract of the agency because, in that case, the property is not transferred. However, in this case, the property is actually transferred to the trustee for the benefit of some other person, and it cannot be used by the trustee for his own personal benefit. And, that is where the main difference between a public and a private trust lies.

On whom the beneficial endowments will vest in an uncertain and fluctuating in nature as beneficiaries can be the public at large as well as a group of persons that might fall under a particular description. However, beneficiaries are certain for a private trust and are a closed group. Also, the Indian Trust Act extends only to the private trusts, not to the public trusts. Another important difference is that Public trusts that are usually religious and charitable in nature are exempted from tax under Section 10(23C) of the Income Tax Act, 1961. However, private trusts do not enjoy such exemption. It is also pertinent to keep in mind that it is a statutory obligation to get the trust registered u/s 12A of the Act with the Commissioner of income tax.

Why trust and not, will:-

It is usually asked question that why one must not create a will instead of starting a private trust. Trust in many instances might prove to be better than will as Will is sometimes, insufficient to distribute your assets. With that, it is more confidential, does not require probate and can be easily modified in future if needed. A Will is only executed after one’s death while, in a trust, during one’s lifetime when planning for succession will not lose control over the assets.

Taxation of Private Trusts

Income from private trusts is available to specified beneficiaries and not the public at large. Private trusts are of two basic types for Income tax purposes:

• Specific trusts– where the individual shares of the beneficiaries are known and ascertainable for e.g. Mr. X creates a trust for his 5 sons and the share of each son is mentioned in the deed as 20% each, then such trust is known as specific trust.
• Discretionary Trust: In this no individual shares of the beneficiaries are mentioned in the deed and income is distributed to them on the “discretion” of the trustee.[1] Rule 12 of the Income-tax Rules, 1962 mandates that an individual or Hindu undivided family, if his or its total income or the total income in respect of which he is or it is assessable under theAct, during the previous year, exceeds ten lakh rupees, shall furnish the return electronically for the assessment year 2012-13 and subsequent assessment years.[2]

Procedure to create private trust in Delhi

• Certain necessary steps need to be taken before registering a trust, which are as follows:-

1. Deciding the name of the trust
2. Proper address of the trust
3. The object of the trust (it is good to lay down long-term objectives so that changes can be accommodated easily afterwards).
4. One settler
5. At least 2 trustees (trustees decided must be skillful enough to handle the prescribed tasks of the trust, even the settler can himself be the trustee to exercise greater control over the property).
6. Beneficiaries (clearly identify who can be the beneficiaries to avoid hustle later).
7. Property of the trust whether moveable or immoveable (Practically, what is usually done is that only a small amount of property is shown as the trust property to save the registration fee or stamp duty).

• After all the above requisites are met, a trust deed is prepared on the stamp paper of requisite value (8% of the value of property is requisite stamp duty in Delhi. However, it varies from state to state). After this, Trust Deed is registered with the Local Registrar under the Indian Trusts Act, 1882 with the following requirements to be fulfilled:-

1. Trust deed[3] on stamp paper
2. One passport size photograph and copy of the identity proof of all the trustees
3. One passport size photograph and copy of the identity proof of the settler
4. One passport size photograph and copy of the identity proof of the witnesses (at least two)
5. Settler’s signature on all the pages of the deed
6. A copy of income-tax registration is also needed.

In doing all this, one would definitely need the help of a notary as some other formalities might also need to be performed depending upon the facts and circumstances.

• After compiling all these required documents, one just needs to go to the local registrar to submit the deed. Also, carrying a photocopy along is necessary signed by the settler on all the pages. When registration is being done, personal presence of the settler and witnesses is a must with their original identity proof.

Finally, registrar returns the original copy and retains the photocopy on the records.

Conclusion

Forming a private trust has proved itself to be a mode of effective succession and state planning in India. The Act provides enough to manage and administer a trust and even, to form one. It becomes quite feasible to manage properties through a trust as it creates a proper legal framework to protect the assets while keeping in mind the interests of family members or beneficiaries as well. It is also easier to transfer benefits of the trust to generations through the Act.

[1] http://taxguru.in/income-tax/creation-taxation-private-trusts.html#sthash.cii3OcL2.dpuf last accessed on 15^th January, 2015

[2] http://taxguru.in/income-tax/taxation-private-trust-tax-planning.html#sthash.denDBBmH.dpuf

Last accessed on 25^th January, 2015

[3] Trust deed signifies the intention of the author of the trust to create it, its purpose, objects and is a proof of transfer of property to the trustee.