In this blog post, Perin Gandhi, an Advocate in Mumbai and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes private trusts. 

“A man was tricked and sent to old age home after the death of his wife by his son and daughter-in-law.”

Well, such headlines have often been a part of daily newspapers and also social networking sites. Such incidents make an individual think- Can I depend on my children? The basic thought which crosses an individual’s mind is that, after me who will take care of my family? How should I ensure that their expenses are met? The biggest mistake that an individual commit is not taking a proper step for its property management. India lacks in succession planning. Whatever the reason may be it affects the smooth and hassle free transfer of the property to their intended beneficiaries and sometimes the process leads to a long-running legal battle for acquisition of wealth. In India, maximum legal disputes happen for family property. At the time of property management, the concern could be the care for a spouse, minor children, old parents who would be unable to meet their living when sole bread earner of the family is not around and even for the Settler himself in his old age.

Most of the advice we get, point towards making a Will. However, Will has its limitations. A will in respect of estate can be contested and has to be probated. So in such a scenario the best available option is forming a Private Trust. A trust is formed depending on the needs of the family, and its main objective is to manage the property of the owner while he is alive and after his death for the benefit of his loved ones who were dependent on him and make them financially secure. Often Entrepreneurs also take the route of private trust to distinguish personal and business assets and protecting his personal assets in times of loss incurred or claims made by the clients and secure his family financially in case a legal battle is initiated against the business disrupting its operation.

Private Trust                                                                      

The Indian Trust Act, 1882, governs a Private Trust. Private trust is a vehicle through which property can be transferred from one person (owner) to another for the benefit of an individual or an ascertainable group of people. The person who forms a trust determines the trustee, beneficiaries and also the property that has to be transferred and the rules that would govern the rights and duties of the trustee is known as the Settler or Author of the trust. The person to whom the property is transferred is the trustee and for whose benefit the trust is formed is the beneficiary. For Example, ‘A’ forms a Private trust and transfers certain property to ‘B’ instructing him to use the said trust property at the time of ‘C’s marriage. A trust so formed can either be revocable or irrevocable depending upon the objective behind forming a trust.

Essential Elements of a Private Trust

• The Settler should be of a sound mind and should have attained the age of majority. However, a minor can also become a settler with the consent of the court. The trustee so appointed should be above 18 years of age and of a sound mind. As he has to manage the property of the trust, he must be the one who is eligible to enter into a contract.
• The property so involved in a trust must be in existence, and the settler must be legally competent to transfer the same to the trustee.
• The trustee is not bound to accept a trust. His acceptance should be conveyed either in writing or by his act. The beneficiaries for whom the trust is formed should be specified properly in the trust deed so as to avoid confusion while fulfilling the purpose of the trust.
• A private trust in respect of an immovable cannot be created orally. It can be executed either by a non-testamentary document or by a testamentary document such as a Will that has to be duly registered. Whereas in the case of movable property, trust can be created by giving oral direction or by a document which may or may not be registered. Whatever the author chooses the mode of execution, the purpose of forming a trust must be clearly conveyed to the trustee.
• A trust is an instrument of transferring not only the interest in the trust property but also its possession and ownership to the trustee so in such a case once a private trust is formed and the trust deed is executed, the author cannot have control over the trust property. However, the trustee who is in possession of the trust property must carefully deal with the property and work towards the benefit of the beneficiaries and should not use it for his purpose.
• The Private Trust so formed must be lawful and should not be fraudulent. If a part of the purpose of the trust is lawful and is the other part is unlawful then the trust so formed becomes void.

Once a trust is formed it can be dissolved or revoked depending upon the type of trust. In the case of an irrevocable trust, with the consent of the settlor or beneficiary, a trust can be terminated. However, in case the settlor dies, then the beneficiary may terminate the trust with the intervention of the court. The court may also pass an order of termination of private trust if it is of the opinion that the material purpose of the trust was not fulfilled or the beneficiaries cannot be located, or the trustees were trying to extend the time limit of the trust for their selfish needs. If a Private trust is formed through a Will, then it can be revoked only by the author of the trust during his lifetime. Once the author dies, the private trust cannot be terminated.

Terminating A Private Trust

• By the Settler: Settler can revoke the trust if a provision is made in the trust deed reserving the power for the settlor to revoke the trust at any point in time by way of a registered Deed of Revocation. Unless such provision is made, he cannot revoke the trust.

• By the Beneficiaries: Beneficiaries may at their wish relinquish their rights in the trust property by signing a document. By doing so, they give up all their rights to the trust property, and the trust deed gets dissolved transferring the property again to the settler. Beneficiaries also on attaining maturity and becoming legally competent to contract, may by their consent revoke the trust.
• Trust period: A trust may be formed for a certain period. It may be specified in the trust deed as to the duration of the existence of the trust. For example, A trust could exist till the beneficiary reaches a certain age say 21 years. On the beneficiary reaching that age, the trust gets dissolved.
• On fulfilment of purpose: A trust may be formed for the fulfilment of certain purpose. Once the purpose for which the trust was formed in the first place gets fulfilled, the existence of the trust comes to an end. For Example, a trust may be formed exclusively for the education or marriage of the beneficiaries. When the beneficiary completes his/her education or his/her marriage gets solemnised, the trust gets dissolved. However, the settler can dissolve the trust even before the fulfilment of purpose. If the trust was formed to pay off the dues of the creditor, the settler could dissolve the trust even if the dues are not cleared with the creditor. The important point to note in this case is that the settler can do so only if the creditor is unaware of the purpose of the trust. If the creditor is aware of the trust and its objective then without the permission of the creditor the settlor cannot revoke the trust.
• The occurrence of the event: A trustee has to work towards the benefit of the beneficiary and to do so he has to enter into transactions which benefit the trust. If there are repeated events of failure in the performance of certain transaction by the trustee which affects the purpose of the trust or the trust property was used for a purpose other than what it was intended for then in such a scenario the trust can be revoked by the settlor or beneficiary.
• Fulfilment becomes impossible: If the trust property gets destroyed or is not maintained in a way which makes it impossible to be used for the fulfilment of the purpose of the trust, then in such an event the trust can be dissolved. For example Due to an earthquake or any natural calamity, the trust property gets damaged and makes it impossible to fulfil the purpose of the trust. This leads to the dissolution of the private trust.
• Purpose become unlawful: When a trust which was lawful at the time of formation becomes unlawful over the course of time then in such an event the trust becomes void. A trust can become unlawful as per section 4 of the Indian Trust Act, 1882 for the following reasons:
  • forbidden by law, or
  • is of such a nature that, if permitted, it would defeat the provisions of any law,
  • is fraudulent,
  • involves or implies to the injury of any person or property of another,
  • the court regards it as immoral or opposed to public policy.

On the happening of any of the above events which make a trust unlawful, the trust can be dissolved.

Conclusion

A trust can be revoked/dissolved for any of the reason mentioned above by either the Settler or beneficiary or by the court, but it is to be noted that at the time of the dissolution of Private Trust, a ‘Trust Dissolution Deed’ must be entered into by the parties which have to be duly registered.

 References:

1. Indian Trust Act, 1882
2. http://thismatter.com/money/wills-estates-trusts/trust-modification-termination.htm
3. Section 3 and 4 of Indian Trust Act, 1882.
4. Section 77, 78 of Indian Trust Act, 1882.
5. http://www.fpgindia.org/2011/09/private-trust-why-should-you-consider-them.html