In this blogpost, Shardool Kulkarni, Student of Pravin Gandhi College of Law, Mumbai and Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about what is trust and how can founders of a trust earn money.

Introduction

 Section 3 of the Indian Trusts Act, 1882 defines Trusts as ‘an obligation annexed to the ownership of 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’ Trusts may broadly be divided into two categories, namely, ‘public’ and ‘private’. Public trusts may be further classified into ‘religious’ and ‘charitable’. The Indian Trusts Act, 1882 governs only private trusts.[1] Public trusts, on the other hand, are governed by central legislations such as the Religious Endowments, 1863, the Charitable Endowments Act, 1890, the Charitable and Religious Trusts Act, 1920, the Registration Act, 1908 and by state legislations such as the Bombay Public Trust Act, 1950. However, very few states have legislations, which govern public trusts.

A trust is said to be created when the author of a trust, with reasonable certainty of words or actions, indicates his or her intention to create a trust, the purpose of a trust, its beneficiaries, the trust-property and when he or she transfers the trust property to a trustee(s) unless the trust is declared by means of a will or the author of the trust himself or herself is to be the trustee.[2] Thus, the founder or ‘author’ of the trust can also become one of the trustees of a trust.

Modes of earning money for founders of a trust:

Trusts may be set up inter Vivos, i.e. during one’s lifetime or through wills. It is obvious that only the founders of trusts, which are established inter Vivos, would be able to reap financial benefits from the trust. Founders or settlors or authors of a trust may earn money through the following means:

Settlor as Beneficiary

The most direct method by which the settlor of a Private Trust may earn money through it is by naming himself as a beneficiary in the instrument of the trust. For instance, an individual who creates a trust to ensure segregation of his wealth among his descendants may name himself as one of its beneficiaries to safeguard his financial interests during his own lifetime. Moreover, trusts are particularly useful for high net worth individuals to manage their wealth while also assuring asset protection. They are a means of investing and safeguarding wealth for families who conduct business together and are likely to continue doing so in the future as well.[3]

Remuneration drawn as Trustee

The founder of a trust may also be its trustee. Under the Indian Trusts Act, 1883, a trustee has no right to remuneration unless a provision for such remuneration has been laid down in the instrument of the trust. Thus, if the founder of a private trust wishes to earn money through a trust as its trustee, he or she must lay down express provisions for the same in the trust’s instrument.

However, in case of a public trust created for charitable and religious purposes, Section 13 (1) (c) of the Income Tax Act states that if any part of such income or any property of the trust or the institution is used or applied, directly or indirectly for the benefit of any person referred to in Section 13 (3), then the tax exemptions given to the trust shall be revoked and it shall be treated as an ordinary Association of Persons and not as a charitable trust. Section 13 (2) (c) states that the income or property of the trust shall be deemed to have been applied for the benefit of a person if any amount paid as salary or allowances to the person is in excess of what would reasonably be paid. Section 13 (3) (a) specifically includes the author of a trust within the ambit of the aforementioned provisions. Thus, if an inordinate and unreasonable amount of money is paid as remuneration to the author of a public trust, then all taxation benefits extending to such trust may be revoked. Moreover, Section 36A (4) of the Bombay Trusts Act disallows trustees of public trusts from borrowing money for their own use from the property of the trust. Section 41D (1) (d) of the Bombay Trusts Act empowers the Charity Commissioner to suo moto suspend, remove or dismiss a trustee of a public trust on the ground of misappropriation of or improperly dealing with the property of the trust.

Irrevocable trusts: Safeguards against future creditor claims

By creating an irrevocable trust, the settlor ceases to have title over the property, thereby safeguarding it from any future claims by creditors in case of bankruptcy in the future. Moreover, the settlor or founder can retain implicit or indirect control through the terms of the trust deed.[4] However, any such safeguards are incidental in nature. A trust created solely with the intention to escape claims by creditors by a person who is bankrupt or may foreseeably become bankrupt at the time of creating a trust is void as the purpose of a trust must be lawful.[5]

Income Generation Through Mutual Funds and Venture Capital Funds

Trusts are pooling vehicles for investments such as mutual funds and venture capital funds.[6] These, in turn, can generate income for the founders or settlers.

[1] Preamble, Indian Trusts Act, 1883 (Act 2 of 1882)

[2] Id, S. 6

[3] J. K. Maheshwari, Trust: An effective vehicle for succession and estate planning, Economic Times, 2011.

[4] Id

[5] S. 4, Illustration (c), Indian Trusts Act, 1883 (Act 2 of 1882)

[6] Hanisha Ameseur & Bijal Ajinka, India, World Trust Survey 275 (2009).