This article on the comparison between a private trust and a public trust is written by Rohit Gehlot from Faculty of Law, Delhi University, also pursuing the Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata.
What is a Trust?
Trust is defined in section 3 of the Indian Trust Act, 1882 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. In other words, it is simply a transfer of property by one person (the settlor) to another (the “trustee”) who manages that property for the benefit of someone else (the “beneficiary”). The settlor must legally transfer ownership of the assets to the trustee of the trust. In India trust is the second most popular form of registration.
Types of Trust
Generally, there are two types of trusts in India: private trusts and public trusts. While private trusts are governed by the Indian trusts Act, 1882, public trusts are divided into charitable and religious trusts. The Charitable and Religious Trust Act, 1920, the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Bombay Public Trust Act, 1950 are some of the statutes for the enforcement of public trusts in India.
Moreover, in recent times, trusts can also be used as a vehicle for investments, such as mutual funds and venture capital funds. These trusts are governed by Securities and Exchange Board of India (SEBI).
Who can form a Trust?
According to Section 7 of Indian Trusts Act, 1882, a trust may be created by the following persons:
1. Every person competent to contract (given in Section 11 of Indian Contract Act, 1872);
2. By or on behalf of minor with the permission of a principal civil court of original jurisdiction;
3. Hindu Undivided Family;
4. Association of Persons (AOP);
5. Trust by a woman;
How to form a trust?
• One can make a trust with the help of a legal firm or a bank, for which a trust document has to be drafted and this should state the type of trust it would be.
• It should clearly state the name of the settlor, the trustees and the beneficiaries, as well as a list of all the assets the trust would hold.
• Apply for a permanent account number for the trust and open a bank account for it as it is a separate entity.
• The trust may or may not be registered; registration is required only if an immovable property is transmitted to the trust.
Who can be a Trustee?
As per Section 10, any person who is capable of holding property may be a trustee; except to the condition of discretion of trust, in that case, he cannot execute it unless he is competent to contract.
Comparing Public and Private Trust
Public and private trust can be distinguished in a number of ways. A simple way to differentiate between a public and a private trust is to know the beneficiaries of the trust. If the beneficiaries make up a large or substantial body of public, then the trust in question is public. A public trust exists “for the purpose of its objects, the members of an uncertain and fluctuating body,” and is managed by a board of trustee. If, however, the beneficiaries are a narrow and specific group such as the employees of a company, then the trust is private. So the basic difference between both the trusts is that in the former, the interest is vested in an uncertain and fluctuating body whereas in the latter, beneficiaries are definite and ascertained individuals. Supreme Court in Deoki Nandan v. Murlidhar 1957 AIR 133 1956 SCR 756 also highlighted the difference between public and private trust. Supreme Court said that in private trust, the beneficiaries are specific individuals, whereas, in the public trust, they are general public or class thereof.
Public Trusts in India
Trusts designed for the benefit of a class or the public generally. In general, such must be created for charitable, educational, religious or scientific purposes. As stated earlier there is no Central Act applicable for Public trusts, but various states have enacted their own acts suitable to their conditions and administration. Public trusts are popular because it is relatively easy to register and manage them. All one needs to do is to draft a trust deed stating the trustees, the objectives of the trust, and the intended beneficiaries who are a part of the general public. The trust is then registered under the State Trusts Act, thereby making the trust eligible for government tax rebates, namely the Income Tax Act. Generally, a public trust is of a more permanent nature than a private trust.
Religious endowments and wakfs are variants of public trusts that come into being when an endowment, usually, property, is dedicated for religious purposes. The creation of religious charitable trusts is governed by the personal laws of the religion. The administration of these religious trusts can either be left to the trustees as per the dictates of the religious names or it can be regulated by statute. In case of Hindus, the personal law provisions regulating the religious trusts have not been codified and are found dispersed in various religious books and epics.
Like the private trusts, public trusts may be created inter vivos or by will. The working of such trusts can be regulated and supervised by both, the state and the beneficiaries. To create a charitable trust three certainties are required which are:
1. Declaration of trust made by settlor which is binding upon him,
2. Setting apart certain property by settlor and thereby depriving himself of the ownership rights, and
3. A statement of object for which the property is thereafter to be held, that is the beneficiaries.
It is essential that the transferor of the property viz. the settlor or the author and the trustee are competent to contract. It is also necessary that trustees should signify their assent for acting as trustees to make the trust a valid one. Once the trust is created and the property is transferred to the trust it cannot be revoked.
In case of breach of public trust, either the Advocate General or two or more persons having interest in the trust can institute a suit regarding following matters:
1. Removal of a trustee
2. Appointment of a new trustee
3. For vesting any property in a trustee
4. for directing a trustee who has been removed as a trustee to provide possession of any trust property in his possession to the person entitled to the possession of such property
5. for directing accounts inquiries.
Private Trusts in India
A trust is called a private trust when it is constituted for the benefit of one or more individuals who are ascertained. Private trusts are governed by the Indian Trusts Act, 1882. A private trust may be created inter vivos or by will. If a trust is created by will it shall subject to the provisions of Indian Succession Act, 1925.
Ingredients of a valid Private Trust
There are certain guidelines or ingredients one should keep in mind to open a trust. These are:
1) Declaration made by the author or settlor of property who can set aside certain property for the benefit of beneficiaries. The author of the trust is a person who declares the confidence.
2) There must be a trustee who manages this property for the benefit of the beneficiaries as per the trust deed, that is, the transfer of ownership by the author to the trustee. The settlor can also become a trustee. A trustee is a person who accepts the confidence by the author.
3) There must be a beneficiary or beneficiaries who can get benefits from the property of settlor.
4) There must be a properly demarcated trust property.
5) The objects of the trust must be clearly specified.
Private trusts are increasingly playing role in protection of wealth. As the trust route to succession planning gains popularity in India, the rich are increasingly looking at asset protection, rather than saving on taxes or passing on wealth to the next generation. According to Barclays Wealth Insights report, 61 percent of family disputes in India were due to wealth distribution. Forming trusts can be a good alternative to these disputes because trusts can function even when one is alive but a person’s will comes into effect only after his/her death.
Private Trusts can also help insolvency protection. If the settlor is a beneficiary, the share of the trust’s assets belonging to the settlor or beneficiary can be attached in case of bankruptcy.
Generally, there is no statutory requirement to create trust by any instrument. Supreme Court in the case of Radha Swami Satsung v. CIT, (1992) 193 ITR 321 (SC) held that no formal document is required to create a trust but still it is desirable to create trust in writing in the case of will or where an immovable property is Rs 100 and more.
Private trust will cease to exist when the purpose of formation of trust is fulfilled or the object of formation of trust becomes unlawful or the trust is revoked or when there is a destruction of trust’s property.
Registration of Public and Private Trusts
Registration of a trust is necessary when it is declared by a non-testamentary instrument. This registration would be required even if the instrument declaring the trust is exempt from the registration under the Indian Registration Act.
In the case of a Private Trust declared by a will, registration will not be necessary, even if it involves an immovable property.
In case of Public Trust, whether in relation to movable property or immovable property and whether created under a will or inter vivos, registration id optional but desirable.
In case of Charitable or Religious Trust in relation to an immovable property, for claiming exemption under Section 11 of the Income Tax Act, 1961 it is essential that the instrument of trust is duly registered.
Taxation of Private and Public Trusts
Being an independent entity private trusts are taxed separately. Generally, there are two situations on which the income of the trust is taxed viz. share of a beneficiary/specific trust and discretionary trust. In the case of a specific trust income is received by the trustee on behalf of beneficiary while in case of latter, the shares of beneficiaries are not known as there is more than one beneficiary. In case of discretionary trust, income is determined by the trustees rather than by a representative.
Public trusts are taxed as per the sections 11 to 13 of the Income Tax Act, 1961 which deals with taxation of charitable Trust.
• Section 11 provides the manner in which income is exempt from income-tax.
• Section 12 provides the income of trust from contributions.
• Section 12A provides the conditions as to registration of trusts, etc.
• Section 12AA provides the procedure for registration.
• Section 13 provides section 11 not to apply in certain cases.
The basic condition for claiming exemption of income by the trust is that “Income should be derived from the property held under a trust and the said income should be applied to charitable or religious purpose in India”.
Trusts today play a significant role in most financial and legal systems and are also recognized under the Hague Convention. The government has also exempted non-residents and private discretionary trusts from the mandatory filing of income tax return electronically.
Trust is a concept which generally features around the author, the trustee and the beneficiary/beneficiaries having rights and obligations assigned to each of them. There are many advantages of trust like protection of wealth, protection of insolvency, taxation, welfare of family members, helps in succession of property and much more. If the trust is formed with all the required legal procedures then it is for beneficial each of the organ of a trust.
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