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This article has been written by Darshi Hetal Jhaveri, pursuing a Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.

Introduction: Trust & its meaning

A trust is referred as an obligation by a person who wishes to transfer his property that is either movable or immovable to a beneficiary of the property through a mediator who acts as the trustee and holds the property for the benefit of the trust. In short, an author of the trust or a settler transfers his movable or immovable property to the trustee who holds the property for the benefit of a third party that is considered as the beneficiary. 

According to the Section 3 of the Indian Trusts Act, 1882, A trustis 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.

For example: “A” who is the trustor transfers his movable property to “Z” who is the trustee for the benefit of the education of “B” who is the beneficiary. Thus, in this case Z will use the benefits he receives from the immovable property in order to educate B. 

Objective of a trust

The objective of a trust is explained under the section 4 of the Indian Trusts Act, 1882. It is stated that the purpose behind it must be lawful. Whereas, unlawful of forming a trust includes the following:

  1. it is forbidden by law.
  2. it defeats any provisions of law.
  3. it includes activities that are fraudulent.
  4. it is immoral or opposed to public policy.

Different factors to consider while setting up trust 

In order to set up a trust, few conditions must be noted. These conditions are explained below:

In order to set up a trust, the trustor must be qualified to set up the trust he wants. The competency of the trustor is stated below:

Who can set up a trust?

Under Section 7 of the Indian Trust Act, 1882, a trust can be set up by the person competent to contract. In order to be competent to a contract, a person must have attained the age of majority, must be of sound mind and must not be disqualified from contracting by any law to which that person could be subjected to. This also denotes that even a company, Hindu Undivided Family (HUF), Association of Person (AoP), can set up a trust.

In order to set up a trust, the trustor must first decide what kind of trust he wants to set up. There are many kinds of trust as explained below. The trustor must choose one among them to create a trust. 

Types of Trust

Simple Trust

As the name suggests, it is the trust without any complications. In this trust, the trustor or the settlor doesn’t direct the trustee about his obligations, but the beneficiary does. The purpose of trust is served by the directions given to the trustee by the beneficiary.

Special Trust

The trustor sets up the trust to transfer the property to the beneficiary by stating the aim of the trust along with the obligation of trust by transferring the property in the hands of the trustee. The purpose of the trust is given by the trustor to the trustee.

Private Trust

Private Trust is created for the personal benefit of certain people as mentioned in the purpose of the trust. The parties to the trust have created such a trust for the personal benefit of themselves and not everyone can become the member of a private trust. 

Public Trust

Public trust is created for the benefit of the larger scale of people that is the general public, or the religious or communal public for whom the trust is acclaimed. Public trust can also be a charitable trust.

In order to set up a trust, either Private trust or Public trust taxes must be paid. The taxes paid by trust are generally lesser than the taxes paid by Individuals or Companies. Taxes on a trust vary on the structure of the trust. It is explained as follows-

Taxation on the Trust

  1. When the beneficiary receives fixed monthly revenue from the trust, as stated in the specific trust then the tax will be levied on such income.
  2. When the trustees decide the share percent to be received by the beneficiary, as stated in the discretionary trust then the tax will be in the hands of the trustee.
  3. When the settlor decides the tenure of the trust, and the property is reversible to the settlor after the revocation, as stated in case of revocable trust, then the tax will be in the hand of the trustor. In a revocable trust, the provisions of the trust can be altered or cancelled by the settlor.
  4. When the tenure of trust can end only after the death of trustee or the beneficiary, as stated in the case of irrevocable trust, then the tax will be levied hand of trustee. In an irrevocable trust, the provisions of the trust can be altered or cancelled without the permission of the settlor or beneficiaries. 
  5. When the donations made to the public trusts are anonymous, they’re taxed at 30% when they exceed rupees one lakh.
  6. When the revenue received is from the property of the trust, 15% is exempted in the case of religious and charitable trust.

How a trust can be set up 

Primarily, the name of the trust must be decided. After that the address of the trust must be decided. And further as mentioned earlier, the object of the trust be decided and noted. After all of these steps have been done, there must be a permanent account number (pan card) for the trust as well as a banking account in the name of the trust.

Secondarily, the property of the trust must be decided. Whether the property is movable property or immovable property must be decided. The gross value of the property must be noted. 

  1. Movable Property- A movable property refers to the property that can move from one location to another. Movable property includes money given in the form of cash, or cheque; other valuable possessions, etc.
  2. Immovable Property- An immovable property refers to the property that can move from one location to another. It includes real estate properties such as office, house or other properties such as land, etc.

Finally, the trust shall be declared either through will or through registration of the trust. Registration of a trust either public or private is not mandatory. But in order to register the trust, the trust deed will be prepared on stamp paper after the value of the trust is noted. The amount of the property decides the stamp value applicable on the trust which varies from one state to another. The trust deed shall be registered at the local registrar along with self attested documents and photographs and signatures of the parties to the trust along with signatures of two witnesses.

Benefits of a trust

Formation of a trust is not only beneficial for the wealthy people but also for the people as well as families with a mediocre set of living. It is a false presumption that trusts have to be build by wealthy people.  The purpose of forming a trust is that the property of the trust remains well preserved and is given to the beneficiary as and when required or mentioned in the deed of trust. A trust will always protect the property.

A trust also avoids the need of long wills that are passed on from one generation to another and the taxes that are levied on them again and again. The chances of a dispute arising in a trust deed which is very well written are also less whereas; the chances of dispute arising of civil litigation are much more in the inheritance of ancestral property via wills.  

The trust can be formed by a company or a Hindu Undivided Family that means it can become an irrevocable trust which will last for a long time, even after the death of the major trustor, trustees and beneficiaries as trustees and beneficiaries keep on changing. Even a religious or charitable trust can stretch for a long period of time due to the changing trustees of the trust.

The right time for setting up a trust is also when an individual or a family is moving abroad, in order to manage the properties in an efficient way and avoid continuous hefty taxation on the multiple properties while staying away.

Apart from that, forming a trust will also exempt tax benefits. As mentioned above the tax payable by a trust is lesser than the tax payable by an individual and thus more and more need for a trust is increasing day by day in India. 

Conclusion

A Trust is named as trust because of its literal meaning where it works on the trust of trustee. A trust is created for the benefits of the beneficiary and the middleman is referred as a trustee which acts as the significant person in whom the person creating the trust can entrust the significant property in question.  

References

  • Indian Trust Act, 1882
  • Income Tax Act, 1961

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