In this blogpost,  Ananda Boga, Founder, Youthrise, Student of Diploma in Entrepreneurship Administration and Business Laws by NUJS ,writes about what is a private trust, what is a retirement trust, the advantages and disadvantages of trust formation and the difference between trust and will. 

Introduction

The main objective of any person who wants to transfer his assets in his lifetime or after his death is to look after and protect their beneficiaries interests. These may include minors who until reach the age of 18, have no say in protecting their interests and a trust creation helps in making this happen. When there is more than one individual, say for instance the entire family that can fall under the category of beneficiaries, a private trust is set up. In other words, a trust is a transfer of property from one individual to another intended for the administration for the benefit of the owner and/or others. The person transferring the property is called the author or settlor of the trust. The trustee, on the other hand, is the person to whom the property is being transferred. The person who eventually gains the benefits is the beneficiary and that property itself is called the trust property. A settler must be a major and of sound mind. However, he/she can also be a minor with the consent of the Court. A trustee can be anyone who is over the age of 18 years, of sound mind and not insolvent. To administer the properties of the trust, however, he or she must be eligible to enter into a contract. An individual also has the right to reject his trusteeship.

Trusts are primarily created for property management purposes. Trust property can be both movable as well as immovable. If immovable, then the transfer of the property to the trustee must be via written and registered document, which has been signed by the settlor. When it comes to movable properties, there is no need for any written document. Delivery of the property to the trustee suffices.

During the time one is alive, he or she may create a trust for the benefit of old parents of the settler. Alternatively, a trust may be set up to benefit the minor children of the settler, disabled or handicapped siblings or for the settlor him or herself at an older age. On the death of the creator, the trust is used as a means to distribute the property amongst all the successors, for his or her spouse, children, disabled or handicapped siblings or for charity purposes.  For instance, a trust set up for the accumulation of money coming in and some capital for mentioned infant children. The collection of money that is incoming must be given to the infants upon their attaining an age mentioned and in the case of a female beneficiary, once they are married. Besides this, private trusts are also at times required to diminish heavy tax burdens.

Retirement trust

It is also the norm for many employers to set up retirement trusts in order to provide employees their retirement benefits. Many of these retirement trusts are also subject to be approved for tax exemptions. Once a Trust property is created, a trustee manages the trust and beneficiaries get the benefits.

For smaller families, separation, legal hurdles, old age, medical bills, financial planning for the future of children and being secure financially can all be looked after through private trusts.

Benefits of a trust for a family with a special child

Families that have a special child are the ones that benefit the most on creating a private trust. A child with special needs requires a lot of maintenance with regards to regular medical check-ups, monetary support and wealth preservation, especially when his or her parents are no longer around. A private trust will ensure that the parents required wishes are carried and executed efficiently. The objective of a private trust is no different with regards to a Muslim, despite having different laws.

Benefits of a trust for businessmen

For aspiring businessmen and entrepreneurs, a private trust ensures minimal disruption to the running of business processes. Without this, he or she runs a risk of claims that could potentially come from any of his or her clients which lead to him having to dip into his or her personal assets since there is no clear distinction made between his business and personal finances.

Procedure for formation of trust

In order to start a trust, firstly one needs to know the type of trust he wants to form. The types of trusts include revocable trust, irrevocable non-discretionary and irrevocable discretionary trust. A revocable trust, also often considered as an alternative to a will, is one in which the assets are not protected as they can be withdrawn from the trust at any time. The settler himself can be the beneficiary but is taxed at the slab rate. An irrevocable non-discretionary trust allows the settlor to have absolute control over the rules of the trust, giving him/her the power to allot the various assets in the proportions he chooses. He himself or his immediate family can be the beneficiary, but if he himself is the primary beneficiary, he is charged tax at a slab rate. Irrevocable discretionary trusts allow the trustees to decide which assets get allotted and in what proportions. The settlor can only decide who the beneficiaries would be.

Creation of a trust requires one to specify in exact terms what the trust property is, what the trust’s purpose is and who the beneficiaries will be. A law firm or banking institution can help set up a trust. On the trust document, along with the type of trust, the name of the settlor, trustees and the beneficiaries as well as the list of assets that the trust holds should be clearly stated. After having done this, one should know that the trust is a separate entity, which would require applying for a permanent account number (PAN) and bank account. The creator of the trust must gift his existing investments in the name of the trust. With regards to these investments, if the creator wishes to continue making these investments, instructions must be given to their bank to debit the trust account instead of their personal accounts. The trust can be registered, and the registration is only required if an immovable property is transferred to or bought through the trust. Trust documents can be made on plain sheets of paper and do not require to be made on stamp paper.

To set up a trust through trust companies, one would be looking at an expense of about Rs.5 lakh or more. To do so with a bank, one would be expected to pay between 0.5 to 5% of the asset cost. However, to set up through a lawyer, the expenses are charged on an hourly basis, depending on the individual lawyer’s fee.  The approximate recurring costs with regards to the annual maintenance fee vary according to the decided trust structure. Along with this, the corporate trustee fee, if any, also varies according to the decided trust structure.

Limitation of establishing a trust

Although creating a private trust is a popular option being beneficial to families of large numbers and various other situations, there are some limitations that one should consider. With regards to cost, the cost of setting up a trust differs across various states as stamp duty is paid according to the rate of each particular state. The success of a trust heavily relies on the rightful appointment of good trustees. Even one wrong choice of a trustee can pose great damage to the very objective of why the trust was formed. It is also difficult to draft a trust deed. If the objective of the text is not clear, it becomes difficult to execute or carry forward. In fact, a will is said to be less difficult to draft as compared to a trust deed.

Difference between a trust and a will

However, creating a private trust has greater benefits than just drafting a will. A trust deed is confidential and hidden from the media. There is no probate required for creating a trust and making modifications in the future is a lot easier with trusts as compared to wills. On creating a private trust for the distribution of assets during the lifetime of the creator, it gives him or her absolute control over the assets at least until their death. This can be achieved with more efficiency with a private trust as a will is only carried out post-demise.

Conclusion

In today’s world, trusts have a significant role to play and are also given recognition under the Hague Convention. The government, in a move to bring to life draconian laws, has announced a proposal for amendment of the Indian Trust Act, 1882. This amendment allows trusts to make investments in bonds and shares of companies that are listed.