In this blog post, Shruti Sharma, a Legal Associate at BetterPlace Safety Solutions Pvt. Ltd. who is currently pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, gives a brief overview on how to start a private trust in India. 

Trusts are being formed for the various purposes and can prove to be an effective vehicle for succession and for estate planning. Private trusts are governed by Indian Trust Act, 1882 which is applicable to the whole of India excluding the States of Jammu and Kashmir and the Andaman and Nicobar Islands. Moreover, this Act doesn’t apply to Waqf, Hindu Undivided Family, charitable endowments, etc.

Introduction

The concept of “Trust” can be traced back to the ancient times when human used to set up Dharamshalas, medical institutions and educational institutions, construct water tanks and bathing ghats, plant trees etc. but later on with the advent of new era, the concept of “trust” emerged for various reasons.

Definition of trust

The word “Trust” has been defined under Section 3 of the 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.” It means transfer of property by the owner to another for the benefit of third person along with himself.

Who can create a trust?

As per Section 7 of Indian Trusts Act, 1882, a trust may be created by the following:

1. Every person competent to contract(as per 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. Company

Who can be appointed as a trustee?

A trustee can be a person:

1. To whom the settlor has transferred his property;
2. Competent to contract;
3. Insolvent, minor or insane cannot be trustee;

A trustee should have a right to reject the trusteeship but if a person accepts trusteeship, he assumes all rights, duties and liabilities of a trustee.

Responsibilities of a trustee

1. Execute trust: He needs to execute a trust and is bound to fulfil the objectives of a trust by following the directions given by the author.

2. Protect title to trust property: He is bound to protect the title to the trust property by maintaining and defending suit. Moreover, he is required to take proper and reasonable steps to preserve the property and the title attached to it.

 3. Reasonable care: A reasonable care is expected from the trustee as a prudent man while dealing with the property. He should maintain and deal with the property as his own.

 4. Keep account and information: He needs to keep clear and proper/accurate account and information of the trust property. Moreover, he may ask the beneficiary to furnish complete and correct information relating to the amount and state of property at all reasonable times.

 5. To convert perishable property: Trustee needs to protect the property and if it is of perishable nature, to convert it into a permanent and profitable character.

 Who can be a beneficiary?

1. Every person who can hold property;
2. Company, corporation ;
3. Unborn person;

Rights of a beneficiary:

1. Rents and profits: Beneficiary has a right to the rents and profits of the trust property subject to trust instrument/deed.
2. Execution of a trust: In case where no trustee is being appointed or their death, the beneficiary may file a suit for execution of the trust.
3. Compel trustee: Beneficiary can compel the trustee to do a particular act or not to do an act to prevent breach of trust.

What is a private trust?

It is a trust created for the benefit of an Individual or a group of individuals or any legal person who is capable of holding property.

Different types of trusts

Basically there are two kinds of trusts in India Public and Private trust. The basic difference between the two is that in the former, the interest is vested in an uncertain and fluctuating body of persons whereas in the latter, beneficiaries are definite and ascertained individuals.

How to create private trust in India?

The instrument by which trust is declared is called instrument of Trust, and is generally known as Trust Deed.

Generally, there is no statutory requirement to create trust by any instrument. Various case laws have been decided in this regard. In the case of Radha Swami Satsung v. CIT, (1992) 193 ITR 321 (SC), it has been 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 upwards.

As per section 5 of the Indian Trusts Act, a private trust related to an immovable property must be created by a non-testamentary instrument in writing , signed by the author of the trust or the trustee and must be registered under Section 17 of Registration Act. Therefore, every non-testamentary instrument declaring trust must be registered. This registration will be mandatory even if the instrument declaring trust is exempted from registration under Registration Act, but a Private trust declared by a will does not require registration.

The following are the requisites for creation of trust:

1. Declaration by the author/settlor of the Trust or someone on whose instance the trust comes into existence and such declaration must be unequivocal and binding on him.
2. Transfer of ownership by the author of the trust to the trustee for the beneficial enjoyment by the beneficiary.
3. Trust property.
4. The purpose/object of the trust must be clearly and precisely specified.
5. The beneficiary who may be particular person or persons.

As mentioned earlier, the settlor/author of the Trust and the trustee should be competent under Section 11 of the Contract Act and the trustee should also consent to make it a valid trust. Moreover, once a valid trust is created and property is transferred, it cannot be revoked afterwards. Moreover, if any provision regarding revocation is provided in the trust deed, then the Sections 60-63 of the Income Tax Act comes into play and the income of trust will be considered as his personal income.

Taxation of Private Trust

Taxation for private trust varies as per the scenario, being an independent entity it is taxed separately.

There are two situations on which the income of trust is taxed:

1. Shares of a beneficiary/specific trust: In this situation, the income is received by the trustee as a representative assesse on behalf of a beneficiary. For example, Mr. Shyam will receive 20% of the total income of the trust. Therefore, in this situation, the tax is recovered as per the rate applicable to the total income of the beneficiary.

 2. Discretionary trust: In this case, the shares of a beneficiary are not known as there is more than one beneficiary. Here, the income is determined by the trustees rather than by a representative. Therefore, the income of the trust is assessed at the maximum marginal rate.

When does a trust cease to exist?

1. When the purpose/object of trust completely fulfilled
2. When the purpose become unlawful or illegal;
3. When the trust expressly revoked;
4. When the purpose of the trust becomes impossible by destruction of the trust property or by any other cause.

Trust v. Will

1. Confidentiality: Unlike will, trust can never be disclosed in media.
2. Modification: Trust deed can be amended/modified easily as compared to Will.
3. Probate: To create trust, no Probate is required unlike Will.

Present scenario regarding trust

• To allow trusts to make investment in shares and bonds of listed companies, government has recently decided to announce a proposal to amend the Indian Trust Act, 1882.
• Trusts are recognized under the Hague Convention.
• Non-residents and discretionary trusts have been provided an exemption from mandatory filling of income tax returns electronically.

Conclusion

At last we can conclude by stating that trust is a concept which revolves around three parties i.e. the author, the trustee and the beneficiary/beneficiaries having respective rights and legal obligations assigned to them by trust deed in relation to the trust property.

There are many advantages added to trust in terms of taxation, welfare of family members, public benevolence and many others. Therefore, if all the requisite legal procedure is adopted and trust is formed, then it is beneficial for each of them.