This article is written by Niharika Singh pursuing BA LLB from Ansal University.
Table of Contents
Introduction
According to the Indian Trusts Act, 1882, a trust is referred to as an obligation that is annexed to the ownership of property, and it arises out of a confidence reposed and accepted by the owner for the benefit of another person and owner. It is an acceptance of an obligation by someone, but against either some kind of property or funds to use it or hold it in order to gain benefit for the person, for whom the trust is created. The rights and liabilities of the beneficiary are also dependent on the kind of trust, to some extent – as there are many different kinds of trusts.
In lay-mans language, we can describe a trust as a three-party fiduciary relationship. In this, the first party (author of the trust) usually transfers a property (often refers to a sum of money, but not necessarily) upon the second party (the trustee) for the benefit of the third party (the beneficiary). A trustee refers to the legal owner of the property. Here, the beneficiary(s) is referred to as the equitable owner(s) of the property. Therefore, trustees have a duty to manage the trust with full interest for the benefit of the equitable owners. A regular accounting of trust income and expenditures also must be provided to the equitable owners, and trustees have the right to get reimbursed or compensated for any expenses that they make. A court of jurisdiction can easily remove a trustee who breaches his/her duty towards the trust and sometimes, some breaches may even be treated as criminal offences. Trustees will be liable to be charged and tried with reference to such breaches.
Some primary duties of a trustee include – duty of prudence, duty of loyalty, and duty of impartiality. A trustee can even sometimes be held to a very high standard of care in their dealings, in order to enforce their behaviour towards the trust. Trustees are also bound to many kinds of ancillary duties, with addition to these duties, this is in order to ensure that beneficiaries receive their dues, etc. In addition, a trustee is expected to always understand, know, and also abide by the terms and conditions of the relevant law concerned as well as the terms of the trust. Trusts are usually governed by the terms and conditions under which they are created. A contractual trust agreement or a deed is required for this in most jurisdictions. There also exist very strong restrictions in relation to a trustee with conflict of interests. Courts can do the following, in case it is found that a trustee has failed to do any of his/her duties-
- Reverse trustee’s actions
- Order for profits to be returned
- Impose other sanctions
This failure of duties or actions is termed as a breach of Trust. It is also highly recommended that both, trustee’s as well as the author’s to seek qualified legal advice before entering into a trust agreement.
Concept of a Trust
Mr.P- Property Reposes Confidence- Mr Q- P’S Grand-Daughter
Here, we can suppose that Mr P wants to pass on his bungalow (property) to Mr Q, for the benefit of his minor granddaughter. The only reason Mr P passes his property to Mr Q is because he has confidence in Mr Q, this is nothing but the essence of a trust, as illustrated.
In simple words, we can describe this trust as nothing but the transfer of property by the original owner (Mr P), to another person on whom the owner has confidence (Mr Q) for the gain of the benefit of a third person (P’s Grand-daughter).
A property, with reference to a trust, does not always have to mean property concerned with real estate. Property in reference to a trust can be referring to even cash, shares, or any other valuable asset’s.
Lastly, there has to be an instrument by which the trust can be entirely declared/created. This instrument is called ‘the instrument of trust’ or ‘the trust deed’.
The Parties in a Trust
Author/Trustor/Donor/Settlor (Mr P) – The person who originally transfers their property and has confidence in another person in order to create the trust. Trustee (Mr Q) – The person who accepts the transfer of property as well as the confidence in order to create the trust.
Beneficiary (P’s Grand-daughter) – The end benefiter of the trust who will benefit from the trust in the near future, or person for whose benefit the trust is created.
Objectives of a Trust in General
As per what Section 4 of the Indian Trusts Act, 1882 states, all purposes and objectives are said to be lawful to create a trust, unless they are:
- Forbidden by law
- Is fraudulent or related to fraud
- Defeats any kind of provision of the law
- Immoral
- Against Public Policy
- Involves injury to another person or to his property
Who can Create a Trust
A trust may be created by-
- Any person who is competent to contracts in India. This may include any individuals, AOP, HUF, or any company/firm etc.
- A trust can even be created on behalf of, or by a minor in India. This may be done through the permission that is to be first granted by a Principal Civil Court.
Types of Trust’s that can be Created in India
- Private Trusts – These trusts are for a closed group. In other words we can say that beneficiaries can be identified in these type of trusts. Eg: A trust that is created for a friend or someone in the family of the author.
- Public Trusts – These are usually created for a large group or a public in large. The end beneficiaries cannot be identified in these type of trusts. Eg: NGO’s or charitable institutions for the general public.
The Indian Trusts Act, 1882
The Indian Trusts Act is an Act related to private trusts and trustee’s in India. The act defines what exactly will be called a Trust, and who exactly can be a trustee legally and also provides a definition for them. The Indian Trusts Amendment Bill of 2015 enabled the government to scrutinize the trusts’ investment at will, but at the same time also removed some restrictions on monetary assets investment, etc. The act also defines and states how the author of the trust can assign his assets to be controlled by the trust, and how he can appoint trustees and beneficiaries. Furthermore, the Act states that the trust should have a clear definition of the following:
- What is the intention of the author to create the trust.
- The future beneficiary who is the controller of the monetary assets later.
- Purpose of the trust.
- The monetary assets that are assigned to the trust.
- Grants control of the monetary assets– whether to the trustee, partially or fully, and what control the author has left.
Trust Beneficiary
Under the provisions of Trusts Act 1882, every person is legally capable of holding a beneficiary in a trust, in India. Beneficiary means the person for whose benefit the repose is originally accepted. The beneficiary is entitled to all the benefits that an author of the trust mentions in the Trust deed/Instrument of Trust.
Relevant provisions – Section 68, of the Indian Trusts Act, 1882.
Definition as given under Section 3 – Defines beneficiary as the person for whose benefit the confidence is accepted, is called the beneficiary.
Section 9 of the Trusts Act– According to this section, any person who is capable of holding property may be a legal beneficiary. The beneficiary is not bound to accept the Interest under Trust.
Rights of a Trust Beneficiary in India
Case law – S. Darshan Lal V. Dr. R.E.S Dalliwal (AIR 1952 All 825)
Many people often believe, in India, that a beneficiary has no rights in a Trust other than just to wait and see what the trustee’s actions are and what, how the trustee will distribute exactly to them. However, this is not true as trust beneficiary have certain rights to them provided under The Trusts Act as well. They have certain rights in relation to the trust. The rights of the beneficiaries, except for those mentioned in the Act, typically depend on the type of trust, provisions contained under the trust, type of beneficiary that they hold, and lastly, state law.
If the trust is a revocable trust – This means that the author of the trust can revoke or change the trust at any time that they desire, it also proves that the author may even change the beneficiary completely, as and when he desires. In this type of a trust, the rights are usually provided by the author to the beneficiary, and mentioned in the deed (if any). A trust can be revocable until the author/settlor dies and then it changes to an irrevocable trust.
However, in case of an irrevocable trust– The trust cannot be changed except by court orders, that too in rare cases. Beneficiaries of this kind of trust have full rights to information about the trust and what takes place or does not. The beneficiary also has the right to make sure that the trustee(s) are behaving in an accurate manner, etc.
There are also, generally, provisions in the Trust that contain which rights are given to which beneficiaries and which beneficiaries are entitled to what within the trust. However, the following are the common rights that are given to every beneficiary in a irrevocable trust as revocable trusts are not considered to be stable.
Right to payment (Rents & Profits)
All beneficiaries of Trust have the right to payment as set forth in the document of the trust. It is mandatory for trustee’s and author’s to make sure that the beneficiary receives whatever payment is legally supposed to be given to the beneficiary. Beneficiary has the right to receive all profits.
Right to information
All types of beneficiaries have the right to get all types of information regarding the trust and its administration. Enough information needs to be provided to the beneficiary in order for them to know where exactly they stand in the Trust and how to enforce their rights.
Right to an Accounting
Current beneficiaries are entitles to all information of accounting within the Trust. An accounting, this sense, refers to a detailed report of all income and expenditure that the Trust incurs. Rules of the accounting of the trust may vary, but usually it is the trustee’s responsibility to maintain an account and give an accounting report at the end of the year. Beneficiaries also have the right to completely waive off any accountings.
Remove the trustee
If the beneficiaries feel in any way that the trustee is not acting in a proper or accurate manner, and is not able to take responsibility of the trust well, then the beneficiary has the right to put a petition in court and get the trustee removed according to what they find inappropriate. Trustee’s have the obligation to cope up and manage with all needs of current beneficiaries, as well as remainder beneficiaries, that may prove to be a tough job for them sometimes, which often leads to their removal from the Trust.
Termination of The Trust
In very rare cases, if all beneficiaries, remainder as well as current beneficiaries agree on mutual terms, they have the right to petition in court and end the Trust. This happens in cases where the trust beneficiaries believe that the trust is acting improperly in some way or not productive in some way. Sometimes, the reason for which the beneficiaries want to end the trust, may also be that the purpose the trust may have been fulfilled, or must be impossible. State laws vary on when this type of termination is allowed to end the trust.
Liabilities of a Trust Beneficiary in India
Duty to compensate the trustee
It is the duty of the beneficiary to compensate or reimburse the trustee in case there are any damages caused either to the trustee or to the trust, due to the beneficiary. It is legally mandatory for the beneficiary to compensate if there is any injury or damage caused by himself.
Liability in breach of trust
The beneficiary is held liable, if by any chance, in any case, he/she breaches the trust agreement in any way. He is held fully liable for all losses/damages if he commits a breach of trust.
Liability not to harm others’ interests
Beneficiary cannot harm another party’s interests in any way in the trust, as he will be liable for any harm caused to another party within the trust that is due to him or his behaviour/etc.
Liability not to obtain any advantage without the consent of other beneficiaries: It is mandatory for the beneficiary to take consent of all other beneficiaries involved in the trust in case, he/she needs to obtain any kind of advantage. If not done, it will be considered as a breach of trust.
Liability to receive his interest(s)
The beneficiary is entitled to get his/her interest from the trust, but the beneficiary should not claim more than his interest in the trust property.
Liability to become aware of breach of trust
It is the beneficiary’s liability to become aware of all types of breach of trust, whether by the author or by the trustee, and it is his liability and responsibility to become fully aware and proceed against any party, if a breach of trust is found by the beneficiary.
Liability in case to deceive the trustee
The beneficiary will be held liable if in case, it is found that he has deceived the trustee in any way or induced him to commit a breach of trust. Court will proceed against the beneficiary in this matter.
Liability to take reasonable steps
The beneficiary will be held liable in case he fails to take reasonable steps and actions, as mentioned in the trust deed, within the rights and duties of other beneficiaries. It is mandatory for the beneficiary to only take steps within the limitations and boundaries set of all other beneficiaries.
Bar to Remedies for Breach of Trust
The beneficiary’s right of action can be lost in anyone one of the following ways:
- By concurrence
- By the way of limitation (lapse of time)
- By continued acceptance in the breach
- By release of trustee from any liability
- By subsequent confirmation of breach
Conclusion
To conclude, we can say that under the provisions of the Trusts Act, the beneficiary is entitled to many rights and is equally liable for any breaches as well. There is an equal ratio of rights as well as the liabilities of the beneficiary. This analysis also proves that it is compulsory for the beneficiary to maintain a good co-operation with the trustee’s of the trust, which help him save himself from any breach of trusts.
Lastly, even though trust is primarily created for the benefit of the beneficiary, there are still certain rights and liabilities that the beneficiary will hold, and there is still a way and manner that a beneficiary needs to act and behave in within the limitations of the Trust.
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