This article is written by Shobhana Aggarwal, a student of Banasthali Vidyapith. This article discusses charitable trusts and their existence under the Transfer of Property Act. In this article, all the aspects related to trust are dealt with in reference to the Transfer of Property Act, 1882.
‘Trust,’ this word is not a new word. It has been emerging for many years. And it is still being used. But with the passage of time, it has emerged and widened its scope.
Definition of Trust
The word ‘Trust’ is defined under Section 3 of the Trust act 1882. It means that any transfer of property by the owner to any other person for the benefit of a third party, with such an act is known as an act of Trust. In simple words, Trust is a type of financial arrangement between the parties in which the trustee holds the assets of the trustor for the benefit of the third party.
So, it is a kind of three-tier fiduciary relationship in which one person transfers the property to another person for the benefit of the third party.
A trust is created for the beneficiary. A beneficiary can be a single individual and it can also include a group of individuals. Surprisingly this can also be created for a child who is not born yet.
Different types of Trust
The different types of trusts can be ascertained with the identification of the beneficiaries. It also depends upon the class of person. By looking at the class of person, who is going to be benefitted, we can ascertain about its types.
In India, we mainly find two types of trust which are:
- Public trust
- Private trust
In public trust, it is uncertain about where the interest has been vested upon and upon whom it has been entrusted. It is known as public trust because it is created for the benefit of a large number of people. So, in this case, we can say that the beneficiaries are the general public at large. Public trust is further divided into two parts; Religious and Charitable trust.
Requirement of Public trust
- For creating a public trust, the requirement is that the trust to be made must be for the benefit of the general public. The public should Definitely get benefitted from such trust.
- For making public trust, it should be charitable.
A private trust is the type of trust which is for the benefit of an individual. In a private trust, there is certainty regarding whom the interest has been vested. A private trust can be created for the benefit of individuals as well. A private trust can be further divided into two parts:
- Whose recipients can be resolved;
- Whose recipients can’t be resolved.
Creation of a Private Trust
A private trust can be created for any lawful purpose. A person who is of sound mind, above the age of 18 years, and who is not disqualified by the law to contract is entitled to the creation of a private trust. Besides humans, any company or a firm or, an association can create a private trust.
In case of a breach of trust
In case of any breach of trust, the trustee is bound to compensate for the loss. But a trustee is not liable for the loss if it is done by his co-trustee and if he had taken due care and diligence on his part.
In this case, it was laid down that though the act only applies to private trust, besides this it also lays down principles that will be equally applicable to both public and private trust.
Parties in a Trust
There are three major parties to a trust which are:
Who is a Trustor
A trustor is that person who firstly creates an agreement and afterward grants the trustee to have control over the assets and the property.
Who is a Trustee
A trustee is a person who is responsible for managing all the trust for what he had been appointed for. A trustee will basically hold the title of the property with which he/she is trusted.
Who is a Beneficiary
A beneficiary is a person who receives the benefit of the agreement of trust. In simple words, a beneficiary is a person who is going to receive the benefits of the trust created.
Role of trustor:
- His main work includes making the trust.
- Another role is the appointment of trustees.
Role of the trustee:
- He must obey and rely upon the wishes and guidelines of the trustor.
- The trustee is responsible mainly for the administration of the trust. The trust includes many things for example: paying income tax to the authority.
- A trustee has the duty to be loyal to the beneficiary.
- A trustee has the duty to take reasonable care.
- A trustee has the duty to not delegate his power or work to any other person.
- A trustee is bound to manage everything according to the wishes of the trustor and to his best interests.
- A trustee is bound to protect the trust property.
- A trustee is bound to take care of all accounts of the trust property.
Characteristics of a valid Trust
- There must be a certainty of intention for which the trust is being created.
- There must be certainty regarding the subject matter of the trust.
- Object for which the trust is entrusted must be certain.
Why is the concept of Trust increasing
The concept of trust is now much more popular than it was earlier. The concept of trust is mainly used by the settlor for the transfer of the property. Some trusts are also created for the benefit of the minor children.
Purpose of the Trust
A trust can be formed for carrying many works, one of such important works is succession. Trust acts as a vehicle for work-related succession.
Objectives of a Trust
The object of the Trust shall not include any activity for the profit within the meaning of the Income Tax Act, 1961. The other objectives of the trust are listed as follows:
- To encourage the human resources development, development of educational institutions from pre-primary, primary, high school, pre-university college, degree colleges, and other courses. Maintenance of learning centers for the transformation of personality, confidence building, positive inking, communication skills, etc.
- To start, manage, and administer any orphanage, nursing homes, old age homes, hospitals, libraries, or social status to acquire land and building and other assets and properties for achieving the objectives of the trust.
- To provide medical facilities for deserving children of the rural locality. To start rural health clinics, hospitals, mobile health units, etc.
- To spread the messages of preserving and conserving the Indian culture to save the same from the influences of the western cultures throughout India and of all foreign countries.
- To help and to provide relief to the poor irrespective of caste, creed, race, religion, or language.
- To lift the public from the curses of poverty, hunger, illiteracy, and diseases by starting and carrying out concentrated and intensive programs.
- To cooperate with the central and the state government and other authorities in extending aid for educational purposes.
- To work with special concentration for the child and women’s welfare.
- To promote charitable values, literature, science, education, and culture.
- To explore ways for the promotion of socio-economic development in the community.
- To work for the welfare of the neglected and marginalized section of the society.
- To protest and fight against the injustice against people.
- To aware people of social issues so they can fight against evils.
- To provide and facilitate legal assistance to underprivileged and poor sections of trust to fight for their rights and justice.
These are some of the objectives which a charitable trust has and the list is too long.
Constitution of charitable Trust
In India, we have the Indian Trust act, 1882. But the provisions of the Indian trust act, 1882 do not apply to Public trust (Charitable trust).
Conditions for creation of a Trust
There are certain conditions attached while forming a charitable trust. The conditions are listed as follows:
- There must be a founder of the trust, for which purpose the trust is to be created.
- There must be trustees.
- The main ingredient: which is the property of the trust.
- Beneficiaries, those people who will basically get benefited from the trust created.
- There must be an intention to create trust.
- Purpose of trust must be known.
- There must be a transfer of the property to the trustee himself.
- The settlor has to give up all his interest in the property.
- There must be a clear descriptive analysis of the property.
- It must be clearly mentioned that for what purpose the trust has been created, it’s objects.
- In all cases, there is no such requirement of the trust deed. But in certain cases, it is advisable to have such an instrument.
Who may create Trust
If we talk in a general sense a person who is capable of creating a trust can form a trust.
- In India, any person who is competent to contract can enter into a contract.
- Any person is competent to enter into a contract only when the person has reached the age of majority i.e.,18 years or above.
- The person entering into a contract must be of sound mind and must not be disqualified from contracting into any type of contract.
- A minor can also get its trust only after prior permission from the Principal Civil Court. A person can also stand on behalf of the minor.
Section 7 of the Transfer of Property Act, 1882:
According to the provision of Section 7 of the transfer of property act, 1882, only that person is entitled to create a trust who is competent to contract and who has the authority to transfer such property.
So, basically, there are only two main requirements to who may create a trust.
First is that the person must have the power or authority for that disposition of the property and second, that the person must be competent to contract.
But the Indian Trust act, 1882 does not apply to public trust (Charitable trust).
The trust has been created with the help of the property. The property is the main ingredient for creating trust. The main purpose for which the trust has been created is to make the beneficiaries get the benefit from that agreement.
But what if the property which we trust is destroyed?
So, there is a great need to protect the property. The main work of the trustee is to manage the property trusted. A trustee is responsible for taking care of the trusted property. So he must do his duty.
Transfer of trust property by the beneficiary
The beneficiary can direct the trustee to transfer the trust property to him or to such other person as the beneficiary. But where there is more than one beneficiary and all of them agree then they can also direct the trustee to transfer the property to them or to the other person to whom the beneficiaries desire the property to be transferred.
A beneficiary can also transfer his interest in the property to the other person and the person to whom the interest is transferred shall have the same rights and liabilities as the beneficiary had from the date of transfer of interest itself. But a condition is also attached to such transfer of interest the interest can only be transferred by the beneficiary or beneficiaries as the case may be when they have attained the age of majority and are of sound mind and also are not disqualified by any law for the time being in force in India.
Above all the cases if the beneficiary is a married woman and the trust property has been bequeathed to her via the trust to ensure that she would never deprive herself of her beneficial interest then the trust property and the interest cannot be transferred according to the above insistence.
Documents and accounts of trust property
There is a trust account. In this, all the assets are held by a third party for the protection of the beneficiary. There are different types of trust accounts on the basis of their types.
Protection of trust and trust property
Whenever trust is created the main duty is to manage it properly. The first duty is to control the trust and the property as well.
When a third party claims that this is his trust, The beneficiary can file a suit declaring that this property belongs absolutely to the trust.
Some important and unknown facts about Trust in India:
- In India, private trust is being governed by the Indian Trust Act, 1882 and on the other hand, public trust is managed by themselves. Except in some states.
- There is no maximum limit prescribed for the number of trustees. But the minimum limit has been mentioned, which is two trustees at the time of the registration process.
- The registration process is incomplete without the most important document which is ‘Trust Deed’.
- Only Public trust can avail the benefit of exemption from tax.
Scope of charitable trust under the Transfer of Property Act
In India, private trust is governed by the Indian trust act, 1882 but the Public trust is governed by different statutes. Public trust is also classified further into two subtypes. One is Charitable trust and the second is religious trust. Till now there is no central legislation for governing public trust. But many states like Maharashtra and Madhya Pradesh have enacted their own separate legislation for public trust.
In our Constitution, the charity has been in our concurrent list, meaning thereby that both the state and the center have the power to legislate over the charitable trust.
Section 11, 12, and 13 of Income-Tax Act:
Distinguish trust with respect to mortgage, lease, or sale:
There are a lot of differences between mortgage, lease, trust, and sale. When a property is given by way of lease, transfer, or mortgage then it involves only two parties.
There are some types of income on which no tax can be imposed upon them. These types of income are exempted from paying taxes. These income are:
- Income derived from charitable or religious purposes.
Liability of beneficiary
Apart from the rights of a beneficiary, there are some liabilities of the beneficiary as well which are:
1. Duty to compensate the trustee in case of any damage
It is the duty of the beneficiary to compensate the trustee in case of some type of damage to the trust. If any type of injury or any type of damage is caused by him to the trust, then he is bound to compensate it to the trustee.
2. Liability in cases of Breach of Trust
The beneficiary will be held liable if there is a breach of trust on part of him, then he will be liable for all the losses.
3. Liability not to harm the interests of others
If the beneficiary provides any harm to another party’s interests then the beneficiary will be liable for all the harm caused to that party.
4. Liability not to take any benefit without consent
A beneficiary is bound not to take the advantages without the consent of other beneficiaries.
5. Liability of not claiming interest more than his interest
A beneficiary should not claim more than his interest. He should only claim whatever he is entitled to get.
6. Liability in case of deceiving the Trustee
If in any case, it is found that the beneficiary has deceived the trustee in any way leading to the breach of trust ultimately, then the beneficiary will be held liable.
Discharge of a trustee
Under the provision of the Indian trust act in 1882 it is being mentioned about the procedure by which a trustee will be discharged.
- He will be discharged on the extinction of the trust.
- By that procedure which is described under the instrument of trust.
- He can be discharged if a petition has been filed in the Court for his discharge.
- A trustee can be discharged if a new trustee has been appointed in his new place.
And moreover, a trustee can get himself discharged by applying to the civil court for seeking discharge from his office. And if the court is satisfied with his reasons for discharging then the court can discharge the trustee.
But if the court thinks that these are not sufficient reasons, then the court will not discharge the trustee unless and until they find an appropriate person on that behalf.
At last, it can be concluded that the concept of Trust revolves around 3 parties. The 1st party is the grantor of the trust himself, the 2nd party is the trustee and the 3rd party is the beneficiary. A beneficiary is that party who is going to be benefitted from such an agreement. These three parties have their own rights and duties which are being assigned to them upon the Trust deed. Trust deed is a kind of instrument for the declaration that it is a trust. These days there is an emergence of the concept of trust that it is coming as a mode of succession. Now the law is changing according to the circumstances.
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