In this article, Dhruv Alagh pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses How to start a private trust in India.

A relationship that is created by an individual, in which more than one person holds an individual’s property to use and protect it for the benefit of others. An individual can control the distribution of their property during their lives or after their deaths through the use of a trust.

What is a Trust?

Basically, a trust is an instrument used for safeguarding the beneficiaries especially when beneficiaries are minor and not capable enough to protect their interest.

• The person who creates the trust is known as the settlor and The person who holds the property for another’s benefit is the trustee and in all, The person who is benefited by the trust is the beneficiary.

A legal entity is created by the settler through which a second party ie. the trustee holds the right to manage the trustor’s assets for a benefit of the third party ie. the beneficiary.

Salient features of Private Trust In India

• Private trusts are created and governed by the provisions of the Indian Trusts Act, 1882. Though charitable trusts are beyond this Act. The whole of India comes under this Act except the states who’s State Government has specifically amended this Act.
• A private trust, that is created under and governed by the Indian Trusts Act,1882 manages assigned trust property for private or religious purpose. Privileges and tax benefits that are enjoyed by the public trusts or NGOs are not enjoyable by these private trusts.

How to create a Trust?

A person who is a major, not legally insane, insolvent, or minor can be a settlor and create a trust.

However with the permission of court a minor can also create a trust.

For creating a trust one must:

• Clearly, specify the property of the trust
• The purpose of the trust
• The beneficiaries of the trust
• Methods of Creation

• Declaration of Trusts
• Trust Transfers
• Powers of Appointment
• Contracts
• Statute
  

Role of the trustee

A trustee is said to be the person to whom a settler transfers his/her property.

• Anybody can become a trustee but if he/she has to manage the properties of the trust then he must be eligible to enter into contracts.
• A minor, insolvent or an insane person cannot be trustee.
• One can always say no or reject his/her trusteeship
• A person assumes all the rights, liabilities and duties of a trustee once he/she accepts the trusteeship voluntarily and according to reasonable terms.

Role of a beneficiary

• Every person who is capable of holding property such as a human being, corporation, or a company and even a state can be made beneficiary of a private trust.
• Even an unborn person can also be made a beneficiary of a trust.
• However, a beneficiary is not bound by the wants of the person creating the trust. This way a proposed beneficiary can ask for his/her own interest under the trust by either making a denial to the trustee or by claiming inconsistent or irregularity with the trust.

Under Indian Trust Act, a settlor can create a trust with his or her own personal property and can officially appoint one or more trustees and lay down the terms and conditions benefiting the identified beneficiary or beneficiaries including one’s spouse, own child, relative or any other individual or group of individuals.
Private trust or family trust does not come under Public Charitable Trusts and hence are not allowed to enjoy the privileges entitled by a trust with a charitable purpose.

What can be treated as a trust property

Movable or immovable property both can come under the trust property.

• Trust consisting of immovable property transfers the property to the trustee through a written and registered document.
• In case of the trust consisting movable property only the delivery of the property to the trustee is enough and there is no need of the written document.

Documents Required

• Detail of all members or trustees of the trust with their address and PAN no.
• Certified true copies of the Institution’s Registration Certificate
• Certified true copies of Laws & by-laws of the Institute
• Copy of income tax registration certificate.
• Audited Balance Sheet and Income & Expenditure account with Audit Report of last 3 years
• The original copy of Trust Deed evidencing the creation of the Trust.

There are various types of trusts which are created containing various kind of purposes.

Example: A trust can be created for the financial benefit of the person who is creating the trust, or for a surviving spouse or minor children, or for a charitable purpose.

Major types of trusts are

• Living: This type of trust is created by the settler while he or she is alive.In other words, it is an alternative for a will.
• Testamentary: This type of trust is created through a will when the settler dies.
• Revocable: Trust that can be easily modified or terminated by the settler after its creation.  It does not protect assets, as they can be withdrawn from this kind of trust. Here, assets are not considered to be given away so, these are taxed at the hands of the settler at the slab rate. In this kind of trust settler can become the beneficiary.
• Irrevocable non-discretionary: Trust that cannot be modified or terminated by the settler after its creation. Here assets cannot be withdrawn. The settler has to control the trust norms completely. Settler decides which beneficiary should receive which asset, and in what proportion. In this trust settler can be the beneficiary and after him/her, his/her child/children can become the beneficiary. If the settler in this type of trust is the primary beneficiary, he/she is taxed at slab rate.
• Irrevocable discretionary: Here, the settler lets the trustees decide which beneficiary should get which asset and in what proportion. The settler only decides the beneficiaries. In this case, the beneficiaries can save on income tax from the assets.

Though law permits the variety of trust, trust arrangements that attempt to escape and avoid creditors or lawful responsibilities are declared invalid by the courts.

Advantages of Private Trust In India

• Has simple process of registration.
• Has simpler record-keeping regulations.
• Quite a low possibility of interference by the regulator.

TAXATION OF A PRIVATE TRUST

• A private trust is an effective estate planning tool. In case you have a special child, an estate to protect, or a business to transfer to the next generation, A formation of private trust in such situations sought many issues. Although the creation of a private trust needs a lot of consideration. Just like the most important element that is taxation needs to be addressed.
• The primary reason of taxation being so important is that the income of a private trust is taxed differently in different structures of a trust and any type of ineffectual, unavailing planning in or by the trust can lead to maximization of taxation for the particular entity.

The four distinct elements in a Private Trust are

• An intention of the settler to create the trust.
• a subject matter
• a trustee
• a beneficiary.

Unless all these elements are present, a court cannot enforce an arrangement as a trust.