Shashi Bekal, Advocate

Abstract

In this article, an attempt has been made to discuss the basics of a Private Trust. This article will be helpful for individuals, and advocates, solicitors, chartered accountants and consultants who advise families on succession planning. The author aims to cover aspects such as the formation of a private trust, roles & responsibilities, functions, taxation, governing statutes and other aspects in the subsequent articles which will follow.

Abstract

1.   An Introduction to Private Trusts

2.   Terminologies to be understood

2.1. Advisory Board

2.2. Beneficiary

2.3. Beneficial interest

2.4. Settlor

2.5. Trustee

2.6. Trust Property

3.    Creation and Purpose

4.    Types of Private Trusts

4.1. Distribution based

4.1.1. Determinate

4.1.2. Discretionary

4.2.    Revocation based

4.2.1. Revocable

4.2.1. Irrevocable

5.     Dénouement

1.  An Introduction to Private Trusts

According to section 3 of the Indian Trust Act, 1882 A “trust” is 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.

In India, there are two types of trusts, private and public. The public trusts are further categorised into charitable and religious trusts which are governed by legislations such as the Charitable Endowments Act of 1890, the Societies Registration Act of 1860 and the Charitable and Religious Trusts Act of 1920.

A private trust is a body constituted usually for members of family, relatives, friends et cetera for their benefit. Private Trusts are governed by the Indian Trust Act, 1882.

Trusts are established for the smooth succession of the settlor’s estate and business while he is alive or after his death. Trusts have become a popular mode of succession planning in the recent past.

2. Terminologies to be understood

2.1. Advisory Board

A body constituted under a trust to provide advice to the trustee.

2.2. Author of the Trust

The person who reposes or declares the confidence is called the “author of the trust”.

2.3. Beneficiary

The person for whose benefit the confidence is accepted is called the “beneficiary”.

According to section 9 of the Indian Trust Act, 1882, Every person capable of holding property may be a beneficiary. Further, a proposed beneficiary may renounce his interest under the trust by disclaimer addressed to the trustee, or by setting up, with notice of the trust, a claim inconsistent therewith.

A settlor can also be a beneficiary but he cannot be the sole beneficiary. Further, a trustee can also be a beneficiary1, but the same should be expressed clearly.2

2.4. Beneficial interest

The “beneficial interest” or “interest” of the beneficiary is his right against the trustee as owner of the trust property.

Where a beneficiary has absolute beneficiary interest, he can transfer the rights, title and interest to anyone else.3

2.5. Instrument of trust

The instrument, if any, by which the trust is declared is called the “instrument of trust”.

The Original Trust deed executed by an individual and registered is not a public record of a private document and hence a certified copy of the same cannot be admissible as evidence under section 76 of the Indian Evidence Act, 1872.4

2.6. Settlor

The term “settlor” is not defined in the Indian Trust Act, 1882. The “author of the trust” is the settlor of the Trust. The Settlor should de jure transfer ownership of the assets to the trustee of the Trust.

2.7. Trustee

The person who accepts the confidence is called the “trustee”.

According to section 10 of the Indian Trust Act, 1882, Every person capable of holding property may be a trustee; but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract.

No individual is bound to accept a trust. A trust is accepted by any words or acts of the trustee indicating with reasonable certainty such acceptance. Instead of accepting a trust, the intended trustee may, within a reasonable period, disclaim it, and such disclaimer shall prevent the trust-property from vesting in him. A disclaimer by one of two or more co-trustees vests the trust-property in the other or others, and makes him or them the sole trustee or trustees from the date of the creation of the trust.

In the event the settlor is the trustee, there is no formal transfer but there is a deemed transfer for the purpose of taxation. 56

2.8. Trust Property

The subject matter of the trust is called “trust property” or “trust money”.

It is not necessary that the settlor transfers the property entirely, the settlor may retain certain rights of possession and enjoyment during his/her lifetime.7 It is also possible that the settlor may not transfer the property but rather, only the rights to receive the income from the property.8

Privates Trusts (Part 1): Basics of a Private Trust

The creation of trust becomes unlawful if the Trustees are not the owners of the property nor acquired the same.9

3. Creation and Purpose

A private trust or a family trust is commonly created to hold the family estate and business. The beneficiaries are usually individuals. Even if the beneficiary is a family deity, it doesn’t make the private trust a religious trust. Similarly, if one of the activities of the private trust is charitable, it does not mean the trust is a charitable trust. A family trust is an independent vehicle for the settlor to ensure the protection, management and utilization of their assets during their lifetime and after their death. A Trust can also be created by a Will, A Trust created by Will does not require to be stamped.10

According to section 7 of the Indian Trust Act, 1882, a trust may be created (a) by every person competent to contract, and, (b) with the permission of a principal Civil Court of original jurisdiction, by or on behalf of a minor; but subject in each case to the law for the time being in force as to the circumstances and extent in and to which the author of the trust may dispose of the trust-property.

Where a trust is created for the settlor and his wife; on dissolution of marriage and remarriage of the wife, it was held that she has forfeited the benefits under the trust.11

A Corporate body can also create a trust.12 A corporation may be a cestui que trust. A Corporate body may be a trustee, except the banks of Madras, Bengal and Bombay.13

According to section 11 of the Indian Contract Act, Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Section 8 of the Indian Trust Act, 1882 states that the subject matter of a trust must be property transferable to the beneficiary. It must not be a merely beneficial interest under a subsisting trust. One may refer to Section 6 of the Transfer of Property Act, 1882 to understand what may be transferred. Where the author of the trust/settlor declares to transfer an immovable property of Rs. 100 or more, the same would have to be through an instrument duly executed and registered.14 Therefore, a trust deed transferring immovable property requires compulsory registration. Stamp Duty is payable on the settled property to the trust.

The Hon’ble Supreme Court in the case of J.K. Trust v. CIT [1957] 32 ITR 535 (SC) held that word “property” in section 4(3)(i) of the Income- tax Act, 1922 Act is of sufficient amplitude to comprehend “business”.

Thus, to create a trust, a trust deed is required. The trust deed is an instrument in writing that, inter alia transfers the assets of the settlor to the trust/trustees and spells out the purpose of the trust and the beneficiaries. According to section 6 of the Indian Trust Act, 1882, a trust is created when the author of the trust indicates with reasonable certainty by any words or acts an intention on his part to create thereby a trust, the purpose of the trust, the beneficiary, and the trust-property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust-property to the trustee.

According to section 4 of the Indian Trust Act, 1882, A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is (a) forbidden by law, or (b) is of such a nature that, if permitted, it would defeat the provisions of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of another, or (e) the Court regards it as immoral or opposed to public policy. Every trust of which the purpose is unlawful is void. And where a trust is created for two purposes, of which one is lawful and the other unlawful, and the two purposes cannot be separated, the whole trust is void. In this section, the expression “law” includes, where the trust- property is immovable and situated in a foreign country, the law of such country.

A trust by an insolvent, in favour of some particular creditor to pay credit at a higher rate than others is void.15

Trusts in consideration for immoral relations have been held to be void.16</sup > However, trusts specifically for illegitimate children in being or en vebtre sa mere, are valid.17

Trusts for immoral and irreligious activities are void.18 Similarly, trusts in total retrain of marriage are void.19

It is essential that there is an acceptance of trusteeship by the trustee. The acceptance should be in whole and cannot be in part or with a disclaimer.20 The acceptance or denial should be communicated clearly. Acceptance may be through signing the trust deed.

4. Types of Private Trusts

Private Trusts can be divided into two segments viz. based on their distribution or the nature of transfer of assets.

4.1. Distribution based

4.1.1. Determinate

A determinate private trust, also known as a fixed trust, is a legal arrangement where the beneficiaries have fixed and predetermined entitlements to specific assets or a fixed share of the trust property. In contrast to discretionary trusts, where the trustee has flexibility in distributing benefits, determinate trusts have clearly defined proportions or assets allocated to each beneficiary, typically outlined in the trust deed.

Beneficiaries of a determinate trust have clearly established and fixed entitlements to specific assets or a predetermined share of the trust property. This provides a level of certainty regarding the benefits each beneficiary will receive. Like all trusts, a determinate private trust is established through a legal document called the trust deed. This document outlines the terms, conditions, and fixed entitlements of each beneficiary. While the trustee is responsible for managing and administering the trust, their discretion is limited in comparison to discretionary trusts. The trustee must adhere to the predetermined allocations outlined in the trust deed.

Determinate trusts provide stability and predictability for beneficiaries, as they know in advance what they are entitled to receive. This can be particularly useful for estate planning purposes and ensuring specific assets pass to designated individuals. Determinate trusts are commonly used for distributing assets in a structured manner as part of estate planning, ensuring that beneficiaries receive their designated shares without the need for discretionary decisions by the trustee.

4.1.2. Discretionary

A discretionary trust is a legal arrangement in which the trustee holds and manages assets on behalf of a group of beneficiaries, but unlike a determinate trust, the trustee has the discretion to determine how the trust’s income and capital are distributed among the beneficiaries.

The trust is established through a legal document called the trust deed, which outlines the terms and conditions of the trust, including the powers granted to the trustee for discretionary distributions. Rather than having fixed entitlements, beneficiaries are often grouped into classes, such as family members or charitable organizations. The trust deed specifies the criteria for identifying members of the beneficiary class. The trustee has the authority to decide the timing, amount, and recipients of distributions, allowing for flexibility in responding to changing circumstances, needs, and priorities among the beneficiaries. Discretionary trusts can be utilized for tax planning purposes, as the trustee has the ability to distribute income in a tax- efficient manner, taking advantage of lower tax rates applicable to certain beneficiaries. The structure of a discretionary trust allows for adaptation over time. As family structures evolve or financial needs change, the trustee can adjust distributions to best meet the interests of the beneficiaries. Since the trustee has discretion over distributions, the details of individual beneficiaries’ entitlements can be kept confidential, providing privacy and asset protection.

4.2. Revocation based

4.2.1 Revocable

A revocable trust, also known as a living trust or revocable living trust, is a legal arrangement where an individual (the grantor or settlor) creates a trust during their lifetime to manage and distribute their assets. The distinguishing feature of a revocable trust is that the settlor retains the ability to modify, amend, or revoke the trust during their lifetime.

4.2.2. Irrevocable

In India, an irrevocable trust is a legal arrangement where the settlor (the person creating the trust) relinquishes control and ownership of the trust assets once the trust is established. Unlike a revocable trust, the terms of an irrevocable trust cannot be changed or revoked by the settlor, providing a higher degree of permanence and security for the trust assets.

Once the irrevocable trust is created, the terms and conditions specified in the trust deed become irrevocable and cannot be altered by the settlor. This permanence provides assurance to beneficiaries and ensures that the settlor’s intentions are preserved.

The trustee plays a crucial role in managing and administering the trust in accordance with the terms set forth in the trust deed. The trustee is bound by fiduciary duties and must act in the best interests of the beneficiaries.

5.  Dénouement

A Trust is a measure that ensures the intention of the property owner. Hence a trust deed is a crucial document and utmost care must be taken while executing the same to avoid any unintended consequences. A good board of advisors/trustees are equally important to ensure the intentions of the settlor are carried out even after their death

The series of articles which is proposed to be written on the law governing Family trusts is aimed to cover, aspects such as Roles & responsibilities, Non-residents Trusts, Amendments to a Trust deed, Income-tax implications, implications of the law of evidence and other relevant aspects.