Introduction: A Private Trust is said to be an instrument of safeguarding the interests of beneficiaries especially when the beneficiaries are minor and not capable of protecting their interest.
Any person who is a major and is competent to enter into a contract can be a settler or the person intending to form a trust. In the below given paragraphs the authors have tried to itemize the fundamentals of formation of a private trust and the way it is brought to taxation under India Income Tax Act, 1961.
It is advised that the readers should take proper care and consultation before acting on the material contained in this article.
Figure 1. Why to create a private trust
Figure 2-working of private trust
o If trust property happens to be immovable property: A registered document (trust deed) is necessary to set up a trust if immovable property is being transferred to it. The deed should be made out on stamp paper (for stamp duty consult your civil lawyer) and registered with the Registrar of Assurances under the Registration Act.
o If trust property happens to be movable property
If only movable property is settled upon the trust, no formal document or written agreement is necessary. All the same, it’s advisable to prepare a trust deed on a stamp paper and have it signed by the settlor and the trustees in the presence of a witness to avoid any subsequent disputes.
o Once the trust is set up, the settlor can contribute more funds to it as and when he wants to. Even trustees, as also friends and relatives, can gift funds to a trust. Since gift tax has been abolished, no such tax is payable on the amount gifted to the trust.
1. A Trust is a transfer of property of a person to another with the intention that it is administered for the benefit of the owner and/ or others.
2. The person who transfers the property is called a “Settlor” or “Author of the trust” and
3. The person to whom the property is transferred is called the Trustee.
4. The person for whose benefit the trust is created is called the “beneficiary”.
5. The property transferred for the trust is called the “Trust Property”.
A Trust is created when the Settlor indicates his intention to create a trust. In order to create a trust you must
A trustee is a person,
A” gives some ships to “B” to carry on smuggling business and use the profits arising out of it for maintaining A’s children. Is the Trust valid?
The Trust is not valid because a Trust can be created only for a lawful purpose.
Trust property can be moveable or immovable property.
1. If the trust constitutes immovable property then its transfer to the trustee must be through a written and registered document, signed by the settlor.
2. If the trust constitutes moveable property, delivery of such property to the trustee is enough and there is no need for a written document.
The following are the rights of a trustee:
1. To have possession of the trust property.
2. To get reimbursement of expenses incurred in maintaining the trust property.
3. To apply to the court, for its opinion, advice or direction in the management of the trust property.
4. To have the accounts of the trust property examined and settled on completion of the duties.
On completion of his duties, to have a written acknowledgement from the beneficiaries saying there are no dues from him to the beneficiaries.
The trustee is empowered to take action for the welfare of the trust property to:
1. sell the trust property together or in lots, by public auction or private contract. This can be sold together or at different times.
2. Do the above within a reasonable time, i.e. sell the property and invest the trust money to purchase any other property.
3. Convey the trust property through a valid and registered sale deed.
4. Invest the trust money and monitor the investments.
5. Use the trust property for the maintenance, education or advancement of a minor beneficiary, if any.
6. Give a written receipt for any money, securities or other movable property, which is paid, transferred or delivered, to him.
When there are two or more trustees, any one may be authorized to execute the trust. In that case the authorized trustee can:
1. Accept security for a debt,
2. Allow time for payment of a debt,
3. Compromise, abandon, submit to arbitration or settle any debt relating to the trust.
The disabilities of a trustee are:
1. Once he has accepted the trust; he cannot refuse to act as a trustee.
2. A trustee cannot delegate his duties to another or a co- trustee.
3. A trustee should not use the trust property for his own profit or any other purpose, unconnected with the trust.
4. A trustee cannot buy the trust property on his own account or as an agent of a third person.
5. A trustee cannot act unilaterally but must consult his co-trustees, if any.
6. Co-trustees should not lend the trust money to each other
A trust ceases to exist:
1. When its purpose is completely fulfilled; or
2. When its purpose becomes unlawful; or
3. When the fulfillment of its purpose becomes impossible by destruction of the trust property or by any other cause; or
4. When the trust is expressly revoked.
The beneficiary has the right to:
1. Enjoy the rents and profits of the trust property.
2. Expect the trustee to transfer the trust property to one or more beneficiary.
3. Inspect and take copies of the instrument of trust, the documents relating to trust property and the accounts of the trust property.
4. If for any reason the execution of the trust by the trustee becomes impracticable the beneficiary may institute a suit for the execution of the trust.
5. To expect the trustee to properly protect and administer the trust property.
6. To compel the trustee to perform his duty properly.
7. To transfer the benefits arising out of the trust to any other person after the beneficiary attains majority.
When a trust is created by will, it is revocable at the pleasure of the testator, because it does not become effective during the lifetime of the testator.
Any other trust can be revoked in the following ways:
1. By the consent of all the beneficiaries.
2. By the settlor in exercise of powers of revocation expressly reserved to him.
3. If the trust was created for repayment of debts, the settlor can revoke the trust at any time irrespective of whether the debt is repaid or not. However, if the debt is not repaid and the creditor has knowledge of the creation of the trust, then, the trust cannot be revoked without the consent of the creditor.
Income from private trusts is available to specified beneficiaries and not the public at large. Private trusts are of two basic types for Income tax purposes:
Needs for creating a private trust?
Trusts are created for multifarious purposes though the major reasons being the following:
Tax treatment of trusts:
See the diagram below for better understanding:
Point 1: in the following case rates applicable to Individuals will be charged:
Point 2: in the following cases rates applicable to Individuals will be charged:
1. Where none of the beneficiaries
2. Where the relevant income or part of the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; or
3. Where the trust yielding the relevant income or part thereof was created by a non-testamentary instrument before 1-3-1970 and the A.O. is satisfied that it was created bona fide for the benefit of the dependant relatives of the settlor, or where the settlor is HUF, exclusively for the benefit of the dependant members.
4. Where the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund or pension fund or any other fund created bona fide by a person carrying on a business or professional exclusively for the benefits of his employees.
Tax treatment of settlor / grantor
1. M. K. Shah Advocate 2. CA Bhupesh Kumar Shah
11/3, Butler Road, Dalibagh, Lucknow- 226001
Author 1 is a practicing income tax lawyer at Lucknow-UP
Author 2 is a member of the institute of Chartered Accountants of India
(Republished With Amendments)