This piece is part of the series intended for business leaders, providing them working knowledge of various business laws. By its very nature, it is neither comprehensive nor is it supposed to replace the guidance of a law expert. Read more about this series.
This write-up deals only with Private Trusts which are governed by Indian Trusts Act,1882, and not religious or charitable trusts , which are almost altogether different in its creation, registration, operation , taxation and exemption etc.. This write up essentially provides basics of private trusts, and practical aspects as to their creation, uses and operation.”
A Trust is an obligation attached to the ownership of property arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of beneficiary(ies).
The above working definition of a Trust leaves quite a few practical questions unanswered. They are dealt with hereunder with their practical implications.
Trust can be created (also called Settling on Trust) by any person competent to contract (such person being called the author of the Trust) and his capacity is limited to the extent of ownership of the property which he wants to settle on Trust. The settlor of the Trust (original owner of the property) can appoint others (Trustee(s)). He himself can also be Sole Trustee or just one of the Trustees.
Only a person who can hold the property and who is competent to contract can be a Trustee. Obviously, a minor cannot be a Trustee.
Beneficiaries: Any body can be a Beneficiary. Even the author of the Trust herself can also be one of the beneficiaries.
Purpose of the Trust should be lawful. If the object or the purpose is unlawful, prohibited by law, or which the competent court declares to be unlawful, the creation of the Trust will be void, i.e. without any effect and the transfer of the property to the Trustee(s) shall be ineffective. If the purpose of the trust is partly legal and partly illegal – but such purposes cannot be separated, the entire trust shall be void.
USES OF PRIVATE TRUSTS:
Private trusts are generally used to put aside properties for special purposes and to ring-fence the assets from being frittered away by the vagaries of business and human affairs. Most private trusts in India are for the benefit of family members and that too for minors and female members of the family who otherwise are not capable of managing the properties by themselves.
Equally important purposes of creating trusts are –
- For creating independent tax entities – and derive benefits of lower tax rates in lower income slabs (discretionary trusts created by testamentary documents)
- For creating pass through entities – for tax purposes
- For creating Investment Vehicles/Collective Investment Schemes/ Mutual Fund schemes – for investment in securities, shares, debentures, etc. – under the purview and regulation of SEBI.
- To manage funds/assets and business as one entity and yet get the same taxed in the hands of beneficiaries in proportion to their interest in the trust (called Specific Trusts)
- To transfer assets to minors/children without losing control over their management, and yet not expose the same to avoidable risks in the case of the Settlor of the Trust.
Creation of the Trust:
Trust is created by an expression of interest by the owner of the property. Theoretically, a trust can be by word of mouth also (except in respect of immovable property). However, practically speaking, it is done in writing, otherwise there may be issues of proof/evidence of having expressed the intention of creating a trust.
Stamp Duty on Trust Deed:
Once the trust is declared in writing (called Trust Deed or Deed of Trust), it attracts Stamp Duty liability. In most of the states in India, the leviable stamp duty is about 3% of the movable property that is being settled on trust.
Trust in respect of immovable property can be created only in writing and by paying the necessary stamp duty which is higher than the stamp duty payable in respect of trust of moveable property.
Generally, people create Trust in respect of money. In order to avoid stamp duty liability, the Trust is created with a small amount. The amount can subsequently be increased by gifts and other immovable property to the Trust after the Trust is created.
Registration of the Trust Deed: The readers should note the difference between the registration of the Trust Deed and the registration of the Trust itself. Both are different.
As such, there is no requirement of registration of a Private Trust, except when the trust is in respect of immovable property. The reason is simple. The creation of Trust requires the transfer of ownership of property to the Trustee. However, ownership of immovable property cannot be transferred except by registered document as provided under the Transfer of Property Act, 1882 read with section 5 of Indian Trusts Act, 1882. The net result is that for a Trust Deed where the transferred property is merely moveable property, no registration is compulsory. Mere execution/signing of the Trust Deed by Settlor of the Trust, accepted by the Trustees (by signing), all in presence of attesting witnesses is enough to create Trust. Notarization of the Trust Deed by the Public Notary is an added protection. Further registration with the Registrar of Assurances under the Registration Act, 1908 is optional but provides extra protection. But whenever the property being settled is large or there is in slightest doubt of any dispute, it is advisable that the Trust Deed be registered.
Precautions to be taken while preparing Trust Deed:
A Trust can be created only in respect of present property, and not future property or contingent interest in property. That means, for example, that a Trust cannot be created on income that the Settlor is likely to earn in the future. The final vesting of the Trust Property should be in compliance with the rule against perpetuity. To put it in simple words, as a thumb rule, the final vesting of the Trust property should not be beyond the life span of one or more persons living at the time of the creation of the Trust and twenty-one years after the life span of the last of any such living person.
As stated earlier, the Trust Deed should be duly stamped, and if not very difficult, should be registered. Registration will avoid many unwanted queries and problems (even though unjustified) raised by various Government authorities.
Preferably, there should be either one Trustee or three trustees so as to avoid any log-jam. The manner of utilization and investment of the trust property should be worded in detailed and wide terms to avoid any incapacity to deal with trust property. The Deed should take care of filling up the future vacancies of trustees on any account.
In case of any difficulty in the management of a Trust, changes can be effected with the consent of all the beneficiaries. But such beneficiaries should be competent to give consent under law. It is advisable to give the power to change the procedural matters of management of trust property to a majority of the trustees. Other than procedural matters, of course, can be changed with the consent of the beneficiaries competent to consent. If they are not competent to give consent, it has to be with the approval/sanction of the Principal Civil Court of Original Jurisdiction.