Anyone can create a trust in India. The Indian Trust Act, 1882 ('Act') governs the private trusts established in India. This Act is applicable to the whole of India. But, it does not apply to the Waqf, mutual relations of the members of an undivided family determined by any customary or personal law and religious or charitable endowments. Public trusts in India are usually governed by state-specific legislation, such as The Maharashtra Public Trust Act, 1950.
What is a Trust?
Let’s understand the concept of trust with the help of an example:
Mr X wants to pass his bungalow (property) to Mr Y for the benefit of his minor granddaughter. Mr X passes his property to Mr Y, because he reposes (has) confidence on Mr Y. This is nothing but the essence of a trust.
In simple words, a trust is nothing but a transfer of property by the owner (Mr X) to another person in whom the owner has confidence (Mr Y) for the benefit of a third person (Granddaughter of X).
The property doesn’t just mean real estate. It could be cash, shares or any other valuable asset. Further, the instrument by which this entire trust is declared/created is called “the instrument of trust” or the “trust deed”.
Parties in a Trust
- Author/Settlor/Trustor/Donor (Mr X): The person who wants to transfer his property and reposes confidence on another for the creation of the trust.
- Trustee (Mr Y): The person who accepts the confidence for the creation of the trust
- Beneficiary (Mr X’s granddaughter): The person who will benefit from the trust in the near future.
Objectives of a Trust in General
The main objective is that the trust should be created for a lawful purpose. For example, if Mr X had stolen money from a bank and given it to Mr Y with the intention of giving the money to poor children then, in this case the trust itself is void as the very main purpose is unlawful.
So how do we actually understand as to whether the purpose is lawful or unlawful? The answer to it lies in Section 4 of the Act. As per Section 4, all purposes are said to be lawful unless it:
- Is forbidden by law
- Defeats the provisions of law
- Is fraudulent
- Involves injury to another person or his property
- Immoral or against to public policy
Who can create a Trust?
A trust may be created by:
- Every person who is competent to enter into contracts: This includes an individual, AOP, HUF, company, etc.
- If a trust is to be created by on or behalf of a minor, then the permission of a Principal Civil Court of original jurisdiction is required.
Further, it also depends on the law in force that is prevailing at that particular point of time and the extent to which the author of the trust may intend to dispose of his property.
Types of Trusts
- Private Trusts:A private trust is for a closed group. In other words, the beneficiaries can be identified. Eg: A trust created for the relatives and friends of the author.
- Public Trusts: A public trust is created for a large group, i.e. the public in large. Eg: Non-Profit NGO’sCharitable Institutions for the general public.
Registration Mandates for a Private Trust
Section 5 of the Act states that with respect to:
- Immovable property: A private trust must be created by a non-testamentary instrument in writing. Further, the non-testamentary instrument needs to be signed by the author of the trust or the trustee and has to be registered. However, if the non-testamentary instrument is created by awill, registration is not necessary.
- Movable property: A trust in relation to movable property can be declared as in the case of immovable property or by transferring the ownership of the property to the trustee. Hence, registration is not mandatory.
Taxation of Private Trusts
From the purpose of income tax, private trusts can be categorized into two types.
Note 1:
- Exception:In the following case, individuals tax rates are applicable when:
- Trust is exclusively for the benefit of a dependent relative
- It is the only trust declared by the author
Note 2:
- Exception:In the following case, individuals tax rates are applicable when:
- None of the beneficiaries’ income exceed the basic exemption limit
- Beneficiaries’ are not a beneficiary under any other trust
Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice. It should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.
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