Trust and It's Types

S.No.

Aspect

Description

1.     

Definition of Trust

A trust is an obligation annexed to the ownership of property, arising out of confidence reposed in and accepted by the owner for the benefit of another person (beneficiary).

2.     

Types of Trusts

Types of Trust:

Private Trust: The trust created for the benefits of one or more individuals that can be particularly ascertained. These trusts are accustomed to act as per the provision of Indian trust Act, 1882.

Public Trust: The trust which is created for the benefits of public at large or where the beneficiary is incapable of ascertainment is known as public trust. These trusts are essentially governed by charitable and religious trust act,1920, the religious endowments act, 1963, the societies registration act,1860, etc. but not governed by Indian trust Act, 1882.

3.     

Categorisation of Private Trust

Private Specific (Determinate) Trust: These are the private trusts whereby the beneficiaries and the shares of beneficiaries are specified.

Private Discretionary Trust: These are the private trusts whereby the beneficiaries or the shares of beneficiaries are not specified.

Revocable Trust: Revocable Trust is a trust that can be cancelled or revoked by its settlor anytime during his life.

Irrevocable Non- Discretionary Trust: Assets cannot be withdrawn here. Settler has complete control over trust norms he can decide which beneficiary receives which asset, and in what proportion. If the settlor is the primary beneficiary, he she is attached at slab rate. For example- The Settlor may grant 50% of the trust’s benefits to 2nd child. Or the trust may be established for handicapped child to ensure that he or she is properly cared for if the child’s parents or guardians die.

Irrevocable Discretionary Trust- In this case, Settlor lets the trustee decide which beneficiary gets which asset and in what proportion. The Settlor only decides beneficiaries. In other words, while the beneficiaries are identified, their beneficial interest in the trust is not ascertained upfront. A well drafted discretionary trust allows the trustee to add or exclude beneficiaries from the class, the trustee greater flexibility to address changes in circumstances. The beneficiaries cannot come till the trustee to use any of the trust property for their advantage.

4.     

Benefits of Private Trust

 Effective and efficient mode of managing and passing of family assets. For example – Father can create a private trust in the name of son for passing assets.

In creation of Trust, court does not oversee the process unlike at the time of execution of will. Executing a will is the technical term for signing will and making it legally binding. The will is filed with a petition, asking the court to approve the bill and put it into effect. The person named as the executor in the will is in charge of moving the will through the probate process and doing all work of managing and distributing the assets.

Safeguards interest of family members including maintenance of members with special needs.

Avoids family disputes.

Under trust, conditions can be attached such as attainment of particular age/ fulfilment of authors wishes.

5.     

Benefits of Public Trust

High level of public trust fosters strong community bonds and social stability.

Trust in government institutions enhances compliances with laws and regulations, leading to more effective policy implementation.

 Trust in economic institutions and systems encourages investments, stimulates economic activity, and foster a stable business environment.

 During emergencies, public trust ensures quicker and more efficient responses, as people are more likely to follow guidance and support collective efforts.

Trust in public institution motivates people to participate in civic activities, such as voting and community services, strengthening democratic processes.

6.     

Taxation of Private Trusts

Individual Beneficiaries: If the shares of the beneficiaries are determinate, the income of the trust is taxed in the hands of the beneficiaries, according to their respective shares.

Discretionary Trusts: If shares are indeterminate, the trust itself is taxed at the maximum marginal rate.

Settlor’s Taxation: If a trust is revocable, the income may be taxed in the hands of the settlor.

7.     

Purpose of Private Trust

 Use of assets vs. transfer of assets

 Succession of planning

 Ownership succession

 Protection of special purposes

Wealth management

 Taxation

8.     

Key Terms

Below mentioned are the key terms of Trust:

Author of the Trust: The person who creates the trust.

Trustee: The person who accepts the confidence and manages the trust property.

Beneficiary: The person for whose benefit the trust is created.

Trust Property: The subject matter of the trust.

9.     

Creation of Trust

Trusts can be created for any lawful purpose. Trusts of immovable property must be in writing and registered. Trusts of movable property can be created through transfer of ownership.

10.   

Who Can Create Private Trusts

Any person competent to contract can create a trust. Minors can create trusts with permission from a Civil Court of original jurisdiction.

11.   

Benefits of Trusts

Trust is designed to protect assets and benefit members of a group/family beyond lifetime. When assets of a group/family are in a trust, group/family members no longer have legal ownership of them – the assets are owned by the trustees, for the benefit of group or family members.

People usually set up a trust to get some benefit from no longer personally owning an asset. A trust may be useful to:

Protect selected assets against claims and creditors-for example, to protect a family home from the potential failure of a business venture.

Set aside money for special reasons, such as child or grandchildren.

Ensure children, not their partners, keep their inheritances.

Manage the risk of unwanted claims on estate when one dies-such as from a former partner.

12.   

Challenges of Trusts

Below mentioned are some of the challenges of Trust:

Cost: Initial setup and ongoing administration can be costly.

Complexity: Legal and tax implications can be complex and require professional management

Regulatory Compliance: Must comply with relevant laws and regulations, which can vary by jurisdiction.

Conflict of Interest: Potential for conflicts among trustees or between trustees and beneficiaries.

13.   

Procedure for Registration

Below mentioned are the steps for registration of Trust:

Drafting the Trust Deed: Prepare a trust deed detailing the terms of the trust.

Signatures: The deed must be signed by the author of the trust and the trustees.

Stamps and Fees: Pay the applicable stamp duty.

Registration: Register the deed with the local Registrar of Assurances by submitting required documents and paying the registration fee.

14.   

Duties of Trustees

Below mentioned are some of the duties of Trustees of the Trust:

Execute the trust and fulfil its purpose.

Inform themselves about the trust property.

 Protect the title to trust property.

Be impartial and prevent waste of the property.

Keep accounts and provide information.

15.   

Powers of Trustee

Below mentioned are some of the duties of Trustees of the Trust:

Right to reimbursement of expenses.

·         Right to apply to Court for opinion on management of trust property.

Power to sell trust property and reinvest.

Power to apply property for the maintenance of minors.

16.   

Liabilities of Trustees

Below mentioned are some of the duties of Trustees of the Trust:

 Liability for breach of trust.

 No set-off allowed for trustee.

Non-liability for co-trustee’s default unless contributed to it.

Trustees must act together and cannot delegate responsibilities.

17.   

Rights of Beneficiaries

Below mentioned are some of the duties of Beneficiaries:

Right to rents and profits. 

Right to specific execution and transfer of possession.

  Right to inspect trust documents and accounts.

Right to proper trustees and to sue for execution of the trust.

18.   

Extinguishing a Trust

Trusts can be extinguished by fulfilment of its purpose, revocation by the author (under certain conditions), or destruction of trust property.