Creating a trust in India is a legally recognized way to manage and distribute assets for the benefit of individuals or communities. The Indian Trusts Act, 1882 (“the Act”) governs the establishment and administration of private trusts across India. However, it does not apply to Waqfs, personal or customary laws governing Hindu undivided families, or religious and charitable endowments. Public trusts, on the other hand, are regulated by state-specific laws, such as The Maharashtra Public Trust Act, 1950.
What is a Trust?
A trust is a legal arrangement where the owner of a property transfers it to another person or entity, who manages it for the benefit of a third party.
For example, if Mr. X wishes to transfer his property to Mr. Y for the benefit of his minor granddaughter, it forms a trust. Mr. X (the owner) places confidence in Mr. Y (the trustee) to manage the property responsibly for the future benefit of his granddaughter.
Trusts can hold various forms of assets, including real estate, cash, shares, or any other valuable property. The document that formally establishes a trust is called a trust deed or instrument of trust.
Parties Involved in a Trust
- Author/Settlor/Trustor/Donor (e.g., Mr. X) – The person who creates the trust and transfers the property.
- Trustee (e.g., Mr. Y) – The person entrusted with managing the trust assets.
- Beneficiary (e.g., Granddaughter of Mr. X) – The person for whose benefit the trust is created.
Objectives of a Trust
A trust must be established for a lawful purpose. For instance, if stolen money is placed in trust for charity, such a trust would be invalid.
According to Section 4 of the Act, a trust’s purpose is deemed unlawful if it:
- Violates any existing law.
- Defeats legal provisions.
- Involves fraudulent activities.
- Causes harm to individuals or property.
- Is immoral or goes against public policy.
Who Can Create a Trust?
A trust can be created by:
- Any individual or entity legally capable of entering into contracts (including individuals, Hindu Undivided Families (HUFs), companies, and associations).
- If the trust is created for or on behalf of a minor, permission from the Principal Civil Court of original jurisdiction is required.
- The ability to create a trust also depends on prevailing laws and the rights of the settlor to dispose of their assets.
Types of Trusts
1. Private Trusts
- Formed for a specific group of beneficiaries (e.g., family members or friends of the trust creator).
- Beneficiaries can be clearly identified.
- Example: A trust created for the education of a settlor’s children.
2. Public Trusts
- Created for the benefit of the general public.
- Examples: Charitable institutions, non-profit NGOs, and religious organizations.
Registration of a Private Trust
As per Section 5 of the Act, registration requirements vary based on the type of asset held in trust:
- For Immovable Property:
- Must be created through a written, non-testamentary instrument.
- Must be signed and registered by the author or trustee.
- If established via a will, registration is not mandatory.
- For Movable Property:
- Can be declared similarly to an immovable trust.
- Alternatively, ownership of the asset must be transferred to the trustee.
- Registration is not mandatory in this case.
Taxation of Private Trusts
Private trusts are categorized for taxation purposes based on their structure:
- Taxed at Individual Slab Rates – If the trust:
- Exists solely for the benefit of a dependent relative.
- Is the only trust declared by the settlor.
- Taxed at Beneficiary’s Individual Tax Rate – If:
- No beneficiary’s income exceeds the basic exemption limit.
- Beneficiaries are not part of any other trust.
Frequently Asked Questions (FAQs)
Q1: What is the primary purpose of creating a trust?
A: A trust helps in managing and distributing assets for a specific purpose, such as protecting family wealth, supporting charitable causes, or ensuring financial security for dependents.
Q2: Is it necessary to register all trusts in India?
A: Private trusts holding immovable property must be registered, whereas trusts dealing in movable assets do not require registration.
Q3: How is a public trust different from a private trust?
A: A private trust benefits a defined group of people, whereas a public trust serves a larger community, typically for charitable or religious purposes.
Q4: Can a minor create a trust?
A: No, a minor cannot create a trust. However, a trust can be created for the benefit of a minor, with court approval if necessary.
Q5: What are the tax implications of a private trust?
A: A private trust is taxed either at individual slab rates or at the rates applicable to its beneficiaries, depending on the structure and purpose of the trust.
By understanding the Indian Trusts Act, individuals and organizations can make informed decisions about asset management, ensuring both compliance and financial security.
