Private Trusts in Estate Planning: A Comprehensive Guide

Private Trust-an Introduction

A private trust or family trust was a very popular instrument to deal with inheritance tax in Indian before repeal of Estate duty in 1985. However it is considered to be the extreme important tool in western/developed world even today as most of these Countries still have inheritance tax provision in place.

In India, people still love to form private trusts not for tax planning purposes but for settling family estate to the next generation in most appropriate and undisputed manner as compared to other of succession/estate planning like gifts, Will etc. 

In this series of Succession/Estate Planning- Introduction, importance and taxation for all form of Estate planning including FEMA matters relating to such planning, this is Part-1 of this series. For other parts, Contact Best Chartered Accountant Firm In India.

What is a Private Trust?

A “trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. (Section-3 of by Indian Trust Act, 1882)

A Private trust can be used for several purposes like asset protection from undesirable elements, family holding over business and most importantly for the purpose of holding of assets and transferring assets to the next generation. A private trust is established for the benefit of the Beneficiary and consists of a Settlor, Trustees, and Beneficiaries and is Governed by the Indian Trust Act, of 1882.

Registration of Trust is mandatory if it is being created in relation to immovable property while in case of movable property registration is not mandatory if such movable property has been transferred to the trustee/trustees. (Section-5 of by Indian Trust Act, 1882)

How the Trust is created

A private trust is created when the author of the trust indicates with reasonable certainty by any words or acts

(a) An intention on his part to create thereby a trust,

(b) The purpose of the trust,

(c) The beneficiary, and

(d) The trust-property, and transfers the trust-property to the trustee. (Unless the trust is declared by will or the author of the trust is himself to be the trustee). (Section-6 of by Indian Trust Act, 1882)

Parties to the Private Trust

• The Settlor is the person whose assets are contributed to the trust. He is known as the ‘author of the trust’ who must be competent to contract. (S-7 of ITA, 1882)
• The trustee is the person who accepts the confidence of managing and administering the trust property. He is the legal owner of the assets, as there is no concept of equitable ownership. —Every person capable of holding property may be a trustee; but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract. A trust is accepted by any words or acts of the trustee indicating with reasonable certainty such acceptance. No one is bound to accept a trust. (Section-10 of by Indian Trust Act, 1882)

A trustee who has accepted the trust cannot afterwards renounce it except (a) with the permission of a principal Civil Court of original jurisdiction, or (b) if the beneficiary is competent to contract, with his consent, or (c) by virtue of a special power in the instrument of trust. (Section-46 of by Indian Trust Act, 1882)

A trustee cannot delegate his office or any of his duties either to a co-trustee or to a stranger, unless (a) the instrument of trust so provides, or (b) the delegation is in the regular course of business, or (c) the delegation is necessary, or (d) the beneficiary, being competent to contract, consents to the delegation. (Section-47 of by Indian Trust Act, 1882)

In the absence of express directions to the contrary contained in the instrument of trust or of a contract to the contrary entered into with the beneficiary or the Court at the time of accepting the trust, a trustee has no right to remuneration for his trouble, skill and loss of time in executing the trust. (Section-50 of by Indian Trust Act, 1882)

A trustee may be discharged from his office only as follows:—

(a) by the extinction of the trust;

(b) by the completion of his duties under the trust;

(c) by such means as may be prescribed by the instrument of trust;

(d) by appointment under this Act of a new trustee in his place;

(e) by consent of himself and the beneficiary, or, where there are more beneficiaries than one, all the beneficiaries being competent to contract; or

(f) by the Court to which a petition for his discharge is presented under this Act.

(Section-71 of by Indian Trust Act, 1882)

• The beneficiary is the beneficial owner of the assets for whose benefit the trust has been established and must be a person capable of holding property. (Section-9 of by Indian Trust Act, 1882)

Besides the above discussed key persons in a trust, a trust may also have a protector and an advisory board. The protector of the trust is entrusted with the responsibility of ensuring that the directions of the Settlor are given effect and that the trustees administer and dispose of the properties in an appropriate manner. The protector must also ensure that the trust is carried on for the purpose it was originally established. An advisory board is set up under a Trust Deed to advise the trustees. However, the trustees are not bound by the advisory board.

Type of Private Trust:

• Determinate or Specific Trust where the share of each beneficiary is determinate at the time creation of trust or trustees have no discretion with regard to the share of each beneficiary in the income and corpus of the trust as per the trust deed.
  
• Indeterminate or discretionary Trust where the share of each beneficiary is indeterminate at the time creation of trust or trustees have discretion with regard to the share of each beneficiary in the income and corpus of the trust as per the trust deed.
  
• Revocable Trust Where the author at his/her will revoke the trust arrangements as per the terms of trust deed.
  
• Irrevocable Trust where the author cannot revoke the trust arrangements or absence of revocation clause in trust deed.
  
• Testamentary Trust where the trust came into existence through the will of the testator after his/her death.
  
• Living Trust where the trust came into existence during the life time of the testator.
  
• Indian Trust where the trust is registered and under jurisdiction of the Indian Trust Act, 1882.
  
• Foreign Trust where the trust is registered and under foreign jurisdiction.
  
• Combination of above

Why Private Trust ?

• A Private Trust is effective tool for succession planningas the settlor can see its implementation during his lifetime, enabling corrective action to be taken in a timely manner.
• Distribution of Trust Assets does not require a probate from the High Court, unlike in case of a Will, which is an expensive as well as a lengthy process.
• Distribution of assets through Will is always prone to estate duty/inheritance tax unlike in a family trust. we are not new to Estate Duty regulations, having prevailed in India since 1953 until 1985 with some asset classes being subjected to 85 percent duty at the time of its repeal and currently given the economic inequality and increasing need for public spending by the Government, reintroduction of the erstwhile Estate Duty regulations in an altered form may soon be a reality.
• Settlement of trusts provides the flexibility to an individual to distribute assets during the life as well as posthumously while a Will can be changed at any time and hence, an element of uncertainty prevails, which takes away most of the advantages that succession planninghas to offer.
• A Trust demonstrates family cohesiveness to the world and provides effective joint control of family wealth through the Trust deed i.e. a Trust provides united control and effective participation of all members in the decision-making process, leading to mitigation of disputes and legal battles. It can also ease the path for separation within the family, making it a smooth and defined process.
• To achieve a specific purpose like study of children etc
• To protect the family assets from potential business risks
• To achieve at most flexibility in distribution of family assets with least disputes.

Importance of Trust Deed

Trust deed is an instrument by which the private trust comes into existence. It basically spell out various terms and conditions according to which the trustee/trustees shall execute the trust enforced upon them by the author of the trust. A clearly defined trust deed shall minimise the probable litigation and execute the trust to its fullest meaning.

Disclaimer: This blog is for private circulation, the views is the personal views of the author, and would not be responsible for any action taken based on this, without any consultation.

Authored By: CA Sanjay Kumar Agrawal 

Email: sanjay@dsrvindia.com 

M: +91 9810116321