Trusts play a significant role in the legal and financial landscape of India, serving as essential tools for managing property, supporting charitable causes, and ensuring the orderly transfer of wealth. Governed by the Indian Trusts Act, 1882 ("Act"), the concept of a trust is legally defined under S. 3 of the Act as "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". In other words, a trust is a legal arrangement where a person, known as the settlor, transfers property or assets to a trustee, who manages them for the advantage of a third party- the beneficiary. This article explores the fundamental principles, types, and practical applications of trusts in India, making complex legal ideas accessible to everyone. A contract of Trust is one where a stranger to the contract i.e. the beneficiary may even be allowed to sue, thereby making it an exception to the concept of Doctrine of Privity as per the Indian Contracts Act, 1872.
In addition to immovable properties, movable assets such as cash, shares, jewelry, and other valuables items can also be transferred through a trust for the benefit of another person. The first step in creating a trust is drafting a trust deed—a legal document that formally establishes the trust.
Types of Trust
There are various types of trusts, including express trusts, implied trusts, public and private trusts, and secret trusts. Each of the said kind of Trust are created for their particular purpose and benefits, after considering the main objective that the Trustees wants to achieve.
1.Public Trust: Public trusts are generally established for the welfare of the general public including but not limited to charitable purposes, religious purposes, educational purposes, social welfare, etc. Public trusts are governed by specific statutes such as the Religious Endowments Act of 1863, or the Charitable and Religious Trust Act of 1920. Charitable and religious trusts are the most common type of public trusts in India because of its taxation and other benefits.
2. Private Trust: Private Trusts, are formed to conduct business/limited objective for particular individuals, families, or close friends. Private trusts may have beneficiaries who are closely related to the trust's founders. Private limited trusts are regulated by the Indian Trusts Act, 1882.
Besides private or public trusts, there are a sub-categories, which are formed with certain specific objectives:
- Revocable Trusts: A revocable trust is one which can be revoked during the lifetime of the settlor, i.e. the person executing the trust deed, this allows the settlor to regain control over the property and has the option to change the terms and conditions of the trust during his lifetime.
- Irrevocable Trusts: An irrevocable trust deed cannot be altered or regained during the lifetime of the settlor.
- Discretionary Trusts: The discretion to decide how the trust capital and income will be distributed is in the hands of the trustee and accordingly the income will be distributed among the beneficiaries.
- Testamentary Trusts: These types of trusts are formed under the will wherein the testator provide details regarding the trustee and the beneficiary of his/her property, this type of trust will become operative upon the death of the settlor.
- Charitable Trusts: Charitable trusts are formed with intent to work towards the cause of charity. These kinds of trust are established for working towards the fields of education, health, religion and social welfare.
- Special Needs Trusts: Special Needs trusts are formed for the benefit of the PWD community i.e. the persons with physical disabilities, concurrently running with the governmental benefits that they are eligible for. Both financial and public assistance to the disables is the main objective of this kind of trust.
Registration of Trust Deed:
Registration of Trust is basically the process of registering the trust under the Indian Trusts Act of 1882. This step ensures that the trust is a recognized body and operates within the framework of the law. Additionally, registering a trust provides protection to the beneficiary from any illegal or unauthorized activity performed on the part of the trustee with respect to the disbursement of the trust property.
The main reasons and benefits of a trust are as follows:
- It ensures appropriate control of trust operations, ensuring compliance with laws and regulations.
- Trusts work towards fostering non-commercial work in fields such as arts, science, education, and the environment for the sake of an improved society.
- Registered trusts can avail income tax benefits under sections 12A and 80G, promoting support and donations.
- Public trusts serve the general public, and registration ensures they act in the public's best interests.
- It grants a permit to carry on trust businesses under the legal environment.
- Trusts help build up sectors such as education, health care, social welfare, and the environment.
Taxation under the Income Tax Act, 1961:-
In India, Trusts are taxed under the Income Tax Act, 1961 which lays down several provisions about income tax exemption for various types of Trusts. These tax implications need to be understood by anyone who is holding a Trust or is planning to form one as they affect the financial efficiency of the Trust.
1.Taxation of Private Trusts: There are other forms of trusts under this category which consist of the revocable trust and the irrevocable Trust respectively. Tax treatments of both are dissimilar from each other. Income from a revocable trust is generally taxed in the hands of the Settlor, while income of an irrevocable Trust can be taxed in the hands of the Trust or alternatively in some cases, the Beneficiaries, based on the structure of the Trust, the Beneficiaries' citizenship, and the source of income.
2.Charitable/Public Trusts: Falling under the head of Public Trusts are exempted from the Tax liabilities under S. 11 of Income Tax Act, 1961. These Trusts must apply their income, or a portion thereof, towards their charitable objectives to qualify for these exemptions.
Section 92 Of The Code Of Civil Procedure, 1908:
Section 92 of the Code of Civil Procedure (CPC) offers a statutory relief to safeguard public charitable and religious trusts against mismanagement or violation. It enables the Advocate General or two or more interested persons (with leave of court) to present a suit in a specified civil court, requesting reliefs of removal or appointment of trustees, vesting of property, or directions by the court for trust management. Sub-section (3) allows the court to resort to the cy-pres doctrine so that trust property can be utilized for analogous public purposes where original intentions become impracticable. The section does not run where special legislation such as the Religious Endowments Act, 1863, covers the ground.
Case Laws:
The Hon'ble Supreme Court in the case of Sri Agasthyar Trust, Madras Vs. Commissioner of Income Tax, Madras[(1998)5SCC588] , dealt with a contentious issue of whether a trust registered was a public charitable trust or not and accordingly whether the trust is eligible for tax exemption under the Income Tax Act. The trust was created via a partnership deed dated 28th November, 1941, under which a significant percentage of profits were dedicated and used over the charitable and religious purposes. After approximately 3 years, i.e. in 1944 the said deed was altered by the trustee and the alteration included certain non-charitable purposes as well due to which the trust was considered to be non-charitable. Sri Agasthyar Trust, Madras approached the Supreme Court for declaring its trust as charitable stating that the said alteration in 1941 is illegal. The Supreme court while allowing the appeal, held that, "The 1941 deed created an irrevocable trust, especially once the revocation clause was eliminated in 1943. The trustee lacked the authority to modify the objectives by means of executing the deed from 1944. The 1944 deed was illegal and unenforceable in law; it was "a scrap of paper." The trust was set up in 1941 for charitable activities, and therefore it is a public charitable trust.". The Hon'ble Supreme Court further reiterated that the trustees are legally bound to act in accordance with the terms of the trust deed and the nature of the Trust are to be determined by strict interpretation of the clauses of Trust Deed.
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Conclusion
In conclusion, trusts are in India serves as an effective tool for assets management with various advantages inter alia in form of asset protection, estate planning, and exemption from tax. Both public and private interests play a significant role of achieving long term objectives of individuals, depending on the goal that the party wants to achieve. A well drafted and registered trust deed, without having any vague or ambiguity, not only avoids any potential disputes between the beneficiaries but also make sure that the intended benefits are fully realized by the beneficiaries. The concept of forming trust work well if legally valid, well-controlled, and only used for their purpose.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
