Secure What They’ll Inherit

A private trust is a legal arrangement in which a settlor transfer assets (Movable/immovable) into the trust and the trustees manage and administer these assets on behalf of the beneficiary as set out in a trust deed.

Unlike public or charitable trusts, which are created for a general public purpose, private trusts are created for the benefit of particular person.

A private trust involves three key parties:

• Trustor/Settlor: The person who creates the trust and transfers assets or property into it.
• Trustee: The individual or entity responsible for managing the trust’s assets according to the trust deed.

Beneficiary: The person or persons for whom the trust is created and who will benefit from the trust’s assets.

A trust may either be a discretionary trust or a non-discretionary trust.

Private trusts can be established for various purposes, including:

• Family Wealth Protection: To protect and manage family wealth, ensuring it is preserved and passed on to future generations. A common example is a trust that provides for the accumulation of income and capital for specified minor children or special child etc. Subject to their maintenance during this period, the accumulation must be handed over to them upon their attaining a specified age or, in the case of a female beneficiary, upon marriage; 
• Asset Management: To manage assets efficiently, often for minors, individuals with disabilities or those unable to manage their assets.
• Tax Planning: To take advantage of tax benefits and exemptions provided under the law.
• Charitable Purposes: Though typically for public benefit, a private trust can be partially used for charitable purposes, benefiting a specific group. 
• Govt Attachment and Creditors: Private trusts can protect assets from creditors and government claims if they are irrevocable, properly structured, and created without fraudulent intent. Revocable trusts offer no protection, and if the settlor retains control or creates the trust after incurring debts, the assets can be attached. Spendthrift clauses can protect beneficiaries’ interests from their creditors, but not from the settlor’s.

The Indian Trusts Act of 1882 lays down the foundation for private trusts, including:

• Creation of Trust: The Act stipulates that a trust must be created by a clear and unequivocal intention, typically through a written document known as the trust deed.
• Duties and Powers of Trustees: The Act outlines the responsibilities and powers of trustees, including the duty to act in good faith, manage the trust property prudently and adhere to the terms of the trust deed.
• Rights of Beneficiaries: Beneficiaries have specific rights under the Act, including the right to information about the trust, the right to ensure the trustee acts in accordance with the trust deed and the right to seek legal remedy if the trustee fails to do so.

From the definition of trust as given under the Indian Trust Act, it is clear that it is an obligation annexed to the ownership of property and the person who accepts the obligation is called the trustee. The obligation itself is designated as the trust. The trustee is, therefore, the full legal owner of the property. The trust has no corporate entity nor a distinct personality. The trust cannot by itself become a partner or own any property unlike the individual or a body corporate. It is only the trustee who is the legal owner of all the properties held on trust. The trustee can, therefore, carry on business either as a proprietor or as a partner in his capacity as the trustee; the trustee is, of course, accountable to the beneficiaries.

The following are the requisites for creation of a Trust:

1. The existence of the author/settlor of the Trust or someone at whose instance the Trust comes into existence and the settlor to make an unequivocal declaration which is binding on him.
2. There must be a divesting of the ownership by the author of the trust in favour of the trustee for the beneficial enjoyment by the beneficiary.
3. A Trust property.
4. The objects of the trust must be precise and clearly specified.
5. The beneficiary who may be particular person or persons.

A trust deed can be made on RS 500 stamp paper and there is no need od registration of same with sub-registrar if no immovable property is involed

If there is any immovable property involved from beginning then its registration is compulsory however if the immovable property is acquired later or added by will or inheritance then Trust can be registered at that time also. The registration process requires the submission of the trust deed, along with other required documents such as identity proof and address proof of the trustor and trustees.

A private trust cannot be created for perpetuity. The vesting of the property cannot be delayed either beyond the life time of one or more beneficiaries or beyond the age of majority of all the beneficiaries.

When registering a private trust, several essential documents must be prepared and submitted to ensure compliance with legal requirements. Here’s a concise list of the documents required:

1. Trust Deed: The foundational document outlining the trust’s objectives, parties involved, and terms. It must be stamped with the appropriate stamp duty based on the value of the trust property.
2. Photographs: Two recent photographs of all individuals involved in the trust, including the trustor and trustees.
3. PAN Cards: Permanent Account Number (PAN) cards of all individuals associated with the trust, which are necessary for tax and identification purposes.
4. Address Proof: Residential address proof of all individuals involved, such as an Aadhaar card, passport, or utility bill.
5. Identity Proof: Government-issued identity proof like Aadhaar card, passport, or driver’s license for all parties involved.
6. Trustee Authentication: If applicable, authentication documents from the trustees.
7. No Objection Certificate (NOC): Required if the trust’s registered office is on rented premises, issued by the property owner.
8. Utility Bill: A recent utility bill (e.g., electricity, water) as proof of address for the trust’s registered office.

• Taxation of Settlor: The settlor is the person who creates the trust and transfers his assets into it. From a taxation standpoint, if the trust is revocable, the income from the trust is treated as if it still belongs to the settlor, and it is taxed directly in his hands under Sections 60 to 63 of the Income Tax Act. In such cases, the trust is ignored for tax purposes.

 However, if the trust is irrevocable, the settlor relinquishes all rights and control over the assets, and the income generated by the trust is not taxable in the hands of the settlor. Instead, it is taxed in the hands of the trustee or the beneficiaries, depending on the structure of the trust.

• Taxation of Beneficiaries: The taxation of beneficiaries depends on whether the trust is a specific (non-discretionary) or discretionary trust.

Non-discretionary Trust

In a specific (non-discretionary) trust, Where there are more than one beneficiary of a private trust and the share falling to each of the beneficiary-are determinate, the assessments are to be made on the trustee(s) as a representative assessee under section 161. Such assessment will have to be made at the rate applicable to the total income of each beneficiary. Accordingly, separate assessment for each of the beneficiary on whose behalf the income is received by the trustee will have to be made. However, as per section 166, the Income-tax department has an option to make direct assessment in the hands of each beneficiary entitled to the income.

 The general principle is to charge all income only once. A Private Trust can either distribute/credit the Income to each beneficiaries who will offer their respective share as income in their respective returns or the Trust will offer the same as income of the Trust and once this second option is exercised, the beneficiary will not again be liable for tax on the same.

 The Assessing Officer should keep this point in view at the time of raising the initial assessment either of the trust or the beneficiary and adopt a course beneficial to the Revenue. Having exercised this option once it will not be open to the Assessing Officer to assess the same income for that assessment year in the hands of the other person. [Circular No. 157, dated 26-12-1974].

 Hence its always suggested to make one separate trust for one beneficiary so income tax will not create confusions

 Example to Show Income Tax Slab Rate Confusion

• Private Non-Discretionary Trust
• Trust Income: ₹10,00,000
• 2 Beneficiaries:
  • Amit – Own income: ₹5,00,000
  • Ankit – Own income: ₹10,00,000
• Each share of income is ₹5,00,000 from the trust (defined, equal shares)

 Income & Applicable Slabs

Amit’s Total Income = ₹5,00,000 (own) + ₹5,00,000 (trust) = ₹10,00,000

So, trustee has to apply lsab as per Amit total Income

Ankit’s Total Income = ₹10,00,000 (own) + ₹5,00,000 (trust) = ₹15,00,000

So, trustee has to apply slab on Ankit’s total income

Discretionary Trust

In a discretionary trust, where the shares or identities of the beneficiaries are not clearly defined, the beneficiaries are not taxed directly. Instead, the trustee pays tax at the Maximum Marginal Rate (MMR). Additionally, if beneficiaries receive capital (not income) from the trust, it is generally not taxed, subject to certain conditions under Section 56.

Where trust income includes business income also [Section 161(1A)]:

Where the income of the beneficiary in the hands of trustee being representative assessee consists of or includes profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate.