Private Trust

What is a Trust?

Section 3 of the Indian Trusts Act, 1882 has defined the term “ Trust” as an instrument used for protecting the interest of the settlor and safeguarding beneficiaries, who are mostly minors or not able to protect their interests.

The trust has 4 elements. They are

• The settlor: The person who creates the trust.
• Trustee: The person who holds the property for another’s benefit
• Beneficiary: The person who is benefited by the trust.
• Trust property: The property involved in the transaction

What is a Private Trust?

A private trust is constituted for the benefit of one or more individuals who are, or within a given time maybe, definitely ascertained. When the trust is established for family members, relatives, friends, etc. then the trust is called a Private Trust.

The formation of a private trust gives this transaction a legal form and guarantees that money is used only for the benefit of the family and in the way the trustee wishes it to be handled.

Ajay transfers ₹10 lakhs for the benefit of his family to a private trust that has been established. He appoints himself as a trustee to handle things in his lifetime and his brother as an alternative trustee. If anything happens to Ajay, then his brother will handle the trust property according to the trust deed.

Types of Private Trust

The implied Trust Registration is further classified into three kinds, namely

In this type of trust, the settlor can easily alter or terminate after its formation. It does not protect properties, because they can be taken away from this kind of trust. Here properties are not considered to be given away so they are taxed at the slab rate by the settler's side. It is merely an alternative of a will.

Here, it is not possible to withdraw the assets, but the settlor has complete control over trust norms as he/she can decide which beneficiary receives which assets and how much. If the settlor is the primary beneficiary, he or she will be taxed at the slab rate.

E.g. the settlor may provide 60% of the trust’s benefits to the 1st child and 40% of the trust’s benefits to the 2nd child. Similarly, the trust may be formed for a physically challenged child to ensure that he or she is properly cared for if the parents or guardians of the child die.

In this case, it is reversive, the trustee will decide which beneficiary should get which asset and in what proportion. The Settlor will decide the beneficiaries list alone. In other words, the beneficiaries alone will be disclosed by the settlor, not their proportion. The trustee will allocate the proportion for each beneficiary.

A well-drafted discretionary trust allows the trustee to include or exclude beneficiaries from the class, allowing the trustee greater flexibility to take decisions according to the circumstances. The beneficiaries cannot compel or influence the trustee to use any of the property for their benefit.

Benefits of a Private Trust

• If the property were managed under “Private trust ownership” then the creditors cannot claim.
• But, note that, if the trust is established only to run away from creditors then in those cases the court can order the attachment of the property lying in the trust.
• Similarly, if anyone wishes to protect his wife's and children's interest from creditors' claims, he can buy an insurance policy under the MWPA (Married Women Property Act). The policy purchased under this act will be created as a kind of private trust for spouse and children.
• Now, the creditor cannot make any claim on the sum assured of that insurance policy. An insurance company will keep it as trust property and the spouse and kids will be the only beneficiaries.

• The trustees of the private trust will manage the assets as per the trust deed. A lot of professional companies, banks, and corporates are providing trusteeship services.
• This private trust helps in the management of assets when there is an issue like increased age factor, health issues, in case of special beneficiaries, etc.

• When the assets are transferred to trust with clearly mentioned objectives, beneficiaries’ names and the way assets must be distributed among the beneficiaries, the trust will do the all appropriate things as mentioned in a trust deed.
• It would also help to prevent unnecessary court trials and the problem of having probate thereby contributing to cost savings.

Private Trust Deed

To establish a private trust, you will need to execute a deed called Trust deed (if the trust was created during your lifetime), and similarly, you can create trust through your will. Also, you have to appoint trustees to administer the trust.

The trust deed or will should specify the following features:

• The intention for creating the trust
• The objective of the trust
• Beneficiary or beneficiaries
• The trust property, which is to be transferred by the settlor to the trust during the creation of trust unless the trust is being stated under a Will, in which event, the asset will get transferred to the trust at the time of your death.
• If the trust was created in your lifetime, more properties can also be transferred to it, including under your Will.

It is also advisable to decide if the trust is to be:

• Discretionary (i.e. where the transfers will be at the trustee's discretion)
• Non-discretionary (where the settler itself explicitly specifies how the distribution of the trust property to the beneficiary is made)
• Revocable or irrevocable.

If your property is transferred to a trust during your lifetime, then the payment of stamp duty is mandatory and would also be required to be registered under the Indian Registration Act.

In case, if your property is transferred to the trust under your Will, then no stamp duty would be payable on the transmission of the property to the trust.

Checklist: Annual Compliances

Private trusts shall comply with the provisions set out in the Indian Trusts Act, 1882, the Income Tax Return Act, its Rules and Regulations, and other related laws.

If a Private Trust's total income exceeds ₹1,50,000 which is the limit for non-taxable income provided under the Income Tax Act, 1961, then the private trust should be mandatorily audited by the Chartered Accountant (CA).

Once the accounts of the private Trust are audited by a CA, the audit report should be made. The audit accounts report must be in Form No. 10B. This report must be attached along with the annual return of income under Form ITR-7.

The Foreign contributions report must be submitted by every private trust. There are two kinds of trust, one which obtains the foreign contributions and another one which does not. When a private trust receives any contribution from foreign, it must submit a report to the Secretary for the Ministry of home affairs, Government of india. The report must be properly certified by a CA and supplemented by the statement of income and expenditure, the record of receipts and payments, and the balance sheet within 9 months of the corresponding financial year. If no such contribution is earned during the last financial year then it is appropriate to send a 'Nil' Audit report.

When the private trust has performed the TDS for payment of salaries to the employees, it needs to annex the certificates of TDS to the persons on whose behalf TDS had been collected.

The beneficiaries of the trust have the right to avail the benefit of rent and profits of the trust property. The income obtained out of a private trust is available only to the beneficiaries and the taxability structure of that income varies concerning the kind of trust. The structures can be of two kinds, they are

• Taxation of Specific Trust:In this type of trust, the income is received by the representative assessee on behalf of a beneficiary. The exact share received by a beneficiary should be mentioned. For example, if a ‘P’ beneficiary receives 70% of the total income of the trust, the tax is deducted as per the rate applicable to the total income of the beneficiary. The tax will be assessed and recovered from the representative assessee, as income-tax laws require the duty to pay tax on trustees.
• Taxation of Discretionary Trust: In this type of trust, the individual shares of the beneficiaries are not determined, and the trustees will decide the allocation of the income among the beneficiaries. The income of such trust will be assessed in the hand of the trustees as per the tax rates under which they fall.

The above-mentioned rules are applicable only when the source of income of the private trust is obtained from its assets. When the income of the trust consists of profits of the business, the taxation is different.

If the funds from the private trust is used in the business, then the profit from the business becomes the property of the trust and the trustees (or author of the trust) cannot stake a claim. The whole income of the specific trust is then charged on the maximum marginal rate.

Private Trust Registration Process

The following steps have to be taken to register as a private trust in India,

• A Trust deed must be drafted on stamp paper of the stipulated value.
• The Trust deed must disclose the name of the trust, trust address, the character of the trust (i.e charitable or religious), the settlor name, and two trustees of the trust as well as the property type, i.e., either movable or immovable property.

Documents Required

• Details of all trustees of the trust along with their address and PAN.
• Certified true copies of the registration certificate of the institute’s
• Photocopy of income tax registration certificate.
• Last 3 years audit report of balance sheet and income & expenditure.
• The original copy of Trust Deed as proof of the creation of the Trust.

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