To reap the benefits of a Trust, certain prerequisites must be met, one of which is the registration process. As immediately as the registrar gives the trust deed his or her approval, the trust takes effect. Do you intend to register the trust? Let’s go deep!
What Is Trust in an Indian Context?
All registered trusts in India are governed by the Indian Trust Act of 1882, which also simplifies the related legal requirements. The Trust is usually described as a legal arrangement in which the Trust’s owner transfers the pertinent property to the pertinent Trustee. The goal of the Trust is to make sure that the assets of the Trustor are distributed among some of the beneficiaries in accordance with the terms stated in the Trust deed.
When the Trust is established, the grantor appoints a trustee who is responsible for managing the Trust and ultimately dispersing the grantor’s assets to the designated beneficiaries. Beneficiaries of trusts are frequently an heir, a family member, or charity in India. Trusts can be used to save taxes, make the probate procedure easier or avoid it altogether, and protect assets.
In India, there are several different kinds of trusts, including revocable;
- Revocable
- Testamentary
- Irrevocable
- Charitable
- Asset protection
- Spendthrift
- Special needs
What Are the Types of Trusts?
There are three types of trusts in India:
- Public Trust
- Private Trust
- Public Cum-Private Trust
Public trusts are divided into religious and benevolent trusts, whilst private trusts operate in accordance with the terms of the Indian Trusts Act, of 1882. Several of the important laws governing the enforcement of public trusts in India are the Religious Endowments Act of 1863, the Charitable and Religious Trust Act of 1920, as well as the Bombay Public Trust Act of 1950.
Private Trust
A private trust is a legal arrangement made for private, individual gain as opposed to a public or charity one. It was established to benefit one or more beneficiaries financially who are known to the Trustor. Private Trust has no charitable intent, and its advantages are only available to those who are named as beneficiaries. Such trusts are required to abide by the terms of the Indian Trusts Act 1882.
Public Trust
A public trust fundamentally serves the interests of all citizens. Public trusts, in contrast to private trusts, are established for philanthropic or religious purposes and do not operate in accordance with the Indian Trusts Act. Such Trust complies with the already applicable general law. These trusts may be created inter vivos by will, just like the private Trust.
Public-Cum-Private Trusts
The Public-Cum-Private Trusts have two purposes, as their name implies. They are permitted to spend their revenue for both private and public objectives. That suggests that either public or private individuals, or both, could well be beneficiaries of that very trust.
Documentation Required for Trust Registration
The following are important documents that must be arranged in order to register a trust:
- Pan details
- Trustee and settlor photos
- Trust registered address
- Proposed Name of trust
- Number of trustees
- Trustee and settlor
- Trust deed on proper stamp value
- No objection certification from the landlord if the property is rented.
- Trust deed’s objective
- Proof related to identity for trustor & trustee such as aadhaar card, voter ID, passport, dl
- Detail about the trustee and settlor such as self-attested copy ID & address proof and occupation
- Proposed rules that Will govern the trust
- Presence of settlor as well as two witnesses at the time of registration of trust
- Address proof related to the registered office such as a copy of the certificate of property/Utility bills
Registration Mandates for a Private Trust
According to Section 5 of the Act, the registration requirements for a private trust vary based on the nature of the property involved:
- Immovable Property:
– A private trust pertaining to immovable property must be established through a non-testamentary written instrument.
– The non-testamentary instrument must be signed by either the trust’s author or the trustee, and it is obligatory to register this instrument.
– However, if the non-testamentary instrument is created through a will, registration is not a mandatory requirement.
- Movable Property:
– In the case of movable property, a trust can be declared similarly to immovable property through a written instrument.
– Alternatively, the trust can be formed by transferring ownership of the movable property to the trustee.
– Notably, registration is not a compulsory requirement for trusts related to movable property.
Taxation of Private Trusts
The taxation of private trusts can be divided into two main categories: the taxation of private revocable trusts and the taxation of private irrevocable trusts.
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Taxation of Private Revocable Trusts
- Transfer of Income without Corresponding Asset Transfer:
– If income is transferred to a person without transferring the corresponding asset generating the income, the transferor is taxed on that income (Section 60).
- Revocable Transfer of Asset:
– Income arising from a revocable transfer of an asset is taxed in the hands of the transferor (Section 61).
3. Exception for Non-Revocable Trusts:
– Section 61 does not apply if the trust is non-revocable during the lifetime of the beneficiary, and the transferor derives no direct or indirect benefit from the income (Section 62).
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Taxation of Private Irrevocable Trusts
Under the Act, sections 160 to 166 outline important provisions regarding the taxability of private trusts. These sections, subject to judicial interpretation, establish an alternate mechanism for recovering tax from trustees on behalf of beneficiaries.
In a private trust, the beneficiaries are the real owners of the income. While tax should ideally be levied on the beneficiaries, the Act allows an alternate mechanism to recover tax from trustees.
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Taxability of Private Determinate Trusts
– Status of the Trust:
– The status of the trust takes the same status as the beneficiaries to the extent of their share.
– Residential Status:
– Residential status aligns with that of the beneficiaries to the extent of their share.
– Taxability:
– Tax can be levied on beneficiaries directly or trustees in a representative capacity. No double taxation occurs.
– Benefits:
– Trustees have access to the same benefits, deductions, or allowances as individual beneficiaries.
– Rate of Tax:
– Tax rates depend on whether it is taxable in the hands of beneficiaries or recovered from trustees. Special rates may apply to specific income types.
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Taxability of Private Discretionary Trusts
– Status of the Trust:
– The status of the trust aligns with that of the beneficiaries if they share the same status.
– If beneficiaries have different statuses, the trustees are considered an assessable unit, potentially taxed as individuals.
– Residential Status:
– Residential status aligns with that of the beneficiaries.
– Taxability:
– Tax is paid by trustees in a representative capacity under section 164(1).
– In cases where income is distributed to beneficiaries, tax can be recovered from both trustees and beneficiaries.
– Benefits:
– Trustees may not have access to all benefits available to individuals unless specific conditions are met for a beneficiary.
– Rate of Tax:
– Income of an indeterminate trust is taxed at MMR under section 164(1).
– Exceptions may apply, and special rates for specific income types continue to apply.
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Step-by-Step Guide to Creating a Trust in India
The standard method for trust registration consists of the following steps:
Step 1: Give the Trust an Apt Name
First and most important step in the Trust registration process is to choose a name for such a proposed Trust. Consider the following tips in mind while serving such a purpose to eliminate any complications:
- The name must adhere to the provisions of the Emblems and Names Act of 1950
- Whenever it comes to the Trademark Act, there must be no violations
- The name should maintain its uniqueness.
Step 2: Create a Trust Deed
The creation of a Trust Deed is an important task as it is the only thing that makes the Trust lawful. As in general, the following clauses are combined in the trust deed:
- The purpose for which the Trust was created is reflected in the Object clause
- This clause provides the Trust the freedom to receive contributions, donations, and subscriptions from any person, organization, or benevolent cause in the form of money or real estate without incurring any debt. This clause also specifies that any contributions that interfere with the Trust’s purpose are not permitted
- Investments: The investment clause outlines the requirements for the trust fund’s administration to be legal and efficient. Additionally, this clause set out guidelines for the efficient distribution of spare assets that aren’t being used but may generate extra income through investments
Conclusion
When all of the trust’s assets are properly dispersed to beneficiaries or another similar body, either straight or through resettlement, a trust is deemed wound up. Whenever the Trust is dissolved, the concerned parties must determine any tax liabilities brought on by the transfer of assets. In order to reduce the likelihood of a legal dispute, this article also imposes the necessity that any such legal obligation is carried out with the approval of the charity commissioner, court, or even other law.
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