One of the major misconceptions that people often have that only high net worth people or elite class is capable of creating trust or transferring trust, whereas trust can be created as well as developed by any normal person too. Trusts can be either private or public owned. Public Trusts are usually owned by the religious or social institutions under specific legislation like Gujarat Public Trust Act, Bombay Public Trust Act etc. and the Indian Trust Act, 1882 speaks of only private trusts. This Act is not applicable on Waqf (Charity lands), religious or any other charitable endowments.
Further moving ahead with the Act, one needs to understand the basic meaning of “Trust”, with help of an example; if there is Mr. A (uncle) who wants to transfer his property (land) to Mr. B for benefit of his minor nephew, so the owner Mr. A has passed the property to Mr. B on the pretext of faith, this is nothing but essence of “trust”. So, basically trust can be regarded as transfer of property by the owner to another person, on whom the owner has confidence and faith that the property shall remain with the other person for the benefit of the third person.
Here, property doesn’t mean only real estate, the term “property” includes shares, documents, machinery, debentures, cash and any other valuable asset which can be liquidated into other asset or valuable form. The instrument through which the trust is declared or created is known as “Trust deed”. This is also known as “trust money” which is the property or money that is transferred to the trustee for the benefit of third party (beneficiary).
Section 4 of the Indian Trust act 1882, defines “Lawful Trust” which means a lawful trust is one which is permitted by law, not against the provisions of law, is not fraudulent in nature, the court should not regard it as immoral or against the public policy and lastly, it should not involve any kind of injury or harm to any person or property of another.
Who Can make a Trust ?
When any person (trustor) has placed or rested his trust (confidence) in another person (trustee) with respect to his money or property for the benefit of a third person (beneficiary), this process leads to creation of a trust. One of the primary reasons of creating a trust is that, it helps the author (trustor) to manage his property along with someone else for the benefit of third person, and thus trust is different from creating a “Will” as there is no need of certification or authorization and thus legal consent can be obtained easily. Some of the other common reasons for creation of trust are-
- To claim income tax exemption under section 10 and 11 which is applicable on income from charitable and religious endowments
- To secure the charitable or religious sentiments of the trustor which ensures a public benefit
- For better management and preservation of the property
- For welfare of family members/ other relatives dependent on the owner (settlor) of trust.
- Trust can also be created for regulation of provident fund, gratuity fund or superannuation fund or any other fund founded for the well-being of the employees.
A trust can be created by any person, who is competent as per the eligibility criteria provided under Indian Contract Act, 1872. In fact, there is no boundation for creation of Trust. Any individual who is competent to contract, company, Hindu undivided family are capable of creating a trust. In case a trust is being created by a minor or on behalf of a minor, then authorization of a Principle Civil Court of original jurisdiction is a pre-requisite for creation of such trust. Lastly, it depends on the law of the land that is in existence at that point of time when the trust is being created and to what extent the author of trust is willing to dispose his property.
Essentials of a Trust –
It is important to know elements of a trust that are necessary, they are as follows-
Section 6 of the Act states the essential of a Trust, and it further mentions about how an author can create a trust, assign the trustees and give them the monetary assets that needs to be controlled by the trust. The trust can be explicit or implied and it basically comprises of-
- There should be intention to create trust on part of author
- Intention of creating trust
- Monetary asset is assigned for benefit of trustee
- The author gives control or transfer the trust property to the trustee
- Trustee has the option to claim expenses and salary from the benefits of the trust for his work
The basic requirement for creating a trust, is that the author should explicitly by words or conduct make it clear that he has reasonable intention to create trust. It should be noted that the following essentials should be certain for applying the provision of valid trust. They are-
- Author’s intention
- Objective to create valid trust
- Trust property
In certain cases, like where a property transfer is done within the same family, then it will not be considered as a valid trust as the beneficiary to the trust was not certain. Even in cases of debt where the owner of the property gives the property to the creditor till his debt is paid or else it will be transferred to creditor, then also it will not be considered as Trust, but it will be a transfer of property by conditional sale.
Parties in a Trust –
As stated above in the definition, it can be deduced that there are three parties in a “Trust”. They are-
- Author/settlor/ trustor of the trust– The person who has the intention to transfer his property or asset to the trustee for creating a trust, for the benefit of a third party i.e Beneficiary.
- Trustee of trust– Any person who is competent to make a contract, upon whom the property is being transferred by the author. The persons who are mentally unstable, insolvent or not attained the age of majority cannot be a trustee. The trustee has been given the right to accept or reject the trusteeship offered, but once the trusteeship is accepted and attained then the trustee shall assume all the rights, duties and liabilities of the property transferred.
- Beneficiary of trust– Beneficiary is the third party for whose benefits the property is being transferred to the trustee. This person avails the benefits from the trust in the near future as beneficiary and this means that person holding the property can be a company, individual or firm/corporation and even an unborn person.
The beneficiary has rights to receive rents and profits of the trust as stated in the trust deed and further execution of trust under the condition that on death of the trustee and no subordinate trustee is appointed. Apart from that, the beneficiary has the power to compel the trustee to do or abstain from doing a particular thing on the condition to protect any breach of trust.
Kinds of Trust –
There are different kinds of trust prevalent and some of the important ones are-
- Express Trust– In case the trust is created verbally or in written form in an expressed term, wherein the process of trust is followed properly and person is appointed as trustee of the trust, then it would be vaunted as an express trust. If the property is movable then the property should be registered first and then legally transferred in the name of trustee.
- Implied Trust – This trust is also created by parties but in covert manner, as the parties don’t expressly declare that they are creating a trust, but it is understood from the conduct of the parties. The parties’ conduct will create presumption as well as indicate the intention to create trust.
- Public and Private Trust – A public trust by its name signifies that it is created by the government for the benefit of public at large or for a specific set of public. It is not necessary that the trust should be serving the entire public, as it may be created for a particular class of public and then also it will be known as public trust. Some of the common causes for which a public trust is created are health, social service, medical facilities, education, training etc. Whereas, Private trust is created for specified person, so as to ensure that no one person will avail the benefit of the property. Such a trust is enforced only at the action of intended beneficiary.
- Secret Trust – There are some trust where nothing is disclosed, neither the existence of trust nor its terms and conditions and thus is called a secret trust. There are certain trusts where the existence of the trust is disclosed but the terms are kept as closed and so that kind of trust acts as “half secret” trust. Although, this kind of trust can be counted as abuse of the concept of “trust”.
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Benefits of Creating a Trust –
There are many benefits of creating a trust. Some of the most significant ones are-
- Creation of trust helps in better planning of tax as the author is no more taxed over the trust property, instead the trustee is taxed for the trust property. An organized and well administered trust can offer many tax rebates and substantial efficiencies.
- Making a will is often tiresome and needs a lot of disclosure of property, whereas making trust instead would help in maintaining the confidentiality of the author as not much disclosure is required and the person can also save estate duty over the trust property.
- One can protect their assets via creating a trust. In simple words, the assets which are converted into trusts, and they will no longer be property of the author and it cannot be seized when the settlor (author) faces any financial problems. But the court can set aside the trust deed in certain cases and return the property to the settlor but it still acts as a risk-mitigation approach.
- Trust helps in avoiding the forced heirship, as this concept is famous in many communities where the property of the deceased person needs to be distributed to their next kin or children, and in cases where the person doesn’t want to share his property with his kin or relatives, then he may opt for better and wider distribution by creating a trust.
- Trust can also aid in providing support to the weak, as people who are unable to manage their own affairs and children or don’t have the means to do so, then the trust may offer independent help to such people.
- One of the common motives setting up of trust is to ensure the protection of family assets or help them in growing, any family would like to grow their assets rather than accumulating in few hands, and thus trust is one of the prominent ways to do so and offer flexibility to property and even help the beneficiaries in times of need.
- Another advantage of trust is that it offers increased flexibility to a property, by creating a discretionary trust where the property is capable of adapting to the changing norms and demands. In this case, settlor can choose a class of beneficiaries and give the discretionary powers to the trustees to distribute the asset as they wish to do. Thus, the beneficiaries only have a contingent interest in this kind of trust.
Registration Mandates for a Private Trust
Section 5 of the Act describes the registration procedure for creating trust of an immovable as well as movable property.
- Immovable property- As the act talks of only private trust, a trust can be created for an immovable property by a non-testamentary instrument given in writing. Further, the non-testamentary instrument is to be signed by the author of the trust or the trustee and then the trust has to be registered. However, in case where the non-testamentary instrument is created via Will, then registration is not required.
- Movable property- in case of movable property, the trust can be declared in the same way as the immovable property or by transferring the ownership of the property to the trustee completely. Thus, if the transfer is done then registration is not mandatory.
Power and Rights of Trustee –
The rights and powers of the trustee are as follows-
- Right to title– One of the primary rights of trustee is that he is entitled to possession of the trust deed and all the other documents with regard to title of the trust property.
- Right to be indemnified for breach of trust– In case there is breach of trust and other person has gained benefit from the breach, then he is bound to indemnify the trustee, but if the trustee was involved in the breach of trust, then no such indemnity will be available for him.
- Right to examine the accounts– Once the duty of the trustee is completed, then he shall have the right to examine and settle the accounts of the trust property
- General authority of trustee– Every trustee has been given some general authority that is reasonable to protect, realize and benefit the trust property and even for the beneficiary who is not yet competent to contract.
- Power to convey– Section 39 of the Act, gives this power to trustee and once the formalities of the sale are complete, the trustee is free to convey the property as may be necessary according to him.
- Power to deal with the trust property– When there are number of trustees and any one of them disclaims the position or dies then the authority over the property shall be exercised by the continuing trustees, but it won’t apply in those cases where the deed has specifically mentioned the number of trustees required to deal with the property and its operations.
- Power to sell trust property– If the trustee has been given the power to sell the trust property, then he may sell the property subject to the charges and trustee may sell the property in one go or even in installments or by conducting an auction or private one. But this can be done, only if it is explicitly mentioned in the trust deed.
Liabilities of a Trustee –
Trustee has certain set of liabilities also, which are given from section 23 to 30 of the Indian Trust Act 1882. They are-
- Liability for breach of trust- Where breach of trust is committed by trustee, then he is liable to pay for the damages caused to the beneficiary or the trust property, unless the loss incurred was due to the fraud committed was induced by the beneficiary. The cases where the trustee won’t be liable to compensate for committing breach are-
- When he has received interest.
- When it can be presumed that he must have received the interest.
- Where the trustee should have received interest.
- No set off for liability caused- In case of breach of trust, there can be either loss or it can also bring profits, but the trustee doesn’t have the liberty to reduce his liability by setting off the loss incurred. In short, the loss has to be borne by the trustee and in case of profit it will go to benefit of the trust.
- Liability for co-trustees- The general rule of trustee was that he will not be liable for the breach of trust committed by any of his co-trustees. But there are some exceptional cases where he will be liable for the act of co-trustees too. They are-
- Section 26 of the Act states that the trustee shall be liable for the acts of his co-trustees.
- Where the trustee has delivered the trust property of his co-trustee without looking into its proper application.
- Where the trustee was aware that breach was committed by the co-trustee or it was intended to commit and he hasn’t taken any proper steps to protect the interest of beneficiary even after knowing the intention of co-trustee.
Thus, from the above content it must have been clear that Indian Trust Act, 1882 governs only private trusts. It further talks about the parties that are involved in creation of a trust deed and how the settlor can relinquish his rights over the property and hand it over to trustee, until the beneficiary is competent enough to get its benefits. People who are not clear with the terms of “trust” are often sceptical before indulging into a trust and transferring their property to a trustee completely, but one should know that there are many advantages to a trust as explained above and one can grow their assets with the help of trust without following very tedious process and disclosures before the government and court.
-This Article has been authored by Rhea Banerjee, Pursuing B.A.LL.B from Indore Institute of Law.