Wednesday, August 6, 2008

Private Trust & Public Trust

A. Meaning of Trust
A Trust is when you set aside money or property for the benefit of an individual and appoint one or more individuals as TRUSTEES. As the term "Trust" suggests, you are really putting your confidence and faith in the trustees to look after the needs of your child. However it is equally important that the trustees accept responsibility. Therefore the basis on which a Trust comes into existence, include:
1. The author indicates with reasonable certainty, his intention to create a Trust.
2. The Trust must have a definite purpose. The aims and objectives have to be specified by the author of the Trust.
3. The Trust is made for the benefit of a specified individual or individuals who are called the beneficiary.
4. There has to be a certain amount of funds and / or property to set up a Trust i.e. Corpus.
5. Transfer of the property to the Trust. This however is not necessary when; a) The author is himself the sole trustee or, b) When the Trust has been created by a will.
6. The author (i.e. the person making the Trust) has confidence in the person whom he wants as a trustee.
7. The trustee accepts this responsibility.
So, a Trust is really a self initiative and calls for a certain amount of education and economic wherewithal.
B. Legal Terminology
1. Author of the Trust: The person who creates a Trust. In this case, it will be the parent of the child with mental disability.
2. Trustee: The person, the author of the Trust would appoint to operate the Trust funds and look after the needs of the child. The parents as authors of the Trust can also be the trustees.
3. Beneficiary: The person for whose benefit the Trust is formed. In this case, it would be the child. There can be more than one beneficiary. A parent can also be a co beneficiary.
4. Movable property: Includes money, jewellery and shares.
5. Immovable property: Includes property, land etc.
Corpus is the money or property that is set aside to set up and run the Trust.
1. The corpus can include both movable and immovable property. There is no specified amount with which you can set up a Trust. It would depend upon how much you can or want to set aside.
2. You can build on the corpus during your lifetime and can also 'will' any property to the Trust. For example you may have a property that you are living in which you do not want to give to the Trust during your lifetime. You can transfer this property to the Trust through your 'will'.
3. A Trust can also be set up solely through a will i.e. all movable and immovable property will only become Trust property once the will is executed.
4. It is advisable to consult a chartered accountant on the question of how and when movable and immovable property can be transferred to and utilized for the Trust. The accountant will advise you on the tax implications.
TRANSFER OF PROPERTY: This does not mean that the trustee becomes the owner of the property. The property is in the name of the Trust and the trustee is just authorized to manage it.
1. When parent creates a Trust through a will- there is no need to transfer the property at the time of writing the will. However, at the time of execution of the will, the property will in due course be transferred to the Trust.
2. Parent as a trustee: When the parent creates a Trust and he, himself is a trustee- there is no need for transfer of property- he himself is holding the property in Trust. However, even though the property remains in the parents' name, the assets from the property will go to the Trust fund. The parent then can use them for his/her own benefit also, only if he is also a beneficiary. (i.e. a co-beneficary)
3. When parents appoint someone else as a trustee- here the parents need to transfer the property, in the name of the Trust.
According to the law any person who is seen as competent to contract can create a Trust, if he/she is:
1. Above 18 years
2. Is of sound mind i.e. is capable of understanding a contract and forming a rational judgment as to its effect upon his interests
3. Is not disqualified from contracting by any law to which he is subject
If the Trust is of IMMOVABLE PROPERTY i.e. land/property, then a Trust needs to be registered.However, if a Trust is of MOVABLE PROPERTY, it need not be registered i.e. it is not compulsory. But to be on the safer side it is better to get this kind of Trust registered too.Registration of Trusts is also important in other situations for example, if you open a bank account in the name of the Trust- a registered Trust deed will be needed.Steps/process Involved In Making And Registering A Trust
1. Make a Trust deed on a stamp paper
2. It is to be signed and the date affixed, by the author of the Trust and the trustee
3. You also have to get 2 witnesses to sign it. Anyone, who is a citizen of India, is of sound mind and is above the age of 18 years, can be a witness
4. You have to get a form of registration signed by the witnesses and along with the Trust deed; it is to be filed at the office of the Registrar of Trusts
5. A photograph and identification card of the author of Trust and the trustees have to be attached
PUBLIC TRUST: These are constituted for the benefit either of the public at large or some considerable portion of it, answering a particular description. Here, you cannot name any specific beneficiaries. They are of a permanent and indefinite character and not confined to any certain limits prescribed in a settlement. A public Trust has for its object, the members of an uncertain and fluctuating body. Hence it is the extensiveness of objective, which affords some indication of the public nature of a Trust, example a public or charitable Trust for educational purposes. Public Trusts get Tax Exemption.
PRIVATE TRUST: In a private Trust the beneficial interest is vested absolutely in one or more individuals who are within a given time, may be definitely ascertained. For example, a Trust created by parents for their child. Here their child is the beneficiary. Private Trusts get No Tax Exemption.
• Specific Trust: There is/are a specific beneficiary or beneficiaries, whose share is naturally specified in the Trust deed. Here the trustee does not have any discretion in apportioning income of the Trust for the benefit of its beneficiaries. This means, the money or income the beneficiary is to get is fixed and is specified in the Trust deed. The trustee does not have the discretionary power to determine this.
• Discretionary Trust: Is where beneficiaries, though specific and ascertained, do not have specified shares in the income and property of the Trust. The manner of employment of Trust funds/income is left to the absolute discretion of its trustees.
The beneficiary is the person for whose benefit the Trust is being made. In this context, it would be the person or persons with mental disability. Under the Indian Trusts Act (1882) the beneficiary has been given many rights.
For example:
1) She /he has the right to inspect and take copies of instruments of Trust and account etc.
2) Right to proper trustees so that the Trust property is properly protected and administered.
3) Right to compel any act of duty by the trustee, etc
These rights are given so that they serve as a counterpoint to the authority of the Trust. However, some of these rights are taken away from our beneficiary (i.e. the beneficiary who has mental disability) because she/he is not seen as being competent to contract. Also the person with mental disability may not actually be able to take advantage of some of the rights.
A trustee is a person whom the author of the Trust would appoint to operate the Trust funds and look after the needs of the child. The parents can also be the trustees.
Who may be a Trustee
1. A person who is capable to contract: is above the age of 18 years; is of sound mind i.e. can understand a contract and make a rational judgment as to its effect upon the interests of the Trust
2. Is capable of holding property
3. Is not disqualified from contracting by any law to which she/he is subject
Number of Trustees
• The number of trustees could be between one and five
• If there are more than one trustee, one of them is elected chairman
Retirement - A trustee may retire after giving a notice of x number of days. This should be specified in the Trust deed.
Powers and Duties - These are a range of powers you can delegate to the trustee depending on the capacity of the beneficiary and how much independence you would like to give them. The trustee may be given the power to monitor.
• To appoint employees and settle relevant terms
• Trustees can employ people for example driver, cook etc. and manage their payments out of the Trust fund
• To file suits on behalf of the Trust
• The trustee can apply to the court for opinion in management of Trust property: without instituting a suit
• To consult doctors, lawyers, chartered accountants or any other specialists
• To invest the Trust fund
• To draw upon the corpus of the Trust for recurring annuity/pension for the beneficiary
• To reimburse themselves out of Trust funds for all expenses incurred in the discharge of their duties
• To manage all assets of a Trust
• To open and maintain a bank account in any nationalized bank
• Care required from a Trustee: A trustee is to deal with the Trust property as carefully as a man would deal with such property if it were his own
• Trustee to execute Trust: The trustee is bound to fulfill the purpose of the Trust and to obey the directions of the Trust given at the time of its creation
• When a Trust is managed by a number of trustees and one of them dies/disclaims, the continuing trustees are required to take the necessary decisions
L. What the trustees cannot do
1.Trustees cannot renounce after acceptance - once accepted, the trustees cannot renounce the Trust except: If the beneficiary is competent to contract, then with his consent Or By virtue of a special power in the Trust deed Or with the permission of a principal civil court of original jurisdiction
2. Co-trustees cannot act singly, unless the Trust deed specifies otherwise
3. Trustees cannot delegate his office/duties unless: the Trust deed specifies so ; delegation is in the regular course of business ; delegation is necessary, the beneficiary, if capable to contract, consents
4. Trustees cannot use Trust property for their own profit or any other purpose unconnected with the Trust
5. He cannot buy the beneficiary's interest without the permission of a principal civil court, even after he has ceased to be a trustee
M. Power to Nominate
In the case of a vacancy in the office of a trustee, there should be a provision in the Trust deed, for the appointment of a new trustee. The vacancy may arise, if the earlier trustee dies or refuses to function as a trustee etc. Through the Trust deed, the author of the Trust, needs to authorize some person or organization to nominate a person as a trustee, in case of a vacancy. However, here again, the person/organization needs to accept the responsibility. Such an arrangement, with an organization can also be made to see that the Trust is functioning properly i.e. a kind of monitoring facility.
N. Dissolution of a Trust
The Trust is formed for the beneficiary. When the beneficiary is no more, the Trust deed needs to specify, as to what should happen to the Trust fund. For example, the Trust deed could state that the Trust fund should be distributed among the legal heirs of the beneficiary or some part should be given to charity etc.All these details may be worked out and incorporated in the Trust deed.


Ali said...

Hello Gopal Sir..Nice article..thanks..Can we open a school under private trust. Thanks in advance.


Sure. A school can be under a private trust. But it will be a taxable entity under Income Tax Act.

Anonymous said...

Sir, can you please tell me whether a religious sect can ask for registration as a trust under the Income tax act under sec. 12A by stating the objects as charitable purposes of education and advancement of religion? Also, please tell me the scope of the terms 'education' and 'advancement of religion' as used for purposes of tax exemption?


All depends on objects clause of the trust. Whether a trust is charitable or religious depends on its objects specified.

Pls get in touch with me to get more specific information.

Best Wishes,