Private trust

Private trusts are governed by the Indian Trusts Act, 1882. This Act is
applicable to the whole of India except the State of Jammu and
Kashmir and the Andaman and Nicobar Islands. That apart this Act is
not applicable to the following:
Waqf
Property of a Hindu Undivided Family's.
Public or private religious as charitable endowments.
Trusts to distribute prizes taken in war among the captors.
Creation of a private trust
A Private trust may be created for any lawful purpose.
A private trust can be created by any person who is of the age of
majority and is of sound mind, and is not disqualified by any law.
Every person domiciled in India attains majority, when he or she
completes age of 18years. But in case of a minor, for whom a
guardian is appointed by the court or of whose property the
superintendence has been assumed by the court of wards the age of
majority is twenty one years.
A trust can be as well created by or on behalf of a minor with the
permission of a principal civil court of original jurisdiction.
Apart from a human being, a company, firm, society or association of
persons is also capable of creating a trust.
Trustee / beneficiary of a private trust
 Any person who is capable of holding property can be
appointed a trustee.
 A person has capacity to hold property if such a person is
capable of administering the property effectively and efficiently
with ordinary prudence. Depending upon the nature of the
 trust, if trustee is required to play a passive and role without
any scope of discretion a minor may as well be appointed as
trustee
 However, where the trust involves exercise of discretion such as
trustre quiring sale of property or its investment, the trustee
should be of the age of majority, of sound mind and should not
be disqualified by any law.
 A Corporation, a company or association of persons may as well
be appointed as trustee.
Beneficiary of a private trust
 Every person capable of holding property such as a human
being , corporation , Company and even a state can be made
beneficiary of a trust.
 An unborn person can also be made beneficiary.
 However, a proposed beneficiary is not bound by the desires of
the person creating the trust. Such a proposed beneficiary can
renounce his interest under the trust by either making a
disclaimer addressed to the trustee or by setting up a claim
inconsistent with the trust.
Rights of a beneficiary
 Unless the trust instrument expresses a different intention, a
beneficiary has a right to the rents and profits of the trust
property.
 Again, the beneficiary has the right to ensure that the intention
of the author of the trust is specifically executed to the extent
of the beneficiary's interest therein.
 Accordingly, a beneficiary can compel the trustee to perform
any particular act of his duty or can as well restrain the trustee
from committing any contemplated or probable breach of trust.
  If no trustees are appointed or all the trustees die, disclaim or
are discharged or where for any other reason the execution of a
trust by the trustee becomes impracticable, the beneficiary can
file a suit for the execution of the trust. In such a circumstance,
the court executes the trust until a trustee is appointed for the
same.
Modes of creating a private trust
 A trust is created when the person creating the trust, termed
the author of the trust indicates with reasonable certainty by
any words or acts the following.
1. An intention on his part to create trust.
2. The purpose of the trust.
3. The beneficiary .
4. The trust property
 Again, unless the trust is declared by will, or the author of the
trust is himself to be trustee, the author has to transfer the
trust property to the trustee
 A trust in relation to immovable property has to be declared in
writing signed by the author of the trust or the trustee and has
to be as well registered such a trust may as well be declared by
a will of the author of the trust or of the trustee. The will is not
required to be registered.
 A trust in relation to movable property can be either declared
as in the case of immovable property or by transferring
ownership of the property to the trustee.
Trust property
 The subject matter of the trust is called trust property. Any
property, which can be transferred to the beneficiary, can be
 subject matter of the trust . But a mere beneficial interest
under a subsisting trust cannot be the subject matter of a trust.
 Certain other properties also cannot form subject matter of a
trust. Some of these are as follows:
1. Chance of receiving property such as chance of a relation to
obtain legacy on death of a kinsman or chance of an heir
apparent to succeed to an estate .
2. Mere right to sue.
3. Public office or the salary of a public officer whether after or be
fore it has became payable.
4. An interest in property restricted in its enjoyment to the owner
personally .
5. Stipends allowed to military, naval, air force and civil
pensioner's of state or political pensions.
Trustee of a private trust - rights and powers
No one is bound to accept a trust as trustee. Instead of accepting a
trust , the intended trustee can within a reasonable period disclaim
it. Such a disclaimer prevents vesting of the trust property in the
trustee. A disclaimer by one of two or more co-trustees vests the
trust property in the other or others, and makes him or them sole
trustee or trustees from the date of the creation of the trust.
However, a trustee who has accepted the trust cannot after wards
renounce it except as under.
1. With the permission of a principal civil court of original
jurisdiction.
2. Consent of the beneficiary if he is of the age of majority, and of
sound mind and not disqualified by any law.
3. By special power in the instrument of the trust.
Equally a trustee cannot generally delegate his duties either to aco -
trustee or a stranger. A delegation of duties can be made only, if:
1. instrument of trust provides for it
2. delegation is in the regular course of business
3. the delegation is necessary
4. the beneficiary,
being a major of some mind consents to the delegation.
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.
Elements of Trust:
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.
Example:
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
Revocable Trust
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.
Irrevocable Non-Discretionary Trust
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.
Irrevocable Discretionary Trust
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
Protection of Assets
 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.
Asset Management
 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.
Distribution of Estate
 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.
Account Auditing
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).
Annual Returns Filing
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.
Submitting a Foreign Contribution Report
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.
TDS certificate: If required
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.
Taxation of Private Trust
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.