Types of Trust
Generally, there are two types of trust in India:
- Private Trust.
- Public Trust.
What is a Trust?
What is a trust?
As per section 3 of the Indian Trust Act, 1882, Trust simply means when an obligation annexed/added to the ownership of property and there is confidence, one person (settler) places in trust in the hands of another person (trustee) for the benefit of a third party (beneficiary).
The two types of trust, explained below:
In the two types of trust, private trusts come under the governance of the Indian trusts Act, 1882.
Private trusts are constituted for the benefit of one or more individuals. The individuals are definite, that means the individuals can be ascertained.
A private trust may be created inter vivos or by will. If a trust is created by a Will, it is subject to the provisions of Indian Succession Act, 1925.
Ingredients of a valid Private Trust
Following are the guidelines for creating a private trust.
1) Settler of property should make a declaration to set aside certain property for the benefit of beneficiaries.
2) There must be a trustee to manage the property for the benefit of the beneficiaries as per the trust deed. A settler can also be a trustee of the same trust.
3) There must be a beneficiary or beneficiaries who derive benefit from the property of settler (trust).
4) Trust properties demarcated properly .
5) Moreover, the objects of the trust must be clearly specified.
Reasons for creating a private trust?
From the two types of trust, the main reason for creating a private trust is;
The private trust route to succession planning is gaining popularity in India, as the the rich are increasingly looking at asset protection because it helps secure the property while the successors can benefit from it. Moreover, it helps the settler to retain his property instead of the next generation disposing it of in near future. Also he can enjoy tax benefits or deductions.
Private Trusts also helps in insolvency protection, application of trust assets applied to retain solvency of beneficiary or trustee being a beneficiary.
Private Trust declared by a will, registration will not be necessary, even if it involves an immovable property.
There is no statutory requirement to create a trust by any instrument. In the Supreme Court, the case of Radha Swami Satsung v. CIT, (1992) 193 ITR 321 (SC) held that creation of a trust does not require a formal document. However, in the case of a will or where immovable property of Rs 100 and more, written trust thus recommended.
Private trust will cease to exist when the purpose of formation of trust is fulfilled or the object of formation of trust becomes unlawful or the trust is revoked or trust property is destroyed.
However, Trust declared by a non-testamentary instrument requires a registration. In this case, also any exempted instrument declaring the trust under the Indian Registration Act also requires registration irrespective.
A particular class of people or the general public benefit from the creation of a public trust.
A public trust must be created for charitable, educational, religious or scientific purposes.
However, charitable and religious trusts come under the governance of ”Charitable and Religious Trust Act, 1920, the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Bombay Public Trust Act, 1950” enforced as statutes of public trusts in India.
Central Act does not apply for Public trusts, However, various states have enacted their own acts suitable to their conditions and administration.
Reasons for creating a public trust?
From the two types of trust, the main reason for creating a public trust;
Public trusts are relatively popular because it is easy to register and manage them.
Public trust created can get benefits of government tax rebates, namely under the Income Tax Act.
Property dedicated for religious purpose comes under the purview of a public trust as a religious endowment and/or wakfs. Personal laws govern religious charitable trusts. The trustee can administer the religious trust as per the dictates of religious names or as regulated by statute. In Hindus, the personal law provides for regulation of religious not yet codified and found distributed in the various religious books and epics.
The State and beneficiaries can regulate the working of public trust.
Furthermore, charitable trust have three requirements:
1. Declaration of trust made by settlor which is binding upon him,
2. Setting apart certain property by settlor and thereby depriving himself of the ownership rights, and
3. A statement of object on how the beneficiaries shall hold the property.
Property once transferred to a trust deemed irrevocable.
Moreover, in case of breach of public trust, either the Advocate General or two or more persons having interest in the trust can institute a suit regarding:
1. Removal of a trustee,
2. Appointment of a new trustee,
3. For vesting any property in a trustee,
4. Directing an expelled trustee to provide possession of any trust property in his possession,
5. Also for directing accounting inquiries.
In case of Public Trust, whether in relation to movable property or immovable property and whether created under a will or inter vivos, registration is not optional but desirable.
In case of Charitable or Religious Trust duly registered in relation to an immovable property, can claim exemption under Section 11 of the Income Tax Act, 1961,
In today’s current scenario, types of trust play a significant role in most financial and legal systems as recognized under the Hague Convention.
Additionally, significant increase in creating a trust for investments benefits in the form of mutual funds and venture capital funds . The Securities and Exchange Board of India (SEBI) govern these types of trust.