Trust formation

Trust is defined in section 3 of the Indian Trust Act, 1882 as “an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner.

Meaning of Trust

Trust is a legal arrangement whereby one party transfers his property to another party for the benefit of third party Trust is governed by the terms under which it is created which are known as ‘trust deed’. In other words, it is simply a transfer of property by one person to another who manages that property for the benefit of someone else

There are three parties involved in a Trust.

  • The Owner or Settlor– Person who sets up the Trust.
  • The Trustee– The person or a corporation who manages the Trust assets
  • The Beneficiary– the person who receives benefits from the Trust

An owner placing property into trust transfers his or her bundle of rights to the trustee. While the trustee is given legal title to the trust property, he/she owes a number of fiduciary duties to the beneficiaries. The primary duties of trustee include the duty of loyalty, the duty of prudence and the  duty of impartiality. To ensure beneficiaries receive their dues, trustees are subject to a number of ancillary duties in addition to primary duties, including a duties of openness  and transparency. duties of recordkeeping,  accounting, and disclosures. In addition, a trustee has a duty to know, understand, and abide by the terms of the trust and relevant law.

Kinds of Trust

A trust can be created during a person’s lifetime and survive the person’s death. A trust can also be created by a will and formed after death. While there are various types of trusts, the basic types are revocable trust and irrevocable trust.

Following are the different kinds of trust:

1) Revocable Trust

2) Irrevocable Trust

3) Constructive Trust

4) Charitable Trust

5) Public Trust

6) Private Trust

Now, let us discuss about all these trusts in brief:

1) Revocable Trust: A trust created by an individual that may be revoked, altered, or amended by the owner of the trust property during his lifetime is known as revocable trust.  This may include such changes as adding or removing assets, adding or removing beneficiaries, and changing trustee. A revocable trust not only allows an individual to specify who will receive his assets after death, it can also provide a method of managing those assets while the owner of the trust property is still alive.

2) Irrevocable Trust: A trust created by an individual that cannot be revoked, altered, or amended is known as irrevocable trust. It is just the opposite of revocable trust wherein the grantor gives up all right, title, and interest to the property and has no right to alter or terminate the trust without the consent of the trustee and beneficiaries. Thus, in order to undo the trust or reclaim the assets, the owner of the trust property should have the specific written consent of the trustee and all of the named beneficiaries.

3) Constructive Trust: A constructive trust is formed where one person is unfairly put in a better position to another person’s detriment.

A constructive trust does not arise because of the expressed intent of the owner of the property but it is created by a court whenever title to property is held by a person who, in fairness, should not be permitted to retain it.

The right to a constructive trust is generally an alternative remedy. The aggrieved party can choose between a trust and otherrelief at law, such as recovery of money wrongfully taken, but cannot obtain both types of relief.

4) Charitable Trust: Trust created for advancement of education, promotion of public health and comfort, relief of poverty, furtherance of religion, or any other purpose which is regarded as charitable in law is known as charitable trust. The arrangement by which the owner transfers his property for the purpose of doing charity, it is named as charitable trust. This kind of trust is formed for the benefit of society and in order to be valid, it must fulfil certain requirements i.e. the owner of the property must intend to create this type of trust and the charitable purpose must be expressly designated.

5) Public Trust: The trust created for the purpose of public welfare and not for the need of any single individual is known as public trust. It might or might not be charitable trust. In this kind of trust, owner is the single individual and the beneficiary is the public at large.

6) Private Trust: The trust created for the benefit of one or more known individuals is known as private trust. It is just opposite of public trust. It is created for the financial benefit of one or more designated beneficiaries rather than for the public benefit.

Advantages and Disadvantages of Trust

Following are some of the advantages of trust:

(i) Asset Protection: Assets transferred to a trust no longer form part of the Settlor’s property, so the trust assets cannot be seized if a Settlor gets into financial difficulties. Thus, trusts can be most effective way of protecting assets.

(ii) Tax Planning: Assets transferred into trust are no longer considered as belonging to the Settlor, so the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the Trustee.

(iii) Protecting the weak: A trust provides a vehicle by which a person can provide for those who may be unable to manage their own affairs such as infant children, the aged, the disabled or persons suffering from illness.

(iv) Preserving Family Assets: Preserving the family assets, or increasing them, is often a motive for setting up a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst the heirs, but is retained as one fund to accumulate further, with provision for payments to members of the family as the need arises while preserving some assets for later generations.

(v) Avoid Probate:  Probate refers to the process of legally establishing the validity of a will before a judicial authority. There is no such need in case of trust.

Following are some of the disadvantages of trust:

(i) Expensive to Establish: Formation of trust involves huge cost as it involves re-registration of property in the name of trust.

(ii) Restriction to Powers: Powers of the trustee are restricted by the trust deed.

(iii) Complex: Registration of trust is a complex process.

Formation of Trust:

A trust may be created for any lawful purpose. The purpose of a trust is lawful unless:

(i) it is forbidden by law.

(ii) is of such a nature that, if permitted, it would defeat the provisions of any law.

(iii) is fraudulent.

(iv)  involves or implies injury to the person or property of another. or

(v) the court regards it as immoral or opposed to public policy.

Formation of trust with unlawful purpose is void.

Who may create trust

A trust may be created-

(a) by every person competent to contract, and

(b) with the permission of a principal civil court of original jurisdiction, by or on behalf of a minor,
but subject in each case to the law for the time being in force as to the circumstances and extent in and to which the author of the trust may dispose of the trust property.

Subject matter of trust

The subject-matter of a trust must be property transferable to the beneficiary. It must not be merely beneficial interest under a subsisting trust.

Who may be beneficiary?

Every person capable of holding property may be a beneficiary.

Who may be trustee?

Every person capable of holding property may be a trustee. but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract.

Comparison Between Trust, Society And Section-8 Company

Basis Trust Society Section-8 Company
Relevant Act Indian Trust Act, 1882 Societies Registration Act, 1860 Companies Act, 2013
Registration Document Trust deed Memorandum of Association and Rules and regulations Memorandum of Association and Articles of Association
Jurisdiction Charity Commissioner Registrar of Societies Registrar of Companies
Stamp Duty involved Trust deed to be executed on the non-judicial stamp paper. Stamp duty varies from state to state. No stamp duty is required for memorandum of association and rules and regulations. No stamp duty is required for memorandum of association and articles of association.
Members required For the purpose of trust deed, two persons are involved i.e. author of the trust and the trustee.
Where author and trustee is same person, unilateral deed has to be executed.
Minimum seven members are required for formation of society. Minimum two members for private company and minimum seven members for public company.
Management Trusts are managed by trustees or by board of trustees. Societies are managed by the managing committee Company is managed by board of directors
Legal Title Legal title of property of a trust vests in the hands of trustee. All properties are held in the name of society. All properties are held in the name of company.
Annual Compliances There is no requirement of annual return filing Societies are required to file annually with the Registrar of Societies, a list of names, addresses and occupation of their managing committee members Section-8 company is required to file annually with the Registrar of Companies, its annual accounts and returns.
Online filing facility Online facility is not available Online filing facility is not available. Everything has to be submitted physically in the office of Registrar Online filing facility is available
Cost factor involved Low Cost Medium Cost Highest cost
Grant of subsidy from government Less preferred Less preferred Most preferred
Tax benefits Income is exempt in case of charitable trust Income from society is not taxable if the same is claimed under section 12A of the Income Tax Act, 1961