Trusts

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: 1. 2. 3. 4. 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 1. A Private trust may be created for any lawful purpose. 2. A private trust can be created by any person who is of the age of majorityand is of sound mind, and is not disqualified by any law. Every persondomiciled 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 thecourt or of whose property the superintendence has been assumed by thecourt of wards the age of majority is twenty one years. 3. A trust can be as well created by or on behalf of a minor with thepermission of a principal civil court of original jurisdiction. 4. Apart from a human being, a company, firm, society or association of persons is also capable of creating a trust. Top 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 ofadministering the property effectively and efficiently with ordinaryprudence.Depending upon the nature of the trust, if trustee is required to play apassive and role without any scope of discretion a minor may as well beappointed as trustee However, where the trust involves exercise of discretion such as trustrequiring sale of property or its investment, the trustee should be of theage 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 appointedas 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 personcreating the trust. Such a proposed beneficiary can renounce his interestunder the trust by either making a disclaimer addressed to the trustee orby setting up a claim inconsistent with the trust.

Rights OF Beneficiary

Unless the trust instrument expresses a different intention, abeneficiary has a right to the rents and profits of the trust property. Again, the beneficiary has the right to ensure that the intention of theauthor of the trust is specifically executed to the extent of thebeneficiary'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 aredischarged or where for any other reason the execution of a trust by thetrustee becomes impracticable, the beneficiary can file a suit for theexecution of the trust. In such a circumstance, the court executes thetrust until a trustee is appointed for the same.

FAQs What is a trust?

Trust in the normal course is referred to as the confidence which one person reposes in another person to whom he transfers the property with an obligation that the funds so generated therefrom shall be utilised for the charitable and religious purposes .

How are the trusts normally created?

Trusts are created when the settlor of the property transfers a property to the trustees for its usage in the public purposes.

Four essential conditions are necessary to bring into being a valid trust.

The person who creates a trust (settlor) should make an unequivocal declaration binding on him. He must transfer an identifiable property under irrevocable arrangement and totally divest himself of the ownership and the beneficial enjoyment of the income from the property . The objects of the trust must be defined and specified. The beneficiaries are specified.

What is the tax treatment of the income of the private religious trusts and public religious trusts?

The income of the wholly religious trusts shall be exempt from income tax . The income of a private religious trust not ensuring to the benefit of the public at large shall not be exempt from tax.

What is the distinction between a public trust and a private trust?

The essential distinction between a public and a private endowment (trust) is that the beneficial endowments vests in an uncertain and a fluctuating body of the persons either the public at large or some considerable portion of it answering a particular description. On the other hand , in a private endowment the beneficiaries are definite and ascertained individuals .

What is meant by accumulation of funds by trusts?

Trusts have an option of accumulating (setting apart), some of the funds received from the voluntary contributions, in every previous year, for certain purposes.

The tax advantage is that the part of the contributions so set apart for the accumulation shall never be considered as the income for the previous year; accordingly, the expandable amount for the charitable purposes shall be reduced.

What is the procedure of obtaining permission for accumulation of funds under the Income Tax Act?

The Trust(s) is required to apply in Form 10 under the Income Tax Rules specifying the objects for which the accumulated sums shall be applied. The filing shall be within the time allowed for the filing of its income tax return.

Whether stating general purposes will suffice, or specific objects are required to be stated, has been a subject of dispute and different courts have adopted different stands.

What incomes are not included for computation of taxable incomeof a trust/ society?

Following incomes are not to be included in the income of the trusts /society:

Income derived from the property held under trust wholly for the charitable and religious purposes actually spent in these purposes in India . Income set apart to the extent it does not exceed 25% of the total income from the property. In case of trusts created before 1/4/61 , the income derived from the property held under trust partially for the charitable and religious purposes which has been actually spent in India . In the above case , the income being set apart to the extent not exceeding 25% of the income from such property. The income as derived by a trust created after 1/4/52 and spent out side India for the charitable purposes . These trusts shall be specified by the CBDT.

In case of the trusts created before 1/4/52 , the income is allowed to be spent out side India for the charitable and religious purposes. Income by way of voluntary contributions towards the corpus of the trust.

Whether the amount donated to other charitable trusts shall be considered for arriving at the amount spent for charitable purposes within the meaning of sec. 11(1)(a) of the I.T. Act, 1961?

As per certain case laws, when a Charitable Trust donates its income to another Charitable trust, the provision of Sec. 11(1)(a) relating to the application of income to that extent can be said to have been met.

Please define the significance of the word Corpus from the viewpoint of Income Tax provisions.

Corpus has not been defined either in the Income Tax Act or in the Societies Registration Act, 1860. Ordinarily, corpus means body of law or collection of writings.

The significance : Under sec. 11(1)(d) of the Income Tax Act, the income from the voluntary contributions towards the corpus of the trust or the institution is not to be included in the computation of income.

Therefore to the extent of the moneys received towards corpus, the trust or the institution is not under obligation to spend at least 75% of this moneys in the year of its receipt as provided in Sec. 11(1)(a) of the I.T. Act.

How does a trust or institution create a Corpus?

Before the funds from any donor are received towards the corpus, it is advised that the Trust should provide for the creation of a corpus funds in its Memorandum. It may be noted that in case the trust wishes to create a corpus out of the surplus funds available during the financial year, this can be achieved by applying to the concerned Assessing officer within the time of filing of its return.

It is to be noted that the donor should specifically mention that the funds so donated by him are towards the corpus of the funds.

What are the consequences in case the society/ trust or the institution does not avail the registration under the Income Tax Act?

The income so received by way of voluntary contributions either to Corpus or otherwise shall be considered and the expenses so incurred shall be allowed to compute the taxable income.

The income so derived shall be assessed in the status of the Associations of persons. The taxability of this income is generally done at the maximum rates of tax.

The following benefits are lost in case of non registration of the society.

Setting apart up to 25% of the income so received during the year. Accumulation of the funds even exceeding 25% of the income received for the specific purposes .

Losing the exemption of the voluntary contributions received towards the Corpus of the society.

What is the correct treatment of accounting for the grants with specified end objectives received from the donor agencies (from the Income Tax angle)?

This issue was addressed in a particular case and the following was prescribed:

The tied up grants received for the end objectives shall be credited to the Donor agencys account The Donor account shall be debited with the amount of the expenses incurred . Any non refundable credit balance in the personal account of the Donor shall be treated as income in the year in which such non refundable balance was ascertained. The major advantage coming from this accounting treatment is that the society /trust need not comply with any of the conditions as prescribed in Sec. 11/12/12A etc.

An alternative treatment is the usual way of crediting the Income side with the amount of grants received and then complying with the condition of expending at least 75% of the amounts of these grants.

Whether the society/ Trust can adjust the deficit from the previous year against the funds received during the year for the purpose of computing the quantum of application of funds u/s 11(1)(a) of the I.T. Act?

Once it is proved that the deficit has arisen due to the expending of the funds for charitable and the religious purposes, the deficit so brought forward can be treated as the application of funds in the subsequent year. This is despite the fact that there is no enabling provision existing in the I.T. Act.

In case the trust also takes a loan in a particular year and spends the amount so raised, the expenses so incurred shall be taken as the application of income in the year of repayment of the loan.

What are the powers of the Commissioner of Income Tax relating to the registration of the trusts?

The commissioner has the power to examine the documents of incorporation of the trusts and also the objects for which the trust is created. An order denying registration has to be a speaking order. This view has been endorsed by the judiciary.

What are the requirements to claim the tax exemption in case of the income from the business run by a trust?

Sec. 11(4A) of the Act specifies that in order to claim the tax exemption under Sec. 11 and 12 , the following conditions are required to be satisfied.

The business from which the income representing the profits and gains from Business and Profession is derived, is incidental to the attainment of the objectives of the trust. Separate books of accounts are maintained by the trust in respect of such business.

What is a religious endowment and whether it can be a private religious purposes?

Ans. Endowments are defined to be the dedication of property by gift or devise to religious or charitable purposes. Religious endowment is one which has for its objects the establishment, maintenance or worship of an idol or deity or any object or purposes subservient to religion. In case, the religious endowments are created for a particular family deity, these become Private endowments. There can be private endowments for religious purposes but there can not be private endowments for the charitable purposes.

What is a public temple and how it is different from the Private temple?

Ans. A public temple is one where a considerable portion of the public or a section thereof has a beneficial interest. The main characteristics for a public temple is that it is intended for the use of the public at large or a specified class who are entitled for the worshipping of the idol.

The essential distinction between a public and a private endowment (trust) is that the beneficial endowments vests in an uncertain and a fluctuating body of the persons either the public at large or some considerable portion of it answering a particular description. On the other hand , in a private endowment the beneficiaries are definite and ascertained individuals .

Trust is defined in section 3 of the 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. In simple words it is a transfer of property by the owner to another for the benefit of a third person alongwith or without himself or a declaration by the owner, to hold the property not for himself and another. In India, the second most popular form of registration is as a Trust. However, the statutory provisions, procedures and the laws relating to trusts are confusing. Under Indian Laws, various kinds of public and private trusts can be formed. Here, we have dealt with the laws and procedures related to Public Charitable Trusts.

The Indian Trust Act, 1882 is not applicable to Public Charitable Trust. There is no specific act under which a Public Trust is to be registered, except in the State of Gujarat and Maharastra. Public Trusts are formed under general law, with guidance drawn from the Indian Trust Act, 1882. The other relevant acts are Religious Endowment Act, 1863, Charitable & Religious Trust Act, 1920 and The Bombay Public Trust Act, 1950. The following are the basic ingredients of a valid trust : i) There must be an author or settlor of the trust. The author or the settlor refers to the person who sets aside certain property for the benefit of the beneficiaries ii) There must be a trustee. The trustee are the persons who manage this property for the benefit of the beneficiaries as per the Trust Deed. The author himself may or may not become a trustee. iii) There must be a beneficiary or beneficiaries. iv) There must be clearly delineated trust property. v) The objects of the trust must be specific.

THE THREE CERTAINITIES REQUIRED Three Certainties of a Trust are : i) Certainty of intention to create Trust. ii) Certainty of the objects and the beneficiaries. iii) Certainty of the subject matter of the Trust i.e. fund or properties must be specified and settled in the deed.

Private Trust-Why should you consider them?

by JI TE ND RA P. S. S OL AN KI on SEPTEMBER 13, 2011

Rahul has been running a business for the last ten years. He has two children four and six years of age. Rahul has been worrying about What will happen to them after him? How will I ensure that their expenses are met? Who will run my business after me? All these thoughts are bothering him while planning for his own future. Situations like Rahul are common. In fact, most of us make the mistake by not taking proper steps in protecting our assets and transferring them to our children. The biggest problem comes when there is a premature death and children are not old enough to take care of themselves. Although a Will can be written for transferring the assets, it still has some limitations and cannot be the only mode of bequeathing ones assets among the beneficiaries, especially in cases like Rahul. Creating a Private Trust resolves most of the problems and can be beneficial in the management and distribution of assets. What are Private Trusts? The primary objective of any individual who wants to bequeath his assets during the lifetime or after death is to protect the interest of beneficiaries. The beneficiaries might include minors who are not old enough to protect their interests. A trust creation helps in meeting this objective. When there are one or more individuals like family members as beneficiaries, a private trust is formed. The trust can be

created by any person who is a major and is capable of

entering into a contract. Why Private Trust? While managing property during ones lifetime, there are various risks which arise and need to be addressed. There may be old parents living separately far away from their children and the children are still minors while the parents have reached old age. During succession planning the concerns could be, care for the spouse and children and donation to charity etc. All these scenarios demand the formation of a Private Trust whose main objective is to manage property (movable and immovable) at present and in future when primary bread-earner is not around. Who benefits from a Trust? Creation of a Private Trust can be very helpful for different family situations and businesses: Nuclear and joint families: For a nuclear family, separation, legal hurdles, old age medical care, childs future and financial security are concerns around which the whole life revolves. Contrary to this in a joint family there have been instances of family litigations leading to business interruptions and assets getting locked in legal battles for years. Many of these issues can be addressed through a private trust. 2. Entrepreneur: An entrepreneur starts his business with a dream to grow big in the future. During the course
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he has to ensure his personal and business assets are clearly defined. Sometimes, a claim can arise from any of his clients and the business gets disrupted if the solution is prolonged. By forming a trust the continuity of business and distinction between the assets can be taken care off. 3. Family of a special child: They are the biggest beneficiaries of creating a private trust. A special child needs are regular medical assistance, financial support when parents are not around, preservation of wealth. By creating a trust, parents can make sure that above requirements get fulfilled in a very efficient manner. 4. Muslims: Although Muslim laws are slightly different when formation of trust is concerned, the objective remains same for them. There can be many other situations where formation of a private trust can help in securing present and future of your loved ones according to your wishes. Limitations Although formation of a private trust can benefit a large number of families and in different situations, it has some limitations which should be taken into consideration while planning; Cost: During transfer of immovable assets, stamp duty is paid as per the rate prevailing in the State. Due to this variation, cost of formation of a trust also varies across states. 2. Trustees: Efficiency of a trust is highly dependent on the selection of the trustees. The trustees are to be appointed by the settlor. A wrong selection can defeat the objective of forming a trust.
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Trust deed: Drafting a trust deed is more difficult than a Will. If not drafted clearly, a trust deed is difficult to execute. Trust vs. Will In many instances a written Will is insufficient to distribute your assets. The battle fought in courts in various cases has revealed that a Will has its own limitations. Below are some benefits which makes creating a private trust more beneficial than just writing a Will:
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Since a trust deed is never disclosed in media, it is more confidential than a will. There is no probate when you create a trust. When you want to make some changes in future a trust deed can be easily modified in comparison to a Will. While planning for succession, especially during ones lifetime, one would not want to lose control over the assets. This can be achieved efficiently through a private trust as a Will gets executed only after the death. Creating a private trust is more beneficial than just writing a Will, but it all depends on the amount of assets one has and how you want to bequeath your property. A Will gets effective only after your demise while a trust can still be run even when you are around. To ensure your trust runs efficiently do remember following points while creating it:

1. Lay down your long term objectives very clearly. It will help the trust to accommodate any changes later. 2. To make your trust more efficient, make sure the trustees you decide have the skill and experience necessary for their prescribed tasks. 3. Identify clearly who will be your beneficiaries to avoid any dissatisfaction later.

4. Identify the list of assets which you want to include during your lifetime and in future when you are not around.