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LEGAL CHAT
Ownership of property through a private trust
N.C.S. RAGHAVAN
ARVIND RAGHAVAN
The concept, nature and scope of ownership of property through private trusts and their use and enjoyment are taken up for study and discussion. The law on the subject is laid down in the Indian Trust Act, 1882 (hereinafter referred to as the “Act”).
When a person desires and decides to make suitable provisions for the financial safety and security of his wife, children, parents, close relatives and friends, he chooses the medium of a private trust to achieve these objectives.
Section 3 of the above Act defines the terms “trust”, “author of the trust”, “trustee”, “beneficiary”, “trust property”, “trust money”, “beneficial interest”, “breach of trust”, “registered” and “notice” and the main points are summarised below to give a broad picture of all matters connected with a private trust.
A person known as “the author of the trust” creates a private trust through a formal declaration duly recorded and evidenced in a document known as “the instrument of trust”. He declares a particular property or a sum of money as “trust property” or “trust money”. He appoints another person or persons or himself and/or other persons as “trustees”. Such “trustees” legally own and hold the “trust property” or “trust money” but only in a fiduciary capacity in trust for the benefit of another person or persons known as “beneficiaries.”
The “trust property” or “trust money” originally brought into the trust becomes the “corpus” or “capital fund” of the trust. Such “corpus” or “capital fund” is invested in property or other types of investments including businesses as may be specified in the instrument of trust itself. The net income or the returns from such “corpus” or “capital fund” (after meeting all the expenses of the trust) are distributed to the beneficiaries periodically in specified shares on specified dates as provided in the instrument of trust.
Beneficial interest
The duration of the trust and the date and mode of dissolution of the trust are specified in the instrument. The trustees distribute the “corpus” or “the capital fund” on the date of dissolution to the beneficiaries in specific shares as provided in the “instrument of trust.” The right of each beneficiary to receive a specified share in the income of the trust together with a right to receive a specified share in the “corpus” or “capital fund” of the trust at the time of its dissolution is defined as “beneficial interest” of a beneficiary. The instrument of trust will also clearly indicate that all the provisions of the Indian Trusts Act, 1882 (as amended from time to time), will be applicable to the trust. The instrument will also specify the powers, authority, rights, duties and obligations of the trustees in general and in relation to the management of the administration and other affairs of the trust.
Note the terms
* The term “registered” has been defined to mean and refer to the document (the instrument of trust) being registered with appropriate registration authorities under the Indian Registration Act, 1908, read with the rules framed therein by the State of Karnataka.
* The term “notice” is defined to mean and refers to a situation, where a person is said to have notice of a fact when he actually knows the fact or when he would have known the fact but for the wilful abstention from enquiry or gross negligence. This definition of “notice” is important in the context of the registration of an instrument of trust which would ensure that the law will presume that there is universal notice and knowledge of the same to the general public, as any person has the right to apply for an obtain a certified copy of the registered instrument of trust and know about its contents.
* A “trust” basically creates a legal relationship by which a trustee legally holds and owns “trust property” or “trust money” only for the benefit of and in trust for the beneficiary with a legal obligation to act as such which is attached to the “trust property” or “trust money.” When a trustee commits any breach of his legal obligations (as discussed above) under the trust, he is said to commit a “breach of trust.” As the legal position of a trustee is based on an absolute trust placed on him by the operation of law under the statute i.e., the Indian Trusts Act, 1882, a “breach of trust” committed by a trustee is taken very serious note of under the law and it has been made into a serious criminal offence i.e., “criminal breach of trust” under the Indian Penal Code, 1860. As the powers, authority, duties and obligations of a trustee are based on the statutory provisions of the above Act, a trustee cannot delegate his powers, authority and obligations to any other person or persons except to a co-trustee (if so provided in the instrument of trust).
Execution and registration of instrument of trust dealing with immovable property, the stamp duty and registration fee will be discussed in the next issue. Tax incidence of the income of the trust, in the hands of the trustees, beneficiaries and the trust itself under the provisions of the Income Tax Act, 1961, will also be discussed.
(N.C.S. Raghavan is a chartered accountant and Arvind Raghavan, an advocate)
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