LEGAL CHAT
Private trust can be formed through a Will
N C S RAGHAVANARVIND RAGHAVAN
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Broadly, private trusts can be divided into three categories i.e., oral, normal and discretionary
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As part of a series on ownership rights under different legal relationships and entities, we have taken up the study of private trusts governed by the provisions of the Indian Trusts Act, 1882 (hereinafter referred to as the “Act”)
A trust can be created orally by the author of the trust and it may be done in the presence of the trustees and the beneficiaries and terms of the trust will also be specified orally. For the sake of certainty, oral trusts have to be confirmed by sworn affidavits made by the author of the trust and the trustees. Normally, such trusts do not exist in practice as there will be a lot of uncertainties relating to the matters governing the rights and responsibilities of the trustees, beneficiaries etc.
Normal trusts
The second category is where the shares of individual beneficiaries in the net income of the trust and in the net assets of the trusts on dissolution are definite and are clearly indicated in the instrument of trust itself. For the sake of convenience, we can refer to them as “normal trusts.”
Discretionary trusts
The third category will be where the individual shares of the beneficiaries are not specified in the instrument of trust and the trustee or trustees are given the option or discretion to divide the net income of the trust among a set of beneficiaries (indicated in the instrument of trust) at any proportion or ratio as the trustees may deem fit and proper. Such trusts are called “discretionary trusts.”
A private trust can be formed through a Will also. It will come into effect on the death of the person who creates it or on a date with reference to the death of the person. Such a trust is called a “testamentary trust.”
A trust also can be declared by a person, as the author, during his life time itself but can be made to come into effect only on his death or on any date with reference to his death.
A normal trust by itself is not taxed to income tax on its net income and only the individual share incomes of the beneficiaries are taxed in the hands of the beneficiaries independently. However, the trustee will file the returns of income of such beneficiaries as a representative assessee for and on behalf of the respective beneficiaries, by virtue of provisions of Section 160(1)(iv) of the Income Tax Act, 1961.
Rate of tax
The rate of taxation applicable is the rate at which the beneficiaries’ total income, including the share income from the trust, will be taxed. On the other hand, a discretionary trust as well as an oral trust will be assessed in the name of the trust itself at the maximum marginal rate fixed under the Income Tax Act, 1961.
The maximum marginal rate means the highest rate of tax fixed for an individual at the highest slab including surcharge on income tax, if any.
An instrument of a private trust shall contain: the name and description of the author of the trust; the name and description of the trustee or trustees; the sum of money or property including immovable property declared as trust property duly described in detail in a separate schedule; the operative portion of the instrument of trust formally declaring the creation of the trust and the trust property; the name and description of the trustees, their powers, authority, rights and responsibilities.; the name and description of the beneficiaries and the nature, scope and extent of the interests of each of the beneficiaries, including their rights to assign their beneficial interests in parts or as a whole to and in favour of third parties; the duration of the trust; the mode and manner of determination and dissolution of the trust and the mode and manner of division of trust property among the beneficiaries of the trust; the mode and manner in which the instrument of trust itself can be amended, altered or additional matters included and the powers and responsibilities of the trustees in relation to the same.
The schedule shall contain the details of the trust property and in the case of immovable properties, their clear descriptions, dimensions, boundaries and locations.
(N.C.S. Raghavan is a chartered accountant and Arvind Raghavan, an advocate)
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