Trusts under Indian Laws:

Trusts, in general, under Indian law have a statutory basis, namely the Indian Trusts Act, 1882.

Generally, there are two types of trusts in India:

1. Private trusts and
2. Public trusts.

The Indian Trusts Act, 1882 governs the private trusts.

Public trusts are classified into charitable and religious trusts. The Charitable and Religious Trusts Act, 1920, the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Societies Registration Act, 1860, and the Bombay Public Trust Act, 1950 are the relevant legislations for the recognition and enforceability of public trusts.

Furthermore, trusts can also be used as pooling vehicles for investments, such as mutual funds and venture capital funds. These trusts are governed by a separate set of regulations: the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996[1] and Securities and Exchange Board of India (Venture Capital Funds) Regulations.[2]

Definition of a Trust:

As per section 3 of Indian Trust Act 1882: “A Trust is an obligation annexed to the ownership of the 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.”

Purpose of creating a Trust [3]:

Trusts are generally formed or created to fulfill any or more of the following objectives:

• For discharge of the charitable and/or religious sentiments of the author of settlor of the trust, in a way that ensures public benefit;
• For claiming exemption from Income tax U/s 10 or 11, as the case may be, in respect of incomes applied to charitable or religious purposes;
• For the welfare of the members of the family and/or other relatives, who are dependent on the settlor of the trust;
• For the proper management and preservation of a property;
• For regulating the affairs of a provident fund, superannuation fund or gratuity fund or any other fund constituted by a person for the welfare of its employees.

Who can create a Trust:

As per Section 7 of the Indian Trusts Act, a trust may be created by every person competent to contract and by or on behalf a minor, with the permission of a principal court of original jurisdiction. Following are eligible to create a Trust.

• Trust by an Hindu Undivided Family;
• Trust by a Minor;
• Trust by a Woman;
• Association of Persons;
• Company.

Types of Trusts:

1. Private Trust:

   A trust is called a Private Trust when it is constituted for the benefit of one or more individuals who are, or within a given time may be, definitely ascertained. Private Trusts are governed by the Indian Trusts Act 1882. A Private Trust may be created inter vivos or by will.[4]
   
   Pre-requisites for creation of a Private Trust [5]:
   Following are essential conditions to bring into being a valid Private Trust [6]:
   • The person who creates a trust (settlor) should make an unequivocal declaration binding on him.
   • The objects of the trust must be defined and specified.
   • The beneficiaries are specified.
   • 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.
     
     Unless all the above requisites are fulfilled, a trust cannot be said to have come into existence.
      

2. Public Trust

   A trust is called as Public Trust when it is constituted wholly or mainly for the benefit of Public at large, in other words beneficiaries in the Public trust constitute a body which is incapable of ascertainment. The Public trusts are essentially charitable or religious trusts and are governed by the general Law. The provisions of Indian Trusts Act do not apply on Public Trusts. Like the private trusts, public trusts may be created inter vivos or by will. The Indian Trusts Act does not apply to public trusts which can be created by general law.
   
   Pre-requisites for creation of a Public Trust:
   There are three certainties required to create a charitable trust are as follows:
   
   • a declaration of trust which is binding on settlor,
   • setting apart definite property and the settlor depriving himself of the ownership thereof, and
   • a statement of the objects for which the property is thereafter to be held, i.e. the beneficiaries.
     
     It is essential that the transferor of the property viz the settlor or the author of the trust must be competent to contract. Similarly, the trustees should also be persons who are competent to contract. It is also very essential that the trustees should signify their assent for acting as trustees to make the trust a valid one. When once a valid trust is created and the property is transferred to the trust, it cannot be revoked, If the trust deed contains any provision for revocation of the trust, provisions of sections 60 to 63 of the Income-tax Act will come into play and the income of the trust will be taxed in the hands of the settlor as his personal income.
     
     Difference between Private and Public Trust:
     The difference between a public and private trust is essentially in its beneficiaries. A private trust’s beneficiaries are a closed group, while a public trust is for the benefit of a larger cross-section having a public purpose.
      

3. Public-cum-Private Trusts

   There may be certain trusts whose part of the income may be applied for public purposes and a part may go to a private person or persons, such trusts are known as Public cum Private Trusts. Such trusts, in respect of the portion of the income going to private person or persons are assessable as private trusts and in respect of that portion of the income which is applied for public purposes, they shall be eligible for exemption under section 11 provided these trust are created before the commencement of Income-tax Act, 1961 i.e. before 1-4-1962. Public-cum-private created on or after 1-4-1963 shall not be eligible for exemption u/s 11.

Registration of Trusts:

As per section 5 of the Indian Trusts Act, a private Trust in relation to an immovable property must be created by a non-testamentary instrument in writing, signed by the author of the trust or the trustee and registered (under Section 17 of Indian Registration Act). Thus, registration of a trust is necessary when it is declared by a non-testamentary instrument.

This registration would still be required, even if the instrument declaring the trust is exempt from registration under the Indian Registration Act. In case of a Private Trust declared by a will, registration will not be necessary, even if it involves an immovable property. Registration will not be required, of a trust in relation to movable property. In case of Public Trust, whether in relation to movable property or an immovable property and whether created under a will or inter vivos, registration is optional but desirable.

In case of Charitable or religious Trust in relation to an immovable property, for claiming exemption u/s. 11 of the I.T. Act 1961 it is essential that the instrument of trust is duly registered.

Registration is always desirable even if it is not statutorily required. Following are the advantages of a registered trust:

• It becomes an official document with support and law;
• Effectuates Transmutation of possession;
• Easy conveyance of trust-property to the Trustee;

Advantages of a Trust:

· A trust can be formed for Charitable/Religious purposes which enables the settlor to discharge his sentiments for public benevolence, amelioration of human suffering, advancement of knowledge etc., in a regulated and proper way.

• From taxation point of view, a charitable or religious trust enjoys several tax exemptions and benefits
• Donations to eligible charitable institutions are also deductible from taxable income of the donor.
• A trust can also be formed for the welfare of family members and relatives dependent upon the settlor. Besides, there is an ample scope of tax planning through private /family trusts.
• The Institution of a trust enables the settlor to preserve his property from division and transfer to outsiders.

Duties of Trustees:

Trustee is not bound to accept the trust.[7] However, once accepted, he cannot renounce it except permission of civil court or beneficiary (if he is major) or by virtue of special power in the instrument of trust.[8] Once trustee accepts trust, he is bound to fulfil the purpose of trust and to obey directions given at the time of creation of the trust. It can be modified with consent of beneficiary.[9]

Following are duties of trustee:

• Inform himself of state of trust property[10]
• Protect title to trust property[11]
• Not to set up title adverse to beneficiary[12]
• Take care of property as a man of ordinary prudence would deal with such property as own property[13]
• Conversion of perishable property to permanent and immediately profitable character[14]
• To be impartial[15]
• To prevent waste[16]
• Keep proper accounts and information[17]; and
• Invest trust-money in prescribed securities and not others.[18]

Step-by-step registration process of a trust [19]:

• Before registering a trust following steps are required to be followed:
  
  1. Name of the trust
  2. Address of the trust
  3. Objects of the trust (charitable or Religious)
  4. One settler of the trust
  5. Two trustees of the trust
  6. Property of the trust-movable or immovable property (normally a small amount of cash/cheque is given to be the initial property of the trust, in order to save on the stamp duty).
      
• Prepare a Trust Deed on stamp paper of the requisite value.
   
• Requirement for registration of Trust Deed with the Local Registrar under the Indian Trusts Act, 1882:
  
  1. Trust Deed on stamp paper of requisite value
  2. One passport size photograph & copy of the proof of identity of the settler
  3. One passport size photograph & copy of the proof of identity of each of the two trustees.
  4. One passport size photograph & copy of the proof of identity of each of the two witnesses.
  5. Signature of settler on all the pages of the Trust Deed
  6. Witness by two persons on the Trust Deed.
      
• Go to the local registrar & submit the Trust Deed, along with one Photocopy, for registration. The photocopy of the Deed should also contain the signature of settler on all the pages. At the time of registration, the settler & two witnesses are required to be personally present, along with their identity proof in the original.
   
• The Registrar retains the photocopy & returns the original registered copy of the Trust Deed.

Levy of Stamp Duty and Registration Fee payable on Trust Deed [20]

18	Trust	54
	(i) Declaration of Trust- Concerning any money or amount conveyed by the author to the trust as corpus	54(A)(i)	Rs.1000/-	I	1%
	(ii) Concerning any immovable property owned by the author  and conveyed to the trust of which the author is the sole trustee	54(A)(ii)	Rs.1000/-	I	1%
	(iii) Concerning any immovable property owned by the author and conveyed to the trust of which the author is not a trustee or one of the trustees.	54(A)(iii)	@5% ( under article No. 20(1))	I	1%
	(iv) Revocation of Trust	54(B)	Max. Rs.200	III	Rs 100/-

End-Notes:

1. Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, were amended and these regulations are now called the SEBI (Mutual Funds) Amendment Regulations, 2009
2. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Trust%20and%20Trust%20Laws,%20The%20World%20Trust%20Survey.pdf, last accessed on 21 September, 2016 at 12:30 hrs
3. http://www.rna-cs.com/trust-an-overview-2/, last accessed on 21 September, 2016 at 12:50 hrs
4. http://www.rna-cs.com/trust-an-overview-2/, last accessed on 21 September, 2016 at 17:58 hrs
5. http://www.rna-cs.com/trust-an-overview-2/, last accessed on 21 September, 2016 at 12:50 hrs
6. See section 6 of the Indian Trusts Act, 1882
7. See section 10 of the Indian Trust Act, 1882
8. See section 46 of the Indian Trust Act, 1882
9. See section 11 of the Indian Trust Act, 1882
10. See section 12 of the Indian Trust Act, 1882
11. See section 13 of the Indian Trust Act, 1882
12. See section 14 of the Indian Trust Act, 1882
13. See section 15 of the Indian Trust Act, 1882
14. See section 16 of the Indian Trust Act, 1882
15. See section 17 of the Indian Trust Act, 1882
16. See section 18 of the Indian Trust Act, 1882
17. See section 19 of the Indian Trust Act, 1882
18. See section 20 of the Indian Trust Act, 1882
19. http://indiamicrofinance.com/procedure-registration-trust-indian-trusts-act-1882.html , last accessed on September 22, 2016 at 17:11 hrs
20. http://202.138.101.165/karigr/stampdutyregistration/default.htm, last accessed on September 22, 2016 at 17:32 hrs