TRUSTS
What is a Trust
A trust is defined as a legal relationship created by a person, the settlor when assets have been placed under the control of a trustee for the benefit of a beneficiary or a specified purpose. Once assets are transferred into the trust, the owner of the assets loses rights and control over them, and they become part of the trust property subject to the rules and instructions of the trust contract. Most basically, a trust is a right in property, which is held in a fiduciary relationship by one party (the trustee) for the benefit of another (beneficiary).
Types of Trusts
The two broad categories are public trusts and private trusts. Public trusts are typically created for charity/religious purposes, while private trusts are used by individuals/families as estate planning trusts. We will be restricting ourselves to trust & estate planning solutions on our website.
Private trusts can be broadly classified into two categories:
- Inter vivos Trust: A settlor who is living at the time the trust is established creates an inter vivos trust, which is a crucial part of trust & estate planning.
- Testamentary Trust: A trust created through an individual’s Will, i.e., after the passing away of the creator, is called a Testamentary Trust, commonly used in estate planning trusts.
Both these trusts can be further classified as below, depending on their revocability, purpose, and intentions:
Revocable Trusts
Revocable trusts are created during the lifetime of the creator (the Settlor) and can be altered, changed, modified, or revoked entirely at the discretion of the Settlor. These estate planning trusts allow individuals to manage their assets efficiently. The settlor himself/herself is normally the trustee and the primary beneficiary. Revocable trusts are extremely helpful in ensuring that an estate is managed in case of disability or other reasons, and they help avoid probate when transferring estate through a will.
However, it should be noted that a revocable trust is not an asset protection technique. Assets transferred to such a trust will remain available to creditors during the lifetime of the Settlor.
Irrevocable Trust
An irrevocable trust cannot be altered, changed, modified, or revoked after its creation. Once a property is transferred to an irrevocable trust, no one, including the Settlor, can take the property out of the trust. A revocable trust automatically becomes an irrevocable trust upon the death of the Settlor.
Using trust registration in India, individuals can establish an irrevocable trust to protect assets and ensure financial security.
Asset Protection Trust
An asset protection trust is a type of estate planning trust designed to protect a person’s assets from creditors. Businessmen and entrepreneurs often create such trust & estate planning structures as they may need to provide personal guarantees for business loans. However, it is advisable to take proper legal opinion before creating such estate planning trusts.
Constructive/Implied Trust
A constructive trust is an implied trust established by a court, determined based on certain facts and circumstances. Even if there was no formal declaration of a trust, a court may rule that the property should be used for a particular purpose. This plays an essential role in trust & estate planning.
Discretionary Trust
It is an arrangement where the trustee decides who among the beneficiaries is to benefit from the trust and to what extent. These estate planning trusts are primarily used for asset protection.
Fixed/Determinate Trust
A fixed trust ensures that the entitlement of the beneficiaries is predetermined by the settlor. The trustee has little discretion, making these types of estate planning trusts ideal for families with financially dependent members. Trust registration in India is necessary for such trusts.
Hybrid Trust
A hybrid trust combines elements of both fixed and discretionary trusts. The trustee must pay a fixed amount to beneficiaries as per the settlor’s instructions but has discretion regarding the remaining trust property. Many individuals opt for trust registration in India to formalize hybrid trusts under legal guidelines.
Who can create a trust
A trust may be created by any person competent to contract, including individuals, AOPs, HUFs, and companies. If a trust is created on behalf of a minor, permission from a Principal Civil Court is required. Trust & estate planning professionals can guide individuals in this process.
Taxation of a trust
In private trusts, if the beneficiaries’ shares are ascertainable (determinate trusts), their income is taxed individually. However, if a trust has business income, it is taxed at the maximum marginal rate unless it is created through a will for relatives. Trust registration in India is essential to ensure compliance with tax regulations.
Registration mandates for a Private Trust
For a private trust holding immovable property, a registered trust deed is mandatory under the trust registration in India framework. However, for trusts created via a will, registration is not necessary. If the trust property is movable, a trust deed signed in the presence of a witness is sufficient.
Rights of a Beneficiary?
Beneficiaries of estate planning trusts have several rights, including:
- Enjoying the profits of trust property
- Inspecting trust documents and accounts
- Instituting legal action if the trustee fails to execute the trust properly
- Expecting proper administration and protection of trust assets
How should you choose a Trustee
Some critical factors to consider when appointing a trustee for an estate planning trust:
- Is the person willing and legally competent to be a trustee?
- Does the person have financial and legal knowledge?
- Will the person act in the best interest of the beneficiaries?
- Does the person have the time and expertise to manage assets and fulfill responsibilities?
Proper trust registration in India ensures that the appointed trustee functions under a legally binding framework, protecting both the settlor and beneficiaries.