Trust is an arrangement where one person gives the ownership of the property to another party (usually a trust) to be taken care of for another party commonly known as a beneficiary. The person transferring the property is known as the settlor and must legally transfer the property to the trustee.
In another words, it is a legal agreement where the owner gives charge to another party to look after his asset(s) for the benefit of the beneficiary whom the owner has mentioned in the trust deed. This is an effective way of estate management where the assets are protected by the Trustee(s).
Here, trust deed is an important aspect in the formation of a trust in which all the details are clearly mentioned in a non-judicial stamp paper. It should have all the related provisions concerning the management of the trust along with the procedure for appointing and removing the members.
The trust deed prescribes the main objectives for setting up the trust, powers of the beneficiary and the trustee. There are different assets which can be protected through trusts in India like cash, insurance policies, mutual funds, shares and properties.
There are three parties involved in trusts which are –
Majorly there are two types of trust that operate in India i.e. Public Trust and Private Trust however; there are other types of trust which can be used for investment purposes. Such trusts are governed by the Securities and Exchange Board of India (SEBI).
In this form of trust, the trustee is just a passive depository of the trust property since there are no duties assigned to him and neither any direction are given to the person.
This type of trust is operative in nature and the trustee acts as the agent who executes the wish of the settlor.
This type of trust is created by the settlor with the intention to benefit one or more individuals as beneficiary. It can be created as a gift to another person or through a will.
This type of trust may or may not be charitable in nature and is primarily setup for the promotion of public welfare and not some selective individuals.
This type of trust is created in a written or verbal form in which a person is nominated to be the trustee of the trust. The settlor transfers the property/asset to the trustee who may distribute it or the income generated from that property/asset among the beneficiary.
This type of trust is established without any procedural formalities and is not distinctly created by the settlor. There are other parties involved in the creation of the trust.
A trust can be created by an individual, Hindu undivided family, association of persons, company, society etc. The trust can also be created by or on behalf of a minor who requires the permission of principal civil court of original jurisdiction.
To register a trust in India, you would require the following documents.
This is the first step of the registration process where you need to choose a name for your trust however; you have to make sure that it should not fall under the restricted word list. A registered name will provide authenticity to the trust.
It is important to be clear of the number of beneficiary and trustees at the time of registering a trust since there is no specific rule governing the number of people. At times, the registrar or sub-registrar decides the number at the time of registration. A minimum of 2 trustees are necessary to be a part of the trust however; there is no upper limit.
According to Section 10 of the Indian Trusts Act, no person is bound to become a trustee; he/she can also reject the offer.
To register a trust you need to draft a trust deed which contains all the important information regarding the working of the trust. While preparing a deed following information needs to be mentioned clearly.
The trust deed must be duly signed by the settlor and minimum 2 trustees and witnesses. The property in question must be clearly mentioned. It should be prepared on a stamp paper whose value must be certain percentage of the total value of the trust’s property.
The Trust Deed needs to be submitted with the sub-registrar or registrar falling under the jurisdiction of your office address. The settlor and two witnesses must be present with an original identity proof during the registration process. The rules of physical presence might differ according to different states.
Once submitted, the authorities will rectify all the details and upon confirmation will issue an official trust deed certified by the relevant authorities. In case you wish to keep a copy of the trust deed with the registrar then an additional fee needs to be paid.
Majorly trusts are registered under the category of private and public trusts in India. They are taxed on different parameters depending on the income of the trusts.
Private Trusts are categorized in two types such as specific and discretionary. In a specific private trust, the share of each beneficiary is specified however; in a discretional private trust the number/amount of share is not specified. Here, is a bifurcation of the tax exemption for private trusts.
For Public Trusts, the tax is decided as per Sections 11 and 13 of the Income Tax Act, 1961. The main motive should be to use the income of the trust for religious or charitable purposes in India.