How to Form a Trust in India

Author: Praharshi Jain

Posted on: Monday,March 16, 2020

Public trusts are created for public charitable purposes. There is no Indian level trust to set up public trusts, while some of the states in India like Madhya Pradesh and Rajasthan have their state-level act to set up public trusts. States like West Bengal and Bihar do not have any act or law to register a public trust. In contrast, in Maharashtra and Gujarat, all organizations that are registered as a society are, by default, also registered as Public trusts.

Trustees are required to manage the trust and they are individually as well as collectively responsible for every action carried out on behalf of the trust. Trustees are also liable for breach of trust.

A Private trust is created under and governed by the Indian Trusts Act of 1882, and it aims at managing assigned trust property for private and religious use. A Private trust does not enjoy the privileges and tax benefits that are available to public trusts.

In India, there are thousands of trusts created by wealthy individuals. Public trusts are treated as organizations with charitable purposes entitling all the tax benefits Examples of some of the trusts are – Sir Dorabji Tata Trust, Paragon Charitable Trust, etc.

Under the Indian Trusts Act, a settlor can create trust with his / her personal property, designated one or more trustees, and lay down the terms and conditions benefitting the identified beneficiaries, including one’s child, relative, or any other individual.

Definition of Charitable Trust

The Indian Trusts Act defines trust as 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 approved by the owner, or said and accepted by him, for the benefit of another, or of another and the owner. 

- The person who declares confidence is known as ‘author of the trust.’
- The person who accepts the confidence is known as the trustee.
- The person for whose benefit confidence is accepted by a trustee is called as “Beneficiary.”
- The subject matter of the trust is known as ‘trust- property.’
- The instrument by which trust is declared is known as trust deed.  

Reasons for Forming a Charitable Trust

- Discharge of religious or charitable sentiments, in a way that ensures public benefit.
- For claiming exemption from income tax, in respect of incomes applied to charitable or religious purposes.
- For the welfare of the family members and other relatives , who are dependent on the settlor of the trust.
- For the management and preservation of the property.
- For regulating the affairs of a provident fund constituted by a person for welfare of its employees. 

Procedure for forming a Charitable Trust

Public charitable or religious institutions can be established either as a trust or as a society or as a Section 8 of the company. It generally takes the form of a trust and primarily formed by one or more members.
For the formation of a Private trust, the following elements are necessary.
- An author or settlor of the trust.
- Trustee
- Beneficiary
- Trust property
- Transfer of trust property or trust money to the trustee.

As per section 6 of the Indian Trusts Act, Trusts is created when the author of the trust indicates with reasonable certainty by any words or action, the following- 
1. An intention on his part to create the trust
2. Purpose of the trust
3. Beneficiary
4. Trust property
5. Transfer of trust property to the trustee

Documents Required for Trust Formation

1. Details of all trustees with their address and PAN No.
2. Certified copies of the Institution's Registration Certificate.
3. Copy of Income Tax registration certificate.
4. Audited Balance Sheet and Income and Expenditure a/c with Audit Report for the last three years.
5. Original copy of the trust deed.

Trustee

A trustee is said to be a person to whom settlor transfers his property.
- Anybody can become a trustee if he/she has to manage the properties of trust and is eligible to enter into a contract.
- An insolvent, insane, or a minor person cannot be a trustee.
- One can reject his / her trusteeship whenever he/ she wants.
- A person assumes all the rights, liabilities, and duties of a trustee after accepting trusteeship.

Beneficiary

- Every person who is capable of holding property, such as a human being, corporate, company, or state, can be made a beneficiary of a private trust.
- Even an unborn child can also become beneficiary of the trust.
- Beneficiary is not bound by the wants and needs of the person creating the trust.

Trust Property

- Movable and immovable property both comes under the trust property.
- Trust consisting of immovable property, transfers the property to the trustee through a registered document.
- In case of trust consisting of movable property, there is no need to transfer the property through the registered document. Only the delivery of ownership to the trustee is enough.

Trust Deed 

When a private trust pertains to an immovable property, a written trust deed is essential and shall also be required to be registered.

Advantages of Trust

- Simple registration
- Simple regulations
- Simple record-keeping
- Low possibility of interference.
- Exemption from Income Tax due to charitable nature.

Disadvantages of Trust

- Tax exemption extended to societies may only be applied to public trusts, not private trusts.
- No system of an equity investment or ownership due to which it becomes less attractive to commercial investors interested in micro-financing.
- Organizations registered under the Societies Registration Act, a Trust Act, are considered unincorporated bodies.
- Also vulnerable to the implication under the money lenders acts of various state governments.

Some important sections of the Indian Trusts Act are as follows- 

Section 6 - Creation of Trust
Subject  to the provisions of section 5, a trust  is created  when  the author  of  the trust  indicates  with reasonable certainty by any words or acts 
(a) an intention on his part to create thereby a  trust, 
(b) the purpose of the trust,
(c) the beneficiary, and
(d) the trust-property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust-property to the trustee.

Section 7 - Who May Create Trusts
A trust may be created- 
(a) by every person competent to contract, 1* and,
(b) with the permission of a principal Civil  Court of original jurisdiction, by or on behalf of a minor; but the subject in each case to the law for the time being in force as to the circumstances and extent in and to which the author of the trust may dispose of the trust-property. 

Section 8- Subject of Trust
The subject-matter of a trust must be property transferable to the beneficiary. It must not be merely a beneficial interest under a subsisting trust.

Conclusion

A trust has many advantages like a simple process of registration and tax exemption and disadvantages like no system of equity investment. Still, the most important thing is its charitable nature. Trust may be registered or not registered, depending upon the state.
The main object behind the formation of trust is religious and charitable sentiments. So, to fulfill this Indian Trusts Act is formed.

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These articles are provided freely as general guides. Do not rely on information provided here without seeking expericed legal advice first. If in doubt, please always consult a lawyer.

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