Formation of trust

This query is : Resolved 

25 December 2007

Dear Sir,
My father want to form a trust for his property and he want that he himself alongwith his sons will be trustee of the trust The object of Trust would be earning out of that property and expenditure on account of social oblgation of family as well as cheritable purpose. Please advice me and what will be tax treatment wheather it will be taxed as aop/boi or as individual/huf.

Sandeep Aggarwal

R.V.RAO (Expert)
26 December 2007

you may also visit the same for more info.
Trusts are often used in family tax planning.

· Changes in tax laws have made trusts less attractive for commercial enterprises.

· Discretionary trusts maybe taxed at the maximum marginal rates applicable to individuals.


India follows the English concept of a trust as a vehicle under which property is alienated from the original owners and held by a trustee for the benefit of others. The law governing trusts is codified and contained in the Indian Trust Act.

Types of trusts

Common types of trusts are noted below.

· Public charitable or religious trusts

Income from these trusts is applied to charitable or religious purposes.

· Private trusts

Income from private trusts is available to specified beneficiaries and not the public at large. In some cases, the shares of the individual beneficiaries are fixed or ascertainable, according to the provisions of the trust deed. In others (discretionary trusts), the trustee has the power to apply the income among a class or group of beneficiaries in proportions determined entirely at the trustee's discretion.

Trusts are often used as vehicles to hold property for present or future needs of dependents and family members, and sometimes they are used to reduce the burden of tax. A common example is a trust that provides for the accumulation of income and capital for specified infant children. Subject to their maintenance during this period, the accumulation must be handed over to them upon their attaining a specified age or, in the case of a female beneficiary, upon marriage. Retirement trusts are commonly set up be employers to provide retirement benefits to employees.

Taxation of trusts

Subject to the fulfillment of specified conditions, a public trust is exempt from tax if the income is applied for charitable or religious purposes. Approved retirement trusts are also exempt from tax. In the case of private trusts, if the individual shares of the beneficiaries are ascertainable, they are included in the individual taxable incomes, the tax assessment being made either directly on the beneficiary or on the trustee as a representative of the beneficiary. However, if the trust has income from business, the entire income from the trust is taxed in the hands of the trustee at the maximum marginal rate applicable to individuals unless the trust is created by will for the benefit of relatives. When the individual shares of the beneficiaries are indeterminate (i.e., discretionary trust), the entire income is taxed din the hands of the trustees, in most cases at the maximum marginal rate applicable to individuals.

Taxation of beneficiaries

Where tax on a discretionary trust is assessed in the hands of the trustee, after-tax distributions to the beneficiaries are exempt from tax in their individual hands.

Tax treatment of settlor / grantor

If the trust effectively alienates income from the settlor/grantor, income tax liability thereon will be avoided. However, the settlor/grantor continues to be liable to income tax on income from the settled property to the extent that it is for the immediate or deferred benefit of a spouse or minor child. The transfer of assets to the trustee maybe subject to gift tax. Stamp duty is payable on the transfer of immovable property.

Use of trusts

Trusts have been widely used as a planning tool to shift income to beneficiaries in lower tax brackets. Public charitable trusts are also common vehicles. Recent changes in tax laws have made trusts less attractive for commercial enterprises
provides the following income of trusts as exempt.
Any income derived from property held under a trust for charitable or religious purposes to the extent to which it is applied for such purposes in India. If such income is set apart or accumulated for such purposes, then if such income does not exceed 25% of the income from the property. Section 11(1)(a)
Any income derived from property held under a trust in part for charitable or religious purposes to the extent to which it is applied for such purposes in India., If such income is set apart or accumulated for such purposes, then if such income does not exceed 25% of the income from the property. The exemption is available if the trust was created before 1.4.1952. Section 11(1)(b)
Any income derived from property held under a trust for charitable purposes to the extent to which it is applied for such purposes outside India provided that it promotes international welfare in which India is interested. Section 11(1)(c)
Voluntary contributions received by a trust or an institution towards its corpus. Section 11(1)(d)
Voluntary contributions received by a trust created wholly for charitable or religious purposes will be deemed to be the income derived from property held for charitable or religious purposes. Thus, such contributions will be exempt as provided in Section11. Section 12

26 December 2007

I want to form a family trust. I want to create the trust by transfer of assets through will of my father with other terms and condition etc.. Where I should apply, wheather it should be registered, if so than who will be the authority. May i get the name of any book which might be useful for me.

Sandeep Aggarwal

R.V.RAO (Expert)
27 December 2007

2.Transfer of Immovable Property to Trust
An immovable property can be transfered to the Trust, either by way of settling the property through a Will or Deed or by way of donating the same to the existing Trust. In all the cases the instrument should be in writing and it should contain complete description of the property so as to clearly identify the property. The title of property should be clear to be transferable to the Trust. It should be free from mortgage and litigation. The instrument by which the immovable property is desired to be introduced to Trust is required to be registered, then only the property can be conveyed in favour of the Trust. per section 7 of the indian trusts act, a trust can be formed –
a. by every person competent to contract, and
b. by or on behalf of a minor, with the permission of a principal civil court of original jurisdiction.
a person competent to contract is defined in section 11 of the indian contract act as a person who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject.
thus, generally speaking, any person competent to contract and competent to deal with property can form a trust.

4.who can be a trustee
every person capable of holding property can become a trustee. a private trust the beneficiaries are one or more ascertainable individuals. generally, a private trust is not a permanent one. but a public trust is of a permanent nature.
6.subject matter of trust
any property capable of being transferred can be a subject matter of a trust.

7.requisites of a trust
the existence of the author/settlor of the trust or someone at whose instance the trust comes into existence.
clear intention of the author/settlor to create a trust.
purpose of the trust.
the trust property
beneficiaries of the trust.
there must be divesting of the ownership by the author / settlor of the trust in favour of the beneficiary or the trustee.
unless all these requisites are fulfilled a trust cannot be said to have come into existence.

8.Transfer of Movable Property to Trust
A trust in relation to movable property, can be formed also by mere transfer of ownership of the property to the trustee, with a direction that the property be held under trust for the benefit of the beneficiaries. The ownership of a movable property can be transferred by physical act of handing over the possession of the property. The transfer of any symbol of ownership will be deemed sufficient, such as the key of the godown where the property is stored, or the deposit certificate of a Bank wherein the securities are lodged.
9.Private/family trusts are neither allowed IT exemption nor required to seek registration under the Income-tax Act

10.The Trust Deed, generally contains the following clauses :


Trust name by which Trust shall be known

Place were its office shall be situated

Author or settlor of the trust

Names of the Trustees


The property settled, for Trust – In case of immovable property, it should contain full description of the property sufficient to identify it

An express intention to direct the trust property from the trustees

The objects of the Trust

Minimum and maximum number of Trustees

The procedure for appointment, removal, replacement of trustees

Trustees rights, duties and powers

Administration of trust

Provision for maintenance of accounts, auditing etc.

Clause enabling, spending and utilization of the Trust funds or corpus.

Bank Account operations

Borrowing money on security for the purpose of the Trust

Investment of the Trust funds and dealing with Trust properties

Alienation of immovable property of the Trust

Amalgamation clause

Dissolution of Trust

Irrevocable nature of the trust.

11.It is well settled that no formal document is necessary to create a Trust as held in Radha Soami Satsung vs. CIT- (1992) 193 ITR 321 (SC). But for many practical purposes a written instrument becomes necessary under following cases –

When the trust is created by a will irrespective of whether the trust is public or private or it relates to movable or immovable property. This is because as per Indian Succession Act, a will has to be in writing

When the trust is created in relation to an immovable property of the value of Rs.100 and upwards, in case of a private trust. In case of public trusts, a written trust deed is not mandatory, even in respect of immovable property, but is optional.

A written trust-deed is always desirable, even if not required statutorily, due to following benefits :

a written trust deed is a prima facie evidence of existence of a trust ;

it facilitates devolution of trust property to the trust;

it clearly specifies the trust-objectives which enables one to ascertain whether the trust is charitable or otherwise;

it is essential for registration of conveyance of immovable property in name of the Trust;

it is essential for obtaining registration under the Income-tax Act and claiming exemption from tax;

it helps to control, regulate and manage the working and operations of the trust;

it lays down the procedure for appointment and removal of the trustee(s), his/their powers, rights and duties;
usually the sub registrar or magistrate in your district registers trust, though family trust does not necessarily gets registered.
about books if any on the subject, ishaal let you know. as of now i have list with me.SRI. R.N.LAKHOTIA HAS WRITTEN A FEW BOOKS ON THIS SUBJECT.GOOGLE SEARCH MAY HELP YPU RIGHT NOW IF YOU WISH.

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