Private Trust Definition: a private Trust may be a legal contract that holds and manages assets for relatives, relations, and friends of the Grantor (the Trust creator and owner). There are three major components to any Trust:
•Grantor: A Trust is made by a “Grantor,” who can also be mentioned as a “Trustor” or “Settlor.”
•Trustee: The trust is managed by a “trustee” (or multiple trustees) who is the custodian and manager of the trust and its assets.
•Beneficiaries: A Trust benefits persons or charities, referred to as the “beneficiaries.”
In legal terms, a private Trust may be a “fiduciary relationship” that grants a beneficiary the proper money or property. Private Trusts can survive the Grantor’s death, and should even be created through the direction during a legal document. within the latter case, the Trust is going to be formed after the Grantor’s death.
Types of Private trust:
There are three kinds of implied trust classified further, namely
Revocable Trust:
In this sort of trust, the settlor can easily alter or terminate after its formation. It doesn’t protect properties, because they will be removed from this type of trust. Here properties aren’t considered to tend away in order that they are taxed at the slab rate by the settler’s side. it’s merely an alternate of a will.
Irrevocable Non-Discretionary Trust:
Here, it’s impossible to withdraw the assets, but the settlor has complete control over trust norms as he/she can decide which beneficiary receives which assets and the way much. If the settlor is the primary beneficiary, he or she is going to be taxed at the slab rate.
Irrevocable Discretionary Trust:
In this case, it’s reversive, the trustee will decide which beneficiary should get which asset and in what proportion. The Settlor will decide the beneficiaries list alone. In other words, the beneficiaries alone are going to be disclosed by the settlor, not their proportion. The trustee will allocate the proportion for every beneficiary.
A well-drafted trust allows the trustee to incorporate or exclude beneficiaries from the category, allowing the trustee greater flexibility to require decisions consistent with the circumstances. The beneficiaries cannot compel or influence the trustee to use any of the property for his or her benefit.
Benefits of a private trust
Protection of assets:
• If the property is “private trust ownership”, the creditor cannot make any claim.
• But, note that, if the trust is established only to run far away from creditors, then in those cases the court can order the attachment of the property that lies within the trust.
• Similarly, if anyone wishes to guard his wife’s and children’s interests from creditors’ claims, he can purchase a policy under the MWPA (Married Women Property Act). The policy purchased under this act is going to be created as a sort of private trust for spouses and youngsters.
• Now, the creditor cannot make any claim on the sum assured of that policy. An insurance firm will keep it as trust property and therefore the spouse and youngsters are going to be the sole beneficiaries.
Asset management:
• The trustees of the private trust will manage the assets as per the deed of trust. tons of professional companies, banks, and corporates are providing trusteeship services.
• This private trust helps within the management of assets when there’s a problem like increased age factor, health issues, just in case of special beneficiaries, etc.
Distribution of estate:
• When the assets are transferred to a trust with clearly mentioned objectives, beneficiaries’ names and therefore the way assets must be distributed among the beneficiaries, the trust will do all appropriate things as mentioned during a deed of trust.
• It would also help to stop unnecessary court trials and therefore the problem of getting probate thereby contributing to cost savings.
Private trust deed:
To establish a private trust, you’ll get to execute a deed called a deed of trust (if the trust was created during your lifetime), and similarly, you’ll create trust through your will. Also, you’ve got to appoint trustees to administer the trust.
The deed of trust or will should specify the subsequent features:
• The intention for creating the trust
• The objective of the trust
• Beneficiary or beneficiaries
• The trust property, which is to be transferred by the settlor to the trust during the creation of trust unless the trust is being stated under a Will, during which in any event, the assets will be transferred to the trust upon your death
• If the trust was created in your lifetime, more properties also can be transferred thereto, including under your Will.
It is also advisable to make a decision if the trust is to be:
• Discretionary (i.e., where the transfers are going to be at the trustee’s discretion)
• Non-discretionary (where the settlement agency itself explicitly specifies how the distribution of trust assets should be made to the beneficiaries)
• Revocable or irrevocable.
If your property is transferred to a trust during your lifetime, then the payment of stamp tax is mandatory and would even be required to be registered under the Indian Registration Act.
In case, if your property is transferred to the trust under your Will, then no stamp tax would be payable on the transmission of the property to the trust
Checklist: Annual compliances
Private trusts shall suit the provisions that began within the Indian Trusts Act, 1882, the income tax Act, its Rules and Regulations, and other related laws.
Annual returns filing, Account Auditing, submitting a foreign contribution report, TDS certificate: If required, Taxation of Private trust, Taxation of Discretionary trust, Taxation of Specific trust.
Private trust registration process:
The following steps need to be taken to register as a private trust in India,
• A deed of trust must be drafted on stamp paper of the stipulated value.
• The deed of trust must disclose the name of the trust, trust address, the character of the trust (i.e., charitable or religious), the settlor’s name, and two trustees of the trust also because the property type, i.e., either movable or immovable property.
Documents required:
• verified true copies of the registration certificate of the institute’s
• Details of all trustees of the trust alongside their address and PAN.
• Last 3 years audit report of record and income & expenditure.
• The original copy of the deed of trust as proof of the creation of the Trust.
• Photocopy of income tax registration certificate.
