Creating a Trust in India involves a series of legal and administrative steps, governed by specific regulations to ensure proper management and protection of assets.

Understanding these steps and the associated legal framework is crucial for establishing a valid and functional Trust.

This guide provides detailed insights into the process of forming a Trust in India, covering legal requirements, tax exemptions, practical considerations, and the procedures for Trust registration in India.

Understanding Trusts & Their Formation

What is a Trust?

A Trust is a legal arrangement where one party, known as the Trustee, holds and manages assets on behalf of another party, known as the beneficiary.

Trusts can be established for various purposes, including personal estate planning, charitable causes, and managing family wealth.

Examples of public Trusts include charitable and religious Trusts, which are established for charitable, educational, and religious purposes.

In India, Trusts are governed by the Indian Trusts Act, 1882, and other relevant legislation.

Why Form a Trust?

Trusts offer several benefits, including:

• Asset Protection: Trusts provide a mechanism to protect assets from creditors and legal disputes.
• Tax Benefits: Trusts can offer tax advantages, including income tax exemptions under certain conditions. Specifically, charitable and religious public Trusts may qualify for income tax exemption under Section 11 of the Income Tax Act, which does not apply to private Trusts.
• Estate Planning: Trusts facilitate the orderly transfer of assets to beneficiaries, avoiding probate and potential legal challenges.

Steps To Form A Trust In India

1. Determine the Type of Trust

Before forming a Trust, it’s essential to determine the type of Trust you want to establish.

The primary types of Trusts in India include:

• Private Trusts: Created for personal purposes, such as managing family wealth or providing for dependents. The legal framework of a private Trust involves specific registration processes and tax implications. Unlike public Trusts, which are established for broader public welfare, private Trusts focus on personal property management and can serve both public and private purposes.
• Charitable Trusts: Established for charitable purposes, such as supporting educational institutions, healthcare, or religious causes.
• Public Cum Private Trusts: Combines elements of both public and private Trusts, often used for mixed purposes.

2. Draft the Trust Deed

The Trust deed is a legal document that outlines the terms and conditions of the Trust.

It should include:

• Name of the Trust: A unique name for the Trust.
• Purpose of the Trust: The objectives for which the Trust is created.
• Trustees: Individuals or entities responsible for managing the Trust.
• Beneficiaries: The parties who will benefit from the Trust.
• Trust Property: Details of the assets placed in the Trust.
• Governing Provisions: Rules and guidelines for the administration of the Trust.

Additionally, the documents required for trust registration include the Trust Deed, signatory documents, and principal address documents.

Failure to provide any of these can lead to the rejection of the application.

3. Execute the Trust Deed

The Trust deed must be executed on non-judicial stamp paper, which is subject to stamp duty as per the Indian Stamp Act, 1899.

The deed should be signed by the Settlor (person creating the Trust), the Trustees, and two Witnesses.

It is crucial to ensure that the deed is properly executed to maintain its legal validity.

4. Obtain Legal Recognition

For a Trust to be legally recognised, it must be registered with the appropriate authorities.

Trust registration offers legal protection against unauthorised claims and enhances the legal standing of the Trust.

This involves:

• Registering with the Sub-Registrar: The Trust deed must be presented at the local sub-registrar’s office for registration. The process involves submitting the original Trust deed, along with identification documents of the Trustees, and paying the applicable registration fees.
• Trust Registration Certificate: Once registered, the Trust will receive a registration certificate, which serves as proof of the Trust’s legal existence.

5. Open a Bank Account

After obtaining the Trust registration certificate, the Trust can open a bank account in its name.

The bank will require the Trust deed, registration certificate, and identification documents of the Trustees to open the account.

This account will be used to manage the Trust's assets and transactions.

6. Comply with Tax Regulations

Trusts must comply with the Income Tax Act, 1961, and other relevant tax regulations.

Key considerations include:

• Tax Exemptions: Charitable Trusts may qualify for tax exemptions under Section 11 of the Income Tax Act, subject to compliance with specific conditions. Establishing a charitable Trust not only provides tax benefits but also offers legal protections that support charitable engagement and financial aid for the underprivileged.
• Filing Income Tax Returns: Trusts must file annual income tax returns, detailing the Trust’s income, expenditures, and distributions. The Trust should also obtain a Permanent Account Number (PAN) from the Income Tax Department.
• Capital Gains Tax: If the Trust’s assets are sold, capital gains tax may apply. It’s important to consult a tax professional to understand the implications and ensure proper compliance.

7. Manage Trust Assets

Effective management of Trust assets is crucial for fulfilling the Trust’s objectives.

Trustees must manage the trust assets in a fair and just manner to maintain public trust and comply with legal standards.

This involves:

• Maintaining Proper Records: Trustees should keep accurate records of all transactions, including income, expenses, and distributions.
• Regular Audits: Periodic audits by a qualified accountant can ensure that the Trust is managed in accordance with legal requirements and the terms of the Trust deed.
• Compliance with Legal Obligations: Trustees must adhere to legal and regulatory requirements, including those related to asset management, reporting, and distribution.

Legal Framework & Considerations

Indian Trusts Act, 1882

The Indian Trusts Act, 1882, provides the legal framework for the creation and administration of Trusts in India.

A public cum private Trust is a type of Trust that serves both public and private purposes, benefiting the public while also providing for specific individuals.

It outlines the rights and responsibilities of Trustees, the process for managing Trust property, and the duties towards beneficiaries.

Income Tax Act, 1961

The Income Tax Act, 1961, governs the tax treatment of Trusts in India.

It specifies the tax exemptions available to charitable Trusts and the tax liabilities for private Trusts.

Understanding these provisions is essential for effective tax planning and compliance.

Additionally, the Trust registration process is a formal procedure that involves multiple parties and compliance with legal standards.

Other Relevant Laws

• Indian Succession Act, 1925: Governs the succession of property and may impact the formation of Trusts, especially in cases involving testamentary Trusts.
• Societies Registration Act, 1860: May be relevant for Trusts that are registered as societies or non-profit organisations.

Estate Planning & Trusts

Incorporating Trusts into Estate Planning

Trusts play a vital role in estate planning, helping individuals manage and distribute their assets according to their wishes.

Key benefits include:

• Avoiding Probate: Trusts can help avoid the lengthy and costly probate process, ensuring a smoother transfer of assets to beneficiaries.
• Providing for Dependents: Trusts can provide financial support for dependents, including minor children and individuals with special needs.
• Protecting Assets: Trusts can protect assets from creditors and legal disputes, safeguarding the financial interests of beneficiaries.
• Incapacitation Planning: Trust can enable mechanism to ensure assets are not frozen and available medical needs of the beneficiary while not disrupting the lifestyle needs of the family.

Creating a Comprehensive Estate Plan

A comprehensive estate plan should include:

• Wills and Trusts: Outlining the distribution of assets and the establishment of Trusts.
• Advance Directives: Providing instructions for medical care and end-of-life decisions.
• Power of Attorney: Appointing individuals to make financial and legal decisions on your behalf.

Consulting Legal and Financial Professionals

Establishing and managing a Trust requires careful consideration of legal and financial implications.

Consulting with legal and financial professionals can help ensure that the Trust is created and administered in accordance with applicable laws and regulations.

Understanding the procedure for Trust registration, including naming the Trust, identifying Settlors, preparing a Memorandum of Association, drafting a Trust deed, and submitting the documents to the registrar for review and certification, is crucial.

The Bottom Line: How Yellow Can Help

Creating a Trust in India involves several key steps, including drafting and executing the Trust deed, obtaining legal recognition, and complying with tax regulations.

Understanding the legal framework and incorporating Trusts into estate planning can provide significant benefits, including asset protection, tax advantages, and effective management of your estate.

By following the outlined steps and seeking professional advice, you can establish a Trust that meets your needs and ensures the proper management and distribution of your assets.

At Yellow, we can help you with all aspects of estate planning, including creating a Trust. Our team of legal experts has more than 50 years of estate planning experience and can help you with any issues you may encounter, while helping you create your Trust in the right and most efficient manner.