A Trust is a legal arrangement where a person (the settlor) transfers assets to another party (the Trustee) to manage them for the benefit of a third party (the Beneficiary).

Trusts in India are governed by the Indian Trusts Act, 1882, which lays out the legal framework for creating both public and private Trusts.

The key document that governs the Trust is the Trust Deed, which details the Trust’s objectives, assets, and duties of the Trustee.

Trusts can be created for various purposes, including asset protection, estate planning, and tax efficiency.

Types Of Trusts In India

In India, Trusts can generally be divided into two broad categories:

Private Trusts

Created for the benefit of specific individuals or families, private Trusts are a popular estate planning tool used to manage family wealth.

A private Trust can be set up to protect assets, distribute income, and ensure that the settlor’s wishes are carried out after their death.

Private Trusts are usually used to avoid family disputes over inheritance and provide for the financial security of family members.

Public Trusts

These are set up for charitable or religious purposes and are governed by separate regulations, such as the Bombay Public Trust Act.

Public Trusts benefit a larger group of people, like a community or society, and are often used to fund educational, healthcare, or religious activities.

Why Create A Trust?

Trusts serve many functions and offer benefits such as:

• Asset Protection: Trusts protect personal assets from creditors or legal disputes.
• Wealth Management: Trusts allow family members to benefit from assets without directly owning them, which ensures better management and protection of family wealth.
• Incapacity Planning:
• Conditional Distribution:  For instance, pay for education and lifestyle till a child turn 25 and only thereafter provide complete control of the assets.

Legal Framework For Trusts In India

Trusts in India are governed by several key laws, including:

1. Indian Trusts Act, 1882: This is the primary law governing private Trusts in India. It outlines how Trusts should be created, managed, and dissolved.
2. Income Tax Act, 1961: Under this Act, certain Trusts can claim tax exemptions. Charitable Trusts, in particular, can benefit from tax exemptions on income generated by their assets.
3. Indian Registration Act, 1908: This governs the registration process for Trusts, ensuring their legal recognition.

Steps To Create A Trust In India

To establish a Trust, you need to follow a structured process:

1. Draft a Trust Deed: The Trust Deed is the foundational legal document that outlines the Trust’s objectives, Beneficiaries, and the Trustee’s responsibilities. This document must be signed by the settlor and witnessed by two individuals.
2. Choose the Trustees and Beneficiaries: The settlor must appoint a Trustee who will manage the Trust’s assets in the best interests of the Beneficiaries.
3. Register the Trust: In many cases, it is mandatory to register the Trust with the local sub registrar’s office. For public Trusts, registration is compulsory. Private Trusts can also be registered to ensure legal protection and is mandatory if the Private Trust is required to hold immoveble assets.
4. Transfer Assets to the Trust: Once the Trust Deed is registered, assets like real estate, bank accounts, or other properties can be transferred into the Trust’s name.

Tax Implications Of Trusts In India

Trusts can offer significant tax advantages, particularly if they are set up as charitable or religious Trusts.

Key points regarding taxation include:

• Income Tax Exemption: Charitable and religious Trusts can claim tax exemptions under Sections 11 and 12 of the Income Tax Act, 1961.
• Capital Gains Tax: Trusts may be subject to capital gains tax when they sell assets. However, certain exemptions are available, particularly for charitable Trusts.
• Inheritance Tax: Although India does not currently have an inheritance tax, Trusts are often used in other jurisdictions to mitigate estate taxes, and the framework could evolve in India.

Types Of Assets Held In Trusts

Trusts can hold a wide variety of assets, including:

• Immovable Property: This includes land, buildings, and other types of real estate.
• Movable Property: Trusts can hold movable assets like a bank account, jewellery, and stocks.
• Intellectual Property: Trusts may be used to manage and protect intellectual property rights, such as patents and copyrights.

Registration Of A Trust In India

The registration of a Trust provides it with legal recognition and makes it easier to enforce the terms of the Trust Deed.

The registration process typically involves:

1. Preparation of the Trust Deed: As mentioned earlier, the Trust Deed must be properly drafted and witnessed.
2. Submission at the Sub Registrar’s Office: The Trust Deed must be submitted at the local sub registrar’s office, along with relevant documents like proof of identity for the settlor and Trustees.
3. Payment of Stamp Duty: Depending on the state, a certain amount of stamp duty will need to be paid during registration.
4. Registration Certificate: Once the Trust is registered, the sub registrar issues a Trust registration certificate, confirming that the Trust is legally valid.

Regulatory Compliance

Trusts must comply with various regulatory requirements, including:

• Annual Tax Filing: Trusts must file annual returns to the Income Tax Department.
• Maintenance of Accounts: Trusts must maintain detailed records of income and expenses, as well as assets held.
• Tax Exemption: If the Trust is eligible for tax exemptions, it must apply to the income tax authorities.

The Bottom Line: How Yellow Can Help

Trusts are a powerful legal tool for managing and protecting assets in India.

Whether you are setting up a private Trust to manage family wealth or a charitable Trust for religious or philanthropic purposes, the Indian Trusts Act, 1882, and other applicable laws provide a solid framework for ensuring compliance and protecting the rights of Beneficiaries.

By registering a Trust and adhering to income tax regulations, you can enjoy tax benefits, protect assets, and provide for future generations.

A properly managed Trust ensures that the settlor’s wishes are carried out effectively, offering peace of mind and legal protection for all parties involved.

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.