Main Features:

1. Appointment of trustee
a. who is bound to fulfil the purpose of the trust and obey the directions of the author
of the trust
b. who is bound to protect title of trust property and not set up title adversary to
beneficiary.
2. Governed by the Indian Trusts Act, 1882:
a. Defines the rights, duties, and liabilities of trustees and beneficiaries.
b. The act provides flexibility in drafting the trust deed, allowing customization.
3. Roles in a Trust:
a. Author/Settlor/Trustor: Creates the trust and transfers assets.
b. Trustee: Manages the trust assets and adheres to its objectives. (Refer to Section 10:
Duties of Trustee)
c. Beneficiaries: Individuals or entities for whom the trust is created.
4. Trust Deed: Legally binding document outlining the purpose, beneficiaries, powers of the
trustee, and other terms.
5. The trustor may also create a Payable on Death Trust which will transfer her assets to the
beneficiaries at the time of her death, without the long process of probate.
[Trust FAQs]

Pros:
 Control over the succession of the assets – the trust deeds dictates how the assets will be
managed. The trustor can change and modify the trust deed as she desires.
 NRIs sons will not attract any inheritance tax if the assets are transferred to a trust.
 Asset protection: Assets in the trust are not subject to direct claims by creditors against
individual family members.
 Protection from matrimonial issues/alimony.
 Tax Efficiency: Helps minimize tax liability when structured with tax planning in mind.
 Succession Planning: Simplifies asset transfer without the need for probate.
 Wealth Management: Consolidates family assets for efficient management and oversight.
 Confidentiality: Family trusts avoid the public disclosures associated with wills and probate.

Cons:
 Initial Setup Costs: Legal and administrative expenses in drafting the trust deed and
transferring assets (stamp duty on assets transferred, registration fees, legal fees, etc.)
 Compliance and Administration: Trustees must maintain proper records and comply with the
trust deed and legal requirements.
 Loss of Direct Control: Once assets are transferred to the trust, the settlor loses direct
control over them.
 Taxation Complexity: Income Tax Act, 1961, treats trusts as separate entities for taxation,
which can lead to higher tax rates if not properly planned. Also, different types of trusts are
treated differently, requiring the need to pay very close attention to the applicable
provisions.

Requirements:
  Form Memorandum of Association for the Trust: includes the objects of the trust what the
trust is formed for.
 A trust deed must be drafted and must be produced to the companies' registrar.
o Trust name
o Registered office or place of business
o Activities carried out by the trust and their objectives
o Information related to the authors/trustors and trustees.
o Assets owned by the trust
o Period or term for which the trust will remain in operation.
o The roles, responsibilities, and powers of the trustees.
o Procedures for amending the trust deed and provisions for the closure or
termination of the trust.
 The powers and responsibilities of the trustee must be carefully drafted and included in the
trust deed, to provide maximum protection to the assets of the asset and ensure that the
purpose of the trust is fulfilled appropriately.
 Documents required
o Trust Deed with the respective stamp value.
o Photograph, PAN card, Address proof, Identity proof of individuals associated in
trust.
o Address proof of the trust registered office.
 Submit the trust deed to the registrar along with other documents.
 Obtain trust registration certificate.
 Obtain all other necessary registrations as required under various laws to conduct business,
undertake financial transactions, hold securities, etc.
For example, a PAN application (signed by the trustee) is necessary to undertake financial
transactions in India.
[Formation of Trust]

Stamp Duty:
1. On the trust deed – 2 to 3% on the value of assets transferred through the trust deed (check
out the respective State Stamp Acts for more information regarding the stamp duty levied)
2. At the time of transfer of assets to the beneficiary – No stamp duty at the time of transfer is
charged.

Tax Implications:
1. At the time of transfer of assets to the trust:
If the trust was created solely for the benefit of a relative of the trustor, any sum of money
or asset transferred to the trust is exempt from tax. In other cases, the trust is liable to pay
gift tax under Section 56(2)(x) of the Income Tax Act.
2. In case of Public Charitable trusts, they can apply for tax exemptions under Section 12A and
offer donor benefits under Section 80G, subject to the condition that at least 85% of the
trust’s income must be spent on charitable activities.
3. The income of a charitable trust is exempt from tax, provided the following conditions are
fulfilled:
a. The trust should be registered with the Commissioner of Income Tax as a Charitable
Trust and the registration shall be made in accordance with the guidelines available in
Section 12A of the Act.
 b. The property of the trust should be bound by a trust deed or another similar legal
obligation.
c. The purpose of holding the property should be a charitable or religious purpose.
d. The trust should not have been created for the benefit of any particular religious
community or caste group.
e. The income of the trust should not be applied for the benefit of the settlor or any person
who can be considered as a close relative of the settlor.
f. An exemption will be available exclusively for the portion of the income which is applied
towards charitable or religious purposes.
g. The trust must submit its books of accounts, if the income of the trust before allowing
the exemptions available, exceeds the basic exemption limit of the trust.
h. The trust should submit the return of income if the income of the trust exceeds the basic
exemption limit. The due date for filing the return varies depending on the
circumstances of the trust.
i. The trust may earn income which is accumulated towards application in the future. In
such cases, the income which is accumulated towards future application should be
invested separately. The mode of investment should comply with the provisions of the
Act.
4. Private trusts are either assessed as an individual or an AOP.
5. In case of in case of revocable trusts, income is clubbed in the hands of the transferor,
whereas, for irrevocable trusts, income is not clubbed in the hands of the transferor.
Irrevocable trusts are governed by the provisions of Section 160 to 164 of the Income Tax
Act.
6. In case of irrevocable trusts,
a. If shares of beneficiaries are known, Section 161 provides that the Income tax will be
levied in the same manner as would have been applied to the beneficiaries of the Trust.
That means the tax will be computed as per slab rates applicable to the individual
beneficiaries as it would have been applicable to them individually.
However, if the trust has income from profits and gains from business, as per Section
161(1A) the entire income will be taxable at Maximum Marginal Rate (MMR). Exception
–
In case of a Trust settled under will for a relative for maintenance.
This is the only Trust settled by the said settlor.
b. If the shares of beneficiaries are not known, Section 164 of Income Tax Act provides that
the income of the trust will be taxable at (MMR).
However, if the trust has income from profits and gains from business, similar provisions
as per Section 161(1A) will apply.
Note: If there are multiple beneficiaries, the trustee files a single return in a representative
capacity.
[Tax Rates] [Taxability of trusts]

Types of Trusts
1. Based on Purpose
Public Trusts Private Trusts
These trusts are created for the benefit of the It is created for the benefit of specific
public or a section of the public, such as for individuals, who can be identified at the time of
charitable or religious purposes. They are trust creation or within a specific timeframe.
 usually formed for philanthropy, social welfare, They are usually created for estate planning,
education, healthcare, and religious activities. asset protection, providing financial security to
Such trusts are indefinite or permanent in family members and tax efficiency. The life of
nature. the private trust ends when the trust purpose is
fulfilled or upon the occurrence of an event,
typically 18 years after the last transferee's
death.
2. Based on Nature of the Trust Deed
Revocable Trusts Irrevocable Trusts
It is a kind of trust where the settlor retains the It is a type of trust where the terms cannot be
right to modify or revoke the trust. This gives altered once created. Such trusts are set up for
the settlor a certain degree of flexibility in the purpose of asset protection, tax planning,
estate planning and managing assets during his and avoiding claims from creditors. Income
lifetime. Income from such trust is taxed in the from such trusts is typically taxed in the hands
hands of the settlor. of the trust or beneficiaries, not the settlor.
Discretionary Trusts Non-Discretionary (Fixed) Trusts
It is the type of trust which gives the trustees It is the type of trust where the beneficiaries’
the discretion to decide how and when to shares are fixed and predetermined by the trust
distribute trust income or assets. Such trusts deed. Such trusts is used for providing assured
are used for protecting assets from creditors, financial support to specific beneficiaries.
ensuring flexibility for beneficiary needs, and
tax optimization.
3. Based on Beneficiaries or Purpose of Use
Payable-on-Death (POD) Trust Family Trust
Type of trust where the settlor retains control Trusts created to manage and protect family
over the assets during their lifetime. After the wealth for future generations. Such trusts can
settlor’s death, the assets are directly be revocable or irrevocable, depending on the
transferred to the beneficiaries. Such trusts are settlor’s needs.
usually used to avoid the probate process.
Children’s Trust Charitable Trust
Trusts created to manage and protect assets for Entities created to support charitable,
the benefit of minor children, such as funding educational, or religious causes. Registered
children’s education, healthcare, or financial under Section 12A and 80G of the Income Tax
support. Such trusts are managed by a guardian Act to get tax exemptions.
or trustee until the children become adults.
Special Needs Trust (Disability Trust) Testamentary Trusts
Created to financially support a person with a Such trusts are created through a will and
disability. Such trusts are used to ensure comes into effect after the settlor's death,
continuous care and financial support for usually for the purpose of estate planning and
people with special needs. ensuring the systematic distribution of assets.
Asset Protection Trust Religious Trusts
Used to protect assets from creditors, lawsuits, Trusts set up for promoting religious activities
and other legal claims. Often set up as an or supporting places of worship.
irrevocable trust to ensure that assets are
safeguarded.

[Types of Trusts]

Dissolution of Trusts
1. Private Trusts:
  A trust can be dissolved according to the trust deed’s conditions.
 If not mentioned in the deed, it can be dissolved with the consent of beneficiaries and
settlor.
 The trust can also be dissolved if property is distributed among the beneficiaries.
2. Public Trusts
 A public trust can only be dissolved when its objective is achieved or becomes
impossible to achieve.
 Approval from the Charity Commissioner is required.
 The assets are transferred to a trust with a similar objective.

Suggested Links:
1. Exemption for Public Trusts
2. Tax liabilities for Religious Trusts/Anonymous Donations
3. Handbook on Taxation of Private Trusts
4. Registration under Section 80G
 Available only to public charitable trusts.
 80G registration enables donors to claim tax deductions on donations made to
eligible charitable organisations.
 The registration grants tax benefits to both the donor and the recipient.
To get your 80G certificate, the following documents are mandatory along with Form
10A/10G:
 Trust deed
 PAN card of the organisation
 Bank account statement of the organization
 Audited accounts of the organization for the last three years
 List of trustees of the organization
 List of activities carried out by the organization
The initial provisional registration under Section 80G is valid for three years. After this
period, organizations must renew their registration. Following a successful renewal, the
registration is valid for an additional five years.
5. Form 10A – Required to claim exemptions under Section 12A of the Income Tax Act.
However, private or family-owned trusts and charities cannot qualify for such exemptions.
The following documents are required:
 A document stating the establishment of the trust.
 A document that serves as proof of the creation or establishment of the trust.
 Registration with the - Registrar of Public Trusts.
 Documents that serve as proof of adoption or alteration of objects.
 Trust’s annual accounts.
 An existing order granting permission for registration under either Section 12A or
Section 12AA.
 A list that highlights the activities of the trust.
 An order that rejects the application granting registration under either Section 12A
or Section 12A.