Formation of Trusts in India

Private trusts in India are regulated under the Indian Trusts Act, 1882. However, is it pertinent to also understand other aspects such as public trusts, rights and duties of a beneficiary, income tax exemptions regarding charitable purposes, etc. Read the article to understand the legal backing of trusts in India.

Wed Jun 15 2022 | Business Law | Comments (0)

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A trust is an arrangement made with regard to future development and/or use of a property by its owner. This property can be immovable such as land, houses, building structures, etc., or movable such as money, shares, debentures, ornaments, etc.

A trust can be distinguished from a gift or transfer of property by way of sale, mortgage, lease, etc.

  • When a property is gifted or is transferred by way of sale, mortgage, lease, etc., it involves only two parties the owner of the property and the person or persons getting the property via such transfer called the transferee.
  • However, when a property is arranged to be transferred by way of trust apart from the owner and the transferee a third party called a trustee is also involved.
  • The property in such cases is not transferred directly to the transferee but is put in control of the trustee for the benefit of the transferee. Depending upon the nature of the trust, the trustee transfers the property or its earnings to the transferee at the happening of certain events or applies the property and /or its gains for the benefit of such a transferee.
  • The document by which a trust is created is termed as an instrument of the trust and the person for rules benefit the trust is created is termed as the beneficiary.

The trust may be private, public, charitable, or religious.

  • A trust is termed private if it is created for the benefit of specific individuals, i.e., individuals who are defined and ascertained or can be ascertained.
  • If however, the trust is created for the benefit of an uncertain and fluctuating body of persons who cannot be ascertained at any point of time, for instance, the public at large or a section of the public following a particular religion, profession or faith, the trust is termed as public trust. Such a trust is generally a non-profit venture with a charitable object and in such cases, it is also referred to as the charitable trust.
  • A trust created for religious purposes is termed as a religious trust and it can be either a private or public trust. A religious endowment made via trustees to a specified person is a private trust and the one to the public or a section thereof is a public trust.

Public trust is normally permanent or at least indefinite in duration. However, a private trust does not work in perpetuity and essentially gets terminated at the expiry of the purpose of the trust or happening of an event or at any rate twenty-one years after the death of the last transferee living at the time of the creation of the trust.

Private trusts are governed by the Indian Trusts Act, 1882. This Act is applicable to the whole of India except the State of Jammu and Kashmir and the Andaman and Nicobar Islands.

That apart, this Act is not applicable to the following:

  • Waqf
  • Property of a Hindu Undivided Family.
  • Public or private religious as charitable endowments.
  • Trusts to distribute prizes taken in war among the captors.

CREATION OF A PRIVATE TRUST

  • A private trust may be created for any lawful purpose.
  • A private trust can be created by any person who is of the age of majority and is of sound mind and is not disqualified by any law. Every person domiciled in India attains majority when he or she completes the age of 18years. But in the case of a minor for whom a guardian is appointed by the court or of whose property the superintendence has been assumed by the court of wards, the age of majority is twenty-one years.
  • A trust can be created by or on behalf of a minor with the permission of a principal civil court of original jurisdiction.
  • Apart from a human being, a company, firm, society, or association of persons is also capable of creating a trust.
  • Any person who can hold property can be appointed a trustee.
  • A person has the capacity to hold property if they ar3e capable of administering the property effectively and efficiently with ordinary prudence. Depending upon the nature of the trust, if a trustee is required to play a passive role without any scope of discretion, a minor may as well be appointed as a trustee.
  • However, where the trust involves the exercise of discretion such as a trust requiring the sale of property or its investment, the trustee should be of majority age,  sound mind, and should not be disqualified by any law.
  • A corporation, company, or an association of persons may as well be appointed as trustees.

BENEFICIARY OF A PRIVATE TRUST

  • Every person capable of holding property such as a human being, corporation, company, and even a state can be made the beneficiary of a trust.
  • An unborn person can also be made a beneficiary.
  • However, a proposed beneficiary is not bound by the desires of the person creating the trust. Such a proposed beneficiary can renounce his interest in the trust by either making a disclaimer addressed to the trustee or by setting up a claim inconsistent with the trust.

RIGHTS OF A BENEFICIARY

  • Unless the trust instrument expresses a different intention, a beneficiary has a right to the rents and profits of the trust property.
  • Again, the beneficiary has the right to ensure that the intention of the author of the trust is specifically executed to the extent of the beneficiary's interest therein.
  • Accordingly, a beneficiary can compel the trustee to perform any act of his duty or can as well restrain the trustee from committing any contemplated or probable breach of trust.
  • If no trustees are appointed or all the trustees die, disclaim, or are discharged, or where for any other reason the execution of a trust by the trustee becomes impracticable, the beneficiary can file a suit for the execution of the trust. In such a circumstance, the court executes the trust until a trustee is appointed for the same.
  • A trust is created when the person creating the trust, termed the author of the trust indicates with reasonable certainty by any words or acts the following.
    • An intention on his part to create trust.
    • The purpose of the trust.
    • The beneficiary.
    • The trust property
  • Again, unless the trust is declared by will, or the author of the trust is himself to be a trustee, the author has to transfer the trust property to the trustee.
  • A trust in relation to an immovable property has to be declared in writing signed by the author of the trust or the trustee and has to be registered. Such a trust may as well be declared by a will of the author of the trust or  the trustee. The will is not required to be registered.
  • A trust in relation to movable property can be either declared as in the case of immovable property or by transferring ownership of the property to the trustee.
  • The subject matter of the trust is called trust property. Any property, which can be transferred to the beneficiary, can be the subject matter of the trust. However, a mere beneficial interest under a subsisting trust cannot be the subject matter of a trust.
  • Certain other properties also cannot form the subject matter of a trust. Some of these are as follows.
    • Chance of receiving property through legacy on death of a kinsman or chance of an heir apparent to succeed to an estate.
    • Mere right to sue.
    • Public office or the salary of a public officer whether after or before it has become payable.
    • An interest in property restricted in its enjoyment to the owner personally.
    • Stipends allowed to military, naval, air force and civil pensioners of state or political pensions.

No one is bound to accept a trust as trustee. Instead of accepting a trust, the intended trustee can within a reasonable period disclaim it. Such a disclaimer prevents vesting of the trust property in the trustee. A disclaimer by one of two or more co-trustees vests the trust property in  other(s) and makes him or them the sole trustee or trustees from the date of the creation of the trust.

However, a trustee who has accepted the trust cannot afterwards renounce it except as under:

  • With the permission of a principal civil court of original jurisdiction.
  • Consent of the beneficiary if he is of majority age, sound mind and not disqualified by any law.
  • By special power in the instrument of the trust.

Equally a trustee cannot generally delegate his duties either to a co-trustee or a stranger. A delegation of duties can be made only, if:

  • instrument of trust provides for it
  • delegation is in the regular course of business
  • the delegation is necessary
  • the beneficiary, being a major of some mind, consents to the delegation.

ADMINISTRATION OF TRUST PROPERTY BY THE TRUSTEE

  • The trustee is required to fulfil the purpose of the trust and to obey the directions of the author of the trust unless they have been duly modified by the consent of all the beneficiaries.
  • In order to do so, the trustee has to acquaint himself as soon as possible, with the nature and circumstances of the trust property and where necessary he is also required to transfer the trust property to himself. He may also reclaim the trust money, invested on insufficient or hazardous security.
  • A trustee has to protect the trust property.
  • In the absence of a contract a trustee is not liable for the loss, destruction, or deterioration of the trust property if in the exercise of his duties he has extended due care as a man of ordinary prudence.
  • A trustee is required to keep clear and accurate accounts of the trust property and is also bound to furnish the beneficiaries at their request full and accurate information as to the amount and state of the trust property.
  • Where the trust property consists of money and cannot be applied immediately or at an early date to the trust's purpose, the trustee is bound to invest the money on certain government securities prescribed by the Indian Trusts Act.
  • A trustee can apply to the court for its opinion, advice, or direction on issues regarding the management of the trust property if such issues can be adjudicated by the court in a short hearing.
  • A breach of duty imposed on a trustee is termed a breach of trust. Where the trustee commits a breach of trust, he is liable to make good the loss, which the trust property or the beneficiary has thereby sustained.
  • However, the trustee is not liable if the beneficiary has by fraud induced the trustee to commit the breach or the beneficiary being competent to do so, has himself, without coercion or undue influence, concurred in the breach, or subsequently acquiesced therein with full knowledge of the facts of the case and of his rights as against the trustee.
  • Again, a trustee is not liable for the breach of trust committed by his predecessor or his co-trustee if he has himself exercised due care and diligence requisite of a man of ordinary prudence and has not facilitated or connived the breach of trust.
  • A trustee may seek reimbursement of all the expenses properly incurred in or about the execution of the trust and/or for the protection and benefit of trust property or the beneficiary. The reimbursement is to be sought from the trust property.
  • Equally if a trustee makes an overpayment to the beneficiary, he can seek reimbursement from the beneficiary's interest in trust property and if such interest is insufficient, the trustee is entitled to recover the money from the beneficiary personally.

The beneficiary can file a suit for the removal of a trustee if the trust property is not held and administered by a proper trustee. The Indian Trusts Act marks out the following individuals as not proper to undertake duties of a trustee:

  • a person domiciled abroad
  • an alien enemy
  • a person having an interest in consistent with that of the beneficiary
  • a person in insolvent circumstances
  • a married woman or a minor (unless the personal law of the beneficiary such as Hindus allows a married woman or a minor).

Where the administration of the trust involves the receipt and custody of money, a beneficiary can file suit to have one more trustee if only one trustee has been appointed as per the trust instrument.

The beneficiary can (where there is one beneficiary or if there are several beneficiaries and all of them agree) direct the trustee to transfer the trust property to him (if there are several beneficiaries to all of them) or to such another person as the beneficiary or the beneficiaries may desire.

A beneficiary can also transfer his interest in the trust property and every person to whom a beneficiary transfers his interest acquires the rights and liabilities of the beneficiary at the date of the transfer. But such a transfer can be sought or made by the beneficiary (or the beneficiaries as the case may be) only if they are of the age of majority with a sound mind and are not disqualified by any law for the time being in force in India.

If the beneficiary is a married woman and the trust property has been bequeathed to her via the trust to ensure that she would not deprive herself ofherof her beneficial interest, the trust property cannot be transferred at her instance aforesaid.

The beneficiary has a right to inspect and take copies of the instrument of the trust, the documents of title relating solely to the trust property, the accounts of the trust property, and the vouchers (if any) by which they are supported and the cases submitted and opinions taken by the trustee from the court for his guidance in the discharge of his duty.

PROTECTION OF TRUST AND TRUST PROPERTY

  • Where a trustee has wrongfully bought trust property the beneficiary has a right to have the property retransferred by the trustee or to have such property declared subject to the conditions and safeguards of the instrument of trust.
  • Where a third person acquires the trust property inconsistently with the trust, the beneficiary can file a suit to seek a declaration that the property belongs to the trust. But such a declaration cannot be obtained if the third party has obtained the property in good faith by making due payment and without having notice of the trust.
  • However, in such cases, the beneficiary can claim the money obtained by the trustee on selling the trust property from the trustee or his legal representatives.

LIABILITY OF BENEFICIARY

If one of several beneficiaries facilitates or partakes in the breach of trust committed by the trustee or deceives a trustee and induces him to commit a breach of trust or fails to take proper steps to protect the interests of other beneficiaries after he becomes aware of the intended or committed breach of trust, he is liable to all other beneficiaries. These other beneficiaries can impound all the beneficial interests of such liable beneficiary until the loss caused by the breach of trust is compensated.

  • As regards the public trusts, there is no Central Act applicable in all the States. However, various states such as Bihar, Madras, Madhya Pradesh, Orissa, etc., have enacted their own acts prescribing conditions and procedures for the administration of public trusts. With a few variations, the state Acts are similar in nature.
  • For instance, the Bombay Public Trusts Act, 1950 provides machinery for charity commissioners to regulate the administration of public religious and charitable trusts. It makes registration of all the public religious and charitable trusts including the religious trusts created under Hindu, Muslim, and Christian personal laws mandatory and prescribes certain norms for the maintenance and audit of budget, and accounts of such trusts and further empowers the charity commissioners to inspect and supervise the property belonging to public trust and as well the proceedings of the trustees and books of accounts of such a trust.
  • That apart, the Act also creates certain restrictions on the investment of public trust money and as well alienation of immovable property of such a trust.

PUBLIC SUPERVISION AND REGULATION


The working of the public trust and its trustees can be regulated and closely supervised by the state and/or the beneficiaries of such a trust. In the case of any alleged breach of public trust or where the direction of the court is deemed necessary for the administration of such trust, either the Advocate General or two or more persons having an interest in the trust and having obtained the leave of the court can institute a suit to seek:

  • removal of a trustee
  • appointment of a new trustee
  • for vesting any property in a trustee
  • to direct a trustee who has been removed or a person who has ceased to be a trustee to deliver possession of any trust property in his possession to the person entitled to the possession of such property
  • to direct accounts inquiries
  • to seek declaration of proportion of the trust property or of the interest therein that shall be allocated to any particular object of the trust.
    • In such a suit, the court may alter the original purpose of the trust and allow the property or income of such trust or any portion thereof to be applied to a different purpose or in a different manner for a similar purpose, as nearly as possible according to the intentions of the author.
    • Such an altercation can be sought where either the original purpose of the trust is fulfilled or cannot be conducted or where the original purpose of the trust provides a use for only part of the trust property or where the property of the trust can be used more effectively for another similar purpose.
    • The Court can also make alternation if the original purpose, in whole in part, has been provided for by other means or has ceased to be charitable or has become useless or harmful to the community, or has ceased to provide a suitable and effective method of using the trust property as per the spirit of the trust.

The creation of religious charitable trusts is governed by the personal laws of the religion. The administration of these religious trusts can either be left to the trustees as per the dictates of the religious names or it can be regulated to a greater or lesser degree by statutes such as the Bombay Public Trusts Act, 1950 discussed above. In the case of Hindus, the personal law provisions regulating the religious trusts have not been codified and are found dispersed in various religious books and epics.

ESSENTIALS OF RELIGIOUS AND CHARITABLE TRUST UNDER HINDU LAW

  • There are four essential requirements for creating a valid religious or charitable trust under Hindu Law:
    • Valid religious and charitable purpose of the trust as per the norms of Hindu Law.
    • Capability of the author of the trust to create such a trust.
    • The purpose and property of the trust must be indicated with sufficient precision.
    • The trust must not violate any law of the country.
  • The religious and charitable purposes are neither delineated nor defined with precision under the Hindu Law.
  • However, acts of piety and benevolence such as gifts to idols, establishment of Dharamsala, mutts or monasteries, the performance of 'Shradh' of the author of the trust or his family excavation of tanks, wells, etc., the establishment of hospitals, educational institute, etc. qualify as religious and charitable under the Hindu Law.
  • No document in writing is necessary to constitute valid religious and charitable trust by a Hindu. There only has to be a clear and unequivocal manifestation of an intention on the part of the author to create such a trust.
  • Such intention may be manifested by performing the ceremonies of ‘Sankalpa’ and ’Samarpan’. However, these ceremonies are not essential for the validity of the trust.

The word ‘Wakf’ has two meanings as per Islamic law:

  • Inalienable lands belonging to the government which are charitable.
  • Pious endowments with reference to the subject matter of trusts the second meaning is relevant.

ESSENTIALS OF WAKF

  • Wakf has to be a permanent endowment in perpetuity.
  • It cannot be either contingent or revocable.
  • No instrument in writing is required to create a wakf and an oral agreement might as well suffice the cause.
  • Neither delivery of possession nor appointment of mutawallis is required. But the subject of wakf must be clearly defined.
  • A wakf can also be made by a will or by a long user.
  • Any Muslim who has attained majority and is of sound mind can make a wakf. A minor or his guardian as on behalf of the minor cannot make a wakf. Again, a wakf cannot be made for an illegal object.
  • A wakfnama by which an immovable property of the value of Rs.100 or more is dedicated by way of wakf requires registration.
  • The property which is either capable of being used without being consumed or which is though consumable in itself is capable of being converted into a property of permanent nature can form the subject matter of a wakf.
  • A wakf can be created for any purpose which is considered religious, pious, or charitable by the Mohammadan law.
  • Any wakf created with the object of obtaining the approval of the almighty or a reward in the next world is pious as per Mohammadan law.
  • Few instances of a pious or a religious purpose may be mosques, provisions for imams, colleges, bridges, assistance to poor people to perform pilgrimage to Mecca, and distribution of alms to the poor.
  • Wakf may be made for both the rich and poor or for the affluent and thereafter for the poor or for the poor people alone. All persons regardless of their financial status can be made beneficiaries of a wakf.
  • Even family members and descendents of the wakf, that is the person creating the wakf, can be made beneficiaries. Under Hanafi law, the wakf itself can also be a beneficiary.
  • Under Muslim law, the administration of a wakf is vested in the Mutawalli but since 1923, a number of Central and State Acts have restricted and regulated the administrative powers of a mutawalli to ensure transparency and proper execution of a wakf. For instance, the Wakf Act 1954 makes registration of a wakf, whether created before or after the commencement of the Act, at the office of a wakf commissioner mandatory.
  • Thereafter, the mutawalli's of these registered wakfs are required to prepare budget and accounts of the wakf for the appraisal of the wakf commissioner and the wakf board.
  • In certain cases, the wakf board can assume direct management of the wakf.

Following incomes are exempted from the application of income tax and no tax is payable on them.

  • Income derived from property held under trust wholly for charitable or religious purpose
    • To extent to which the income is applied for such purpose in India.
    • To the extent but not exceeding 25% of such income, the income is accumulated or set apart for application to such purposes in India.
  • Income derived from property held under trust partly only for charitable or religious purposes.
    • To the extent, the income is applied for such purpose in India and;
    • to the extent but not exceeding 25% of such income, the income is accumulated or set apart for application to such purposes in India provided such trust had been created before 1.4.1962.
  • Income derived from property held under trust to the extent the income is applied for the purposes of the trust outside India if a direction to this effect has been issued by the Central Board of Direct Taxes by general or special order
    • in case of a trust created on or after 1.4.1962, if the trust was created for a charitable purpose which tends to promote international welfare in which India is interested or
    • in case of a trust created before 1.4.1952, if the trust was created for charitable and religious purposes.
  • Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust.
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