INTRODUCTION

A trust is established based on a fiduciary relationship between two parties: the trustor and the trustee. The trustee is given the responsibility to manage property or assets on behalf of a third party, called the beneficiary. As per Section 3 of the Indian Trusts Act, 1882, a trust is described as an obligation tied to property ownership, arising from the confidence placed in and accepted by the owner for the benefit of another person, or for both the owner and another individual.

In a country like India, the establishment of charitable Trusts aimed at uplifting underprivileged communities. Moreover, family trusts provide a means for individuals to manage their assets across generations, ensuring that wealth is preserved and distributed according to their wishes.

STATUTES GOVERNING TRUSTS IN INDIA

• Indian Trusts Act, of 1882: Defines trusts, outlines rights and duties of trustees, and distinguishes between private and public trusts.
• Charitable and Religious Trusts Act, of 1920: Regulates the formation and management of charitable trusts, ensuring transparency and accountability.
• Income Tax Act, of 1961: Governs taxation of trust income, particularly for charitable entities, offering exemptions under specific conditions.
• Indian Succession Act, of 1925: Allows for the creation of trusts through wills and guides the succession of property.
• Registration Act, of 1908: Requires registration of certain trust documents for legality and public notice.

CLASSIFICATION OF TRUSTS

The classification of trusts can be broadly categorized based on various criteria, including their purpose, creation, and tax implications. The main classifications of trusts are:

Based on Purpose

• Private Trusts- Created for the benefit of specific individuals or groups, usually within a family
• Public Trusts- Established for charitable, religious, or public purposes, benefiting the community at large.

Based on Creation

• Express Trusts- Formed by the explicit intention of the settlor, typically documented in a trust deed.
• Implied Trusts- Arise by operation of law, often in situations where the intentions of the parties are inferred from their actions.

Based on Tax Implications

• Charitable Trusts- Established for charitable purposes, offering tax benefits to the settlor.
• Non-Charitable Trusts- Created for personal or family purposes, not eligible for tax exemptions.

DIFFERENCE BETWEEN PUBLIC TRUST AND PRIVATE TRUST

 

KEY ELEMENTS OF TRUST

To create a valid trust, the following elements must be present:

• Settlor: The person who creates the trust.
• Trustee: The person or entity that manages the trust.
• Beneficiary: The person or group that benefits from the trust.
• Trust Property: The assets placed in the trust.

PROCEDURE FOR REGISTRATION/ FORMATION OF TRUST

Public charitable trusts or religious trusts mandatorily require the registration process in India. On the other hand, private Trusts do not mandatorily require registration under the Indian Trust Act, of 1882.

1. Members

For the formation of trust, at least 2 members are required to form Trust.

2. Select a Name for the Trust

The first step in registering a trust is to select a name that accurately reflects its purpose and mission. It is crucial to ensure that the chosen name does not violate any restrictions outlined in the Emblems and Names (Prevention of Improper Use) Act, of 1950.

3. Appointment of Settlors and trustees of the Trust

The settlor is the individual or entity who establishes the trust by creating a trust deed and transferring assets or property into the trust for the benefit of the beneficiaries.

• The settlor must reside in India.
• The settlor must have the legal capacity.
• The settlor must have the legal right to transfer the assets or property into the trust.
• When selecting trustees, it's essential to choose individuals who are trustworthy, knowledgeable, and capable of fulfilling their fiduciary duties.

4. Prepare a Trust Deed and Memorandum of Association

Prepare a trust deed on non-judicial stamp paper. The deed should include the name, Purpose of the trust, Names of trustees and beneficiaries, Details of the trust property, and Rules and regulations governing the trust.

• The Memorandum of Association (MOA) is a legal document that outlines the foundational aspects of Trust. It defines the key objectives, structure, and operational guidelines of a Trust.

5. Submit Documents for Registration

After preparing the trust deed, submit it along with all necessary documents to the Registrar's office within the jurisdiction of the trust's location. The required documents typically include:

• The trust deed (original and attested copies).
• Identity proof (Aadhaar, PAN, voter ID, Passport, etc.)
•  Address proof of the settlor and trustees.
• Passport-sized photographs of the settlor and trustees.
• Address proof of registered Trust office (rent agreement, electricity bill, water bill, etc).
• NOC (No Objection Certificate) given by Landowner. (if applicable)
• Any additional documents as per the specific requirements of the Registrar's office.

• During submission, the settlor’s physical presence is often required, and the settlor must sign each page of the photocopied trust deed. The presence of 2 witnesses is required at the time of registration.

After submission, the Registrar will review and verify the trust deed and other documents for completeness and accuracy.

6. Payment of Registration Fees

Upon verification, you will be asked to pay the registration fee, which varies depending on the state and the value of the trust property. A court fee stamp (typically Rs. 2) must also be affixed to the application form.

It is important to keep the payment receipt, as it serves as proof of application and can be used for future reference.

7.  Receive Registration Certificate

Once the documents are verified and the registration fee is paid, the Registrar will officially register the trust. After successful registration, you will receive a registration certificate.

8. Apply for PAN and Tax Registration (if applicable)

Once the trust is registered, the next step is to apply for a Permanent Account Number (PAN) for the trust through the Income Tax Department. The PAN is essential for Tax compliance and opening a bank Account.

After obtaining the PAN, open a separate bank account in the trust's name. This account will be used to manage the trust’s funds, including donations, grants, and operational expenses. Provide the registration certificate and PAN during the account opening process to comply with banking regulations.

9. Annual Compliance

File tax returns if the trust generates income, ensuring proper taxation of funds.

• Maintain proper records of all financial transactions, including receipts, disbursements, and assets.
• Ensure transparency and accountability by keeping audited accounts and submitting annual reports, if required under the law.

CONCLUSION

In India, setting up a trust helps manage property or support charitable work and family needs. To create a trust, you need to follow certain legal steps like drafting a trust deed, appointing trustees, and registering it with the government. By following the right process, trusts can operate smoothly, ensuring they meet their goals—whether it's for public good or family wealth management.