Trust account within India are governed by the rules that are contained in Indian Trusts Act, 1882 (the “1882 Act”). Under the 1882 Act”Trust” is an obligation attached to the title of property that is a result of a trust deposited in the hands of and accepted by the owner or declared and accepted by him in the interest of a third party, and the owner.
The person who releases or declares confidence to establish the trust is referred to by the name of “author of the trust” or “settlor”. Whoever accepts trust is referred to as”the “trustee”. The person whose benefit the trust is granted by the trustee referred to as”beneficiary” “beneficiary”. The trust property that is the subject of trust is known as “trust property”.
“beneficial interest” or “beneficial interest” or “interest” of the beneficiary is the right to sue the trustee as the owner of trust property. The instrument through which trust property is declared is known as”the “instrument of trust” / “trust deed” / “indenture of trust”.
As per the 1882 Act the fundamental elements to create a trust are as in the following order:
(i) The creator of the trust or settlor, who reserves certain assets to benefit those who are the beneficiary(ies);
(ii) The trustee(s) will manage the trust property on behalf of the beneficiaries;
(iii) Beneficiary(ies);
(iv) The subject to the trust’s subject matter There must be clearly defined trust property as well as
(v) Instrument of trust/trust deed or indenture of trust that is clearly and concisely detailing the purpose that are the subject of Trust.
The formation of trusts results in the transfer of rights associated with the property of trust to trustees to benefit those who are the beneficiary(ies). The trustees, in accordance with the type of trust, will transfer the trust property or earnings or income that comes from trust property to the benefit of beneficiaries.
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Trust Account – Types
In India trusts can be created as: (i) private trust as well as (ii) the public trust. Private trusts are set up and controlled by the rules in the 1882 Act while a public trusts in India is created or established in accordance with the state-specific laws for public trusts that have been adopted by the state in which it is located.
For example, a state that is public that is registered in the states of Gujarat and Maharashtra must be registered according to the Bombay Public Trusts Act of 1950. Other laws that regulate trusts for public use include the Charitable and Religious Trusts Act 1920 as well as the Religious Endowments Act, 1863 as well as the Charitable Endowments Act of 1890.
Private Trust
Private trusts are created in accordance with the 1882 Act for a specific individual(s) or beneficiary(ies) who are named in the trust instrument. Private trusts are established and/or created for a particular reason and ends upon the expiration of the original purpose of the trust, or on the happening of any incident specified under the trust instrument or following dies one of the beneficiary(ies).
The 1882 Act governs private trusts. It cannot be used to apply:
(a) either private or public charitable endowments of religious nature;
(b) Property of Hindu Undivided Family and
(c) the Wakf.
Private trusts can be established in:
(i) Disresponsible Trust – A form of trust in which the percentage of each beneficiary isn’t determined by the Settlor, and trustees, in their discretion, are given the authority to determine the percentage of beneficiaries of the trust property, and who among them will receive the benefits of the trust property.
(ii) Determinate Trust A form of trust in which the amount of the benefit that will be gained from this trust’s property has been set by the settlor prior to making the document of trust. In a determinate type of trust, trustees are not in a position to make a decision regarding the distribution of trust property.
(iii) Revocable Trust – A trust type that can be canceled by the trustee at any point in his lifetime.
(iv) Irrevocable Trust – A trust type that does not end until the purpose or term that the trust was stipulated by the trust’s instrument is fulfilled.
Motives behind the being able to create Private Trusts Private Trust
Registration of a Private Trust
Under the 1882 Act Private trusts with respect to immovable asset must be registered in accordance with the Registration Act 1908 (“1908 Act”). The registration of a trust with respect to property that is movable is not required.
Taxation of Private Trusts
Sections 160 through 164 of the Income Tax Act, 1961 (“1961 Act”) defines the Indian rules for trusts’ taxation. In section 160(1) (iv) in the 1961 Act acknowledges that trustees of trusts as the trust’s representative in tax matters. The section 161(1) of the 1961 Act allows for a scenario in which a trustee is taxed as a representative “in like manner and to the same extent the beneficiaries would have to pay tax.” Section 161(1A) allows for an instance where the trust is taxed at the maximum marginal rate if the amount of income earned by the trust is business profits. Section of 1961 Act states that if beneficiaries cannot be identified or their percentage of the earnings cannot be determined the trust must be taxed at the maximum marginal rate.
Public Trust
A public trust is to benefit the all the people of the world. If it’s an open trust the beneficiaries are not capable of being identified. When a trust property is dedicated an asset of a trust to a trust that is public it is crucial to have a clear and clear intention to sell the trust property to charity to benefit the beneficiaries.
There isn’t any central law to govern the establishment and operation of trusts for public benefit in India and the trusts that are public in India are established or created by the state-specific legislation applicable to public trusts that are enacted in the state. In addition, there is no legislation specific to the state that follow the 1882 Act.
The key ingredients to the public trust are:
(i) Public trust should be created for to the advantage of the entire community / group of community, as distinct from private individuals able of being identified;
(ii) It must be a clear and clear intention to sell the trust property to charitable purposes for the beneficiaries and
(iii) Transfer of property to the trust must be done through an trust instrument.
The reasons for the being the Public Trust:
Registration of a Public Trust
Every trust that is public, regardless of the state where they are settled must be registered in accordance with the 1908 Act.
Taxation of Public Trust
According to Section 11 of the 1961 Act the income earned by a trusts for public use with a charity or religious purpose is exempt from paying tax on their earnings provided that trusts registered in accordance with the 1961 Act on Form 10A.
The section 2 (15) in the 1961 Act stipulates a “charitable purpose” which includes helping the needy as well as education, yoga medical relief, the preservation of the environment (including forests, watersheds and animals) and the protection of places, monuments, or objects of historical or artistic importance, as well as further advancement for any purpose of public utility general. However it is not a charitable purpose to advance any goal of general public utility will not be considered a charitable cause in the event that it involves performing any of the activities which is in the form of commerce, trade or commercial, the or activity that involves the rendering of any service in connection with any commerce, trade or business, in exchange for the payment of a fee or a cess, or for any other reason regardless of the type of the use or application or retention of the earnings derived from the activities, unless (i) the activities are carried out as part of the actual implementation of this advancement of a different goal of the general public utility; (ii) the aggregate earnings from the actions or activities over the previous year are not exceed 20 percent of the total revenue that of the trust other institution carrying out the activity or activities in the preceding year.