Trust is defined in section 3 of the Trust Act, 1882 as ” an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner.
In simple words it is a transfer of property by the owner to another for the benefit of a third person along with or without himself or a declaration by the owner, to hold the property not for himself and another.
Types of Trust
There are basically two types of Trusts
After Death or Testamentary (A request in the Will made to make a Trust after the person passes away) e.g. Memorial Trust
Living Trust or Inter Vivos (Is created when the person is alive) e.g. Public Trust, Charitable Trust and Private Trust
Basics of a trust
A trust is created by the settler/owner/creator/grantor(that’s you). The settler writes the rules governing how the trust is to operate, what it is to do, and how and when to do it. If the trust is revocable, you can change the rules at any time. If the trust is irrevocable, you cannot change the rules.
One appoints a trustee, who will have the job of managing the trust and its assets.The trustee must follow the trust’s rules.
After one creates the trust, it receives gifts from a donor The trustee invests this money in accordance with the rules of the trust. As a result, the trust will find itself with three things: principal (the money it was given, also called the corpus), interest and dividends earned on the principal (called income), and profits (if any) from increases in value enjoyed by the principal (called capital gains). For example trust created for a differently abled child.The rules will determine who gets the income, capital gains and, ultimately, the principal. The recipient is called the beneficiary. A beneficiary can be family members, friends, or charities — anyone you want, in any combination.
Formation of trusts:
Public Trusts can be created for public charitable purposes.An NGO can be created only under a public trust act.
A private trust, created under and governed by the Indian Trusts Act of 1882, aims at managing assigned trust property for private or religious purpose. A private trust does not enjoy the privileges and tax benefits that are available to public trusts or NGOs.
Under Indian Trust Act, a settler(creator or owner) can create a trust with his or her own personal property, designate one or more trustees and lay down the terms and conditions benefiting the identified beneficiary(ies) including one’s own child, relative or any other individual or group of individuals. Private trust or family trust is not a Public Charitable Trusts and hence does not enjoy the privileges entitled to a trust with charitable purpose.
Documents required for trust
Detail of all members or trustees of the trust with their address and PAN no.
Certified true copies of the Institution’s Registration Certificate
Certified true copies of Laws & by-laws of the Institute
Copy of income tax registration certificate.
Audited Balance Sheet and Income & Expenditure account with Audit Report of last 3 years
The original copy of Trust Deed evidencing the creation of the Trust.
Is a TRUST right for you?
Scenarios in creating a trust
You Don’t Want Your Kids to Inherit at Age 18: Just suppose you have more assets than you think. Typically when you’re setting up a will or estate, your spouse is the first person to inherit your assets if something happens to you. But if, heaven forbid, something happened to both of you at the same time, your children might be the next in line to inherit.By default, your child would get everything at once, usually at age 18 (depending on where you live). But many parents do not want their children inheriting significant assets outright at age 18, so a trust allows you to state not only who should inherit, but when they should inherit those assets. Some parents choose staggered distribution rates (some portion at 18 years, 25 years some at 30 and so on)
You Want to Protect Against Creditors: Typically, a middle-class family sets up a trust for the protection of a child from creditors. A child might have a house which is on loan, or credit card debt, or might be living hand-to-mouth. If your child came into a large sum all at once, creditors could try to reach for that amount. If you set up a trust and that child gets the money in a trust that inheritance is protected.
3. You Want Someone Else at the Helm: For instance, your beneficiary might demonstrate poor decision-making or be susceptible to outside influence when it comes to financial decisions.
You Have a Complicated Family Situation: This is something that comes up quite frequently for families of remarried couples who have children. For example, if you and your spouse both have children from previous marriages, you might create a trust to make sure your spouse is O.K. if you predecease him or her but also provide for your children.
You Want to Take Care of a Disabled Child: you might need to think about ways for her to inherit your estate without losing government benefits. Special trusts allow disabled children to stay on government benefits, while having a trust established to pay for special care or special needs not covered by government programs.
What is a living trust?
A Living Trust is a legal document that is made by “The Grantor”, (the creator) with regard to his property and assets, while he is still alive and even be its Trustee, to ensure that the functioning of it is done in accordance to his/her wishes. It is a Private Trust.
A Living Trust is also referred to as an Inter Vivos Trust, which translates as a Trust between living persons i.e. It comes into effect while the Grantor is alive
A Living Trust is revocable which means that the grantor can terminate the Living Trust during his lifetime. This ensures complete control over the assets.
It is a written legal document that partially substitutes for a will.
Who can be the trustee for a living trust?
The creator himself can be a trustee initially until he becomes unable or unwilling to handle the trust. Or else any trusted person from the family and friends can be the trustees and co trustees.
What are the benefits of setting up a trust?
Protect your assets.
Guarantee an income for your loved ones– providing financial stability for their future
Help to avoid inheritance tax– ensuring your money, shares and property are passed on in the most tax efficient way.
What are the disadvantages of a living trust?
Because living trusts are not under direct court supervision, a trustee who does not act in your best interests may, in some cases, be able to take advantage of you. (In a probate, direct court supervision of an executor reduces this risk.)
In addition, the cost of preparing a living trust could, in some cases, be higher than the cost of preparing a will.