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    Private Family Trust

    Private Family Trust


    The Indian Trusts Act, 1882 governs the private trusts. This Act doesn’t apply to public trusts and private charitable trusts. The distinction between the private and public trusts is that in private trusts, the beneficiaries are defined and ascertained individuals, but in public trusts, interest may be vested in uncertain and fluctuating body of persons.

    A private trust comes into existence when the owner of a particular property (the settlor), while intending to transfer the property to a chosen individual/individuals (the beneficiaries) doesn’t vest the property with the beneficiaries but with other people (the trustees), who are given the responsibility of making over the benefits of the property to the beneficiaries. For example, a father may be settlor of a trust, make himself and his wife as the trustees and his children as beneficiaries.

    While creation of such trusts, the following points should be taken care:

    • The subject matter of the trust should be certain; the person desired to be benefited must be certain, and the period of trust must be defined directly or indirectly.
    • Though the Indian Trust Act doesn’t forbid the beneficiary of a trust from being appointed as a trustee, but as a general rule, it is advisable to avoid appointing a beneficiary as a trustee as there may arise a conflict between his interest and his duty. It was held by Orissa High Court in M.C.Mohapatravs.M.C.Mohapatra that the same person may be a trustee and a beneficiary.
    • Typically, a trust deed should provide the day on which the corpus be distributed among the Normally, the settlor should mention the last date by which the trust should be wound up and leave it to the discretion of the trustee to distribute a part of, or the entire corpus earlier. Under the law, however, the life of such a trust cannot exceed twenty five years. In other words, a private trust should be wound up by a date not later than twenty five years from the date of the creation of the trust. In most cases, however, the corpus is distributed after the children attains majority.
    • The investments of trust money are governed by section 20 & section 40 of the Indian Trust Act, 1882. These sections give the details of securities in which investments can be made. However, there is a residuary section 20(f), which says that the trustee may invest money in any security expressly authorized by the instrument of trust. The investment clause in the trust deed should be suitably drafted so that full flexibility remains in the hands oftrustees. However, it may be noted that the investment clause is applicable only if the trust has surplus money, which is not immediately For fulfilling the objects of the Trust, the investment can be made in any immovable and moveable property.


    A registered document is necessary to set up a trust if immovable property is being transferred to it. However, if only moveable property is settled upon the trust, no formal document or agreement in writing is necessary. It is always advisable to prepare a trust deed on a stamp paper, and have it signed by the settlor and the trustees in presence of a witness, to avoid any subsequent disputes.


    A trust may either a discretionary or non-discretionary trust. A trust is non-discretionary if the shares of the beneficiaries are________________ clearly defined by the settlor. In other words, although the trustees have the powers to administer and manage the trust, and its finances, they do not have the discretion to decide the proportion in which the income or the corpus is to be distributed among the beneficiaries.


    A discretionary trust, on the other hand, only specifies the names of the beneficiaries. The trustees have complete discretion to decide the proportion in which the income or the corpus is to be distributed.


    Thus, the trustees may distribute the benefits to just a few beneficiaries (and totally exclude the others) or change the proportion each year or even decide not to distribute the income at all in a given year.


    In effect, so long as the benefits are passed on to one or more of the beneficiaries named by the settlor, the trustees have the discretion to decide who among the beneficiaries will benefit from the trust.


    As per Section 2(31) a trust is not a person and hence trust is not an assessee. Trustees and beneficiaries are assessee under the Act. In case of trust the status of trustee is wholly irrelevant. Trust income be taxed in the like manner and same extent of beneficiaries. Under tax law a trustee is taxed as representative assessee.


    The taxability of the Trust depends upon the type of the trust. In the case of a non-discretionary trust, all income is taxable in the hands of the beneficiaries. But if the beneficiaries are minors, the income is to be clubbed with that of the parent with the higher income.

    On the other hand, in the case of a discretionary trust, in which the shares of the beneficiaries are unknown and indeterminate, it is taxed in the hands of trust at the maximum marginal rate.


    Inheritance by will is different from trust. In case of will there is an inheritance. In case of trust it is a receipt of funds or gift or distribution and there is no inheritance.


    Section 56(2)(vii) is applicable to discretionary trust. If the donor and all beneficiaries are relatives section 56 has no application.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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