Classification of Trusts in India

Trusts play a crucial role in India’s legal and financial landscape, serving various purposes ranging from estate planning to charitable activities. Understanding the classification of trusts is essential for individuals and entities looking to establish a trust for their specific needs. In this article, we will discuss the classification of trusts in India, focusing on private trusts, public trusts and public-cum-private trusts.

Meaning of Trusts

A trust is a fiduciary arrangement that allows a third party, known as a trustee, to hold and manage assets on behalf of one or more beneficiaries. Trusts are established by a settlor who transfers property to the trustee, outlining specific terms and conditions under which the assets are to be managed and distributed.

Trusts are commonly used for estate planning, asset protection, tax planning and charitable purposes. They provide a legal framework to ensure that the settlor’s assets are managed and distributed according to their wishes, while potentially offering various financial and legal advantages.

Classification of Trusts in India

The trusts in India can be classified as private and public trusts.

Private Trusts

A private trust is established for the benefit of one or more specific individuals who are clearly identified or can be identified within a given time frame. The Indian Trusts Act of 1882 governs private trusts in India. These trusts can be created during the lifetime of the settlor (inter vivos) or through a will.

Pre-requisites for Creation

To establish a valid private trust, certain conditions must be met:

• Declaration by Settlor: The settlor must make a clear and binding declaration to create the trust.
• Defined Objectives: The objectives of the trust must be clearly defined and specified.
• Specified Beneficiaries: The beneficiaries of the trust must be clearly identified.
• Transfer of Property: The settlor must transfer identifiable property under an irrevocable arrangement, relinquishing ownership and the right to enjoy the income from the property.
• A trust is considered valid only when all these prerequisites are fulfilled.

Public Trusts

Public trusts are established primarily for the benefit of the general public or a significant portion of it. The beneficiaries of a public trust are usually an indeterminate group of people. These trusts are typically charitable or religious in nature and are governed by general law, rather than the Indian Trusts Act. Public trusts can also be created inter vivos or by will.

Pre-requisites for Creation

To create a charitable trust, three certainties are required:

• Declaration of Trust: A binding declaration by the settlor is necessary.
• Definite Property: The settlor must set apart definite property and divest ownership.
• Stated Objectives: The objectives for which the property will be held must be clearly stated, focusing on the beneficiaries.

Competency is a crucial factor for both the settlor and the trustees. Once a valid trust is created and the property is transferred, it generally cannot be revoked.

Difference between Private and Public Trusts

The primary distinction between private and public trusts lies in their beneficiaries. A private trust has a specific, closed group of beneficiaries, while a public trust serves a broader segment of the public for charitable or religious purposes.

Public-cum-Private Trusts

Some trusts have a dual nature, where part of the income is applied for public purposes and a portion goes to private individuals. These are known as public-cum-private trusts. For the private portion, these trusts are assessed as private trusts and for the public portion, they may be eligible for exemptions under section 11 of the Income-tax Act, provided the trust was created before April 1, 1962. Trusts created after April 1, 1963, may not be eligible for such exemptions.

Other Types of Trusts

In addition to private, public and public-cum-private trusts, there are several other types of trusts in India, each serving specific purposes:

• Revocable Trusts: These trusts allow the settlor to retain control over the trust assets and have the option to modify or terminate the trust during their lifetime.

• Irrevocable Trusts: Once established, these trusts cannot be modified or revoked by the settlor. They are often used for estate planning and asset protection.

• Discretionary Trusts: The trustees have the discretion to decide how the trust income and capital are distributed among the beneficiaries. This type of trust provides flexibility in managing the assets and distributions.

• Testamentary Trusts: Created through a will, these trusts come into effect upon the death of the settlor. They are often used to manage and protect assets for minors or beneficiaries with specific needs.

• Charitable Trusts: Established for charitable purposes, these trusts aim to benefit the public or a significant portion of it. They can be set up for various causes such as education, health, religion or social welfare.

• Special Needs Trusts: Designed to provide for the needs of individuals with disabilities without affecting their eligibility for government benefits. These trusts ensure that the beneficiaries have financial support while maintaining their access to public assistance.

• Family Trusts: Set up to manage and protect family assets for future generations. They can provide financial support to family members and help in estate planning and tax optimisation.

Each type of trust serves a different purpose and has its own set of rules and regulations. Understanding the specific characteristics and benefits of these trusts is essential for individuals and entities looking to establish a trust that meets their unique needs and objectives.

Conclusion

Understanding the classification of trusts in India is crucial for individuals and entities looking to establish a trust for their specific purposes. Whether it’s a private trust for the benefit of specific individuals, a public trust for charitable or religious purposes or a public-cum-private trust with a dual nature, each type of trust has its own set of rules and requirements.

By comprehensively understanding these classifications, settlors can make informed decisions and ensure that their trust aligns with their objectives and legal requirements.