Creation of Trust under the Indian Trust Act, 1882

The Indian Trusts Act, 1882, is a key legislative framework governing private trusts in India. This Act lays down comprehensive rules and procedures for the creation, administration, and management of trusts in India. It helps regulate the relationship between the trustor, trustee, and beneficiaries, ensuring that trusts function effectively to achieve their intended purposes. Trusts play a vital role in property management, estate planning, charitable endeavours, and financial planning.

This article explores the detailed process of creating a trust under the Indian Trusts Act, 1882, and explores the legal principles that govern this process.

What is a Trust?

A trust, as defined in Section 3 of the Indian Trusts Act, 1882, refers to an equitable obligation attached to the ownership of property. This obligation requires the trustee to manage the trust property for the benefit of the beneficiaries or for any purpose deemed lawful by the trustor. The relationship between the trustee and the beneficiary is fiduciary, meaning that the trustee must act in the best interests of the beneficiaries while managing the trust property.

Key Definitions

• Trustor (Author of the Trust): The individual or entity that creates the trust by transferring property to the trustee.
• Trustee: The individual or entity who holds and manages the trust property for the benefit of the beneficiaries.
• Beneficiaries: The persons or groups for whom the trust has been created, and who are entitled to the benefits of the trust property.
• Trust Property: The subject matter of the trust, which can be movable or immovable property.
• Instrument of Trust: A document, often written, that clearly outlines the terms, purpose, and operation of the trust.

Types of Trusts under the Indian Trusts Act, 1882

The Act classifies trusts into two broad categories: Public Trusts and Private Trusts.

1. Public Trusts: Public trusts are created for public welfare and serve purposes such as charitable, religious, or educational activities. These trusts are meant to benefit a large section of society. Public charitable and religious trusts are not covered by the Indian Trusts Act, 1882, but by other statutes such as the Charitable and Religious Trusts Act, 1920.
2. Private Trusts: A private trust is created for the benefit of one or more specific individuals or entities. These trusts can be established for personal purposes, such as managing family wealth, safeguarding property for future generations, or ensuring the well-being of a family member.

Essentials for the Creation of a Trust

The process of creating a valid trust under the Indian Trusts Act, 1882, requires the following key elements:

1. Author of the Trust: The trustor must be competent to create a trust. According to Section 7 of the Act, any person who is competent to contract under Indian law can create a trust. This means that the individual must be of sound mind, not a minor, and not disqualified by law. Additionally, companies and other legal entities can also create trusts, provided they comply with the law governing their establishment and operation.
2. Intention to Create a Trust: The trustor must express a clear intention to create the trust. This intention can be indicated through a written document (trust deed) or by actions that demonstrate a commitment to establishing a trust. The intention to create a trust must be unambiguous, leaving no room for doubt.
3. Lawful Purpose: The trust must be created for a lawful purpose, as specified under Section 4 of the Act. A trust is considered unlawful if its purpose is:
   • Prohibited by law
   • Defeats the purpose of any law
   • Fraudulent
   • Causes harm to individuals or their property
   • Is immoral or contrary to public policy
4. If any part of the trust is unlawful, the entire trust may be deemed void unless the unlawful purpose can be separated from the lawful one.
5. Trust Property: The subject matter of the trust, known as the trust property, must be clearly defined. The property can be either movable or immovable, but it must be transferable under law. A trust cannot be created for an interest that is not legally transferable. According to Section 8 of the Act, the trust property must be sufficiently identifiable and described to allow its proper management by the trustee.
6. Beneficiaries: The beneficiaries of the trust must be clearly identified or identifiable. Any person capable of holding property can be a beneficiary. Beneficiaries can include minors, companies, or even unborn persons (as long as the rule against perpetuity, under Section 14 of the Transfer of Property Act, 1882, is not violated). Beneficiaries have the right to enforce the terms of the trust and can renounce their interest if they choose.
7. Transfer of Trust Property: For a trust to be valid, the trust property must be transferred to the trustee. The trustor must relinquish ownership or control over the property and transfer it to the trustee, who then holds it for the benefit of the beneficiaries. The transfer can be done through a non-testamentary instrument (a document that is not a will) for immovable property or through actual transfer for movable property.
8. Trust Deed: A trust deed is the legal document that establishes the trust. While it is not mandatory to create a trust in writing (except for trusts related to immovable property), a trust deed helps ensure that the terms and conditions of the trust are clear and legally enforceable. It is essential that the deed contains details about the trustor, trustee, beneficiaries, trust property, and purpose of the trust.

Process of Creating a Trust

1. Drafting the Trust Deed

The first step in creating a trust is to draft a trust deed. The trust deed should specify the following:

• Names and addresses of the trustor, trustees, and beneficiaries
• Description of the trust property
• Purpose of the trust
• Duties and responsibilities of the trustees
• Rights of the beneficiaries
• Terms and conditions for the administration of the trust
• Provisions for the addition or removal of trustees
• Provisions for the dissolution of the trust, if necessary

2. Execution of the Trust Deed

Once the trust deed is drafted, it must be signed by the trustor and the trustees in the presence of witnesses. For trusts involving immovable property, the deed must be registered under the Registration Act, 1908, to ensure its legal validity. The trust registration process involves presenting the trust deed to the local sub-registrar’s office and paying the applicable stamp duty and registration fees.

3. Acceptance by the Trustees

The individuals named as trustees in the trust deed must accept the role of trusteeship. Acceptance can be express (through a written declaration) or implied (through actions that indicate consent to serve as trustees). Once accepted, the trustees are bound by the fiduciary duties and responsibilities outlined in the trust deed.

4. Transfer of Property to the Trustees

The trustor must then transfer the trust property to the trustees. For immovable property, the transfer must comply with the requirements of the Transfer of Property Act, 1882, and must be registered. For movable property, the transfer can be effected by physical delivery or by legal assignment, depending on the nature of the property.

Role and Responsibilities of the Trustee

The trustee plays a critical role in ensuring the proper administration of the trust. Some of the key duties and responsibilities of the trustee include:

1. Fiduciary Duty: The trustee must act in good faith and in the best interests of the beneficiaries. They must avoid conflicts of interest and manage the trust property diligently.
2. Duty to Preserve Trust Property: The trustee must take all necessary steps to safeguard the trust property and prevent its loss or damage. This includes investing the property wisely, where applicable, and maintaining proper accounts.
3. Duty to Administer the Trust: The trustee is responsible for managing the trust property according to the terms of the trust deed. This includes distributing the trust income or property to the beneficiaries as specified in the deed.
4. Duty of Impartiality: The trustee must act impartially and fairly toward all beneficiaries, ensuring that no beneficiary is unjustly favoured or disadvantaged.
5. Duty to Account: The trustee must maintain accurate records of all transactions related to the trust property and provide regular accounts to the beneficiaries.
6. Duty to Follow the Trust Deed: The trustee must strictly adhere to the terms and conditions of the trust deed and cannot act beyond the powers granted to them by the trustor.

Termination of Trusts

Trusts can be terminated in several ways under the Indian Trusts Act, 1882. A trust may come to an end if:

• The purpose of the trust has been fulfilled.
• The beneficiaries agree to terminate the trust (in certain cases).
• The trust is revoked by the trustor, provided the trust deed allows for such revocation.
• The court dissolves the trust if it becomes impossible to achieve its purpose or if the trust’s objectives are illegal or immoral.

Landmark Cases on Creation of Trusts

1. Bai Dosabai v. Mathurdas Govinddas (1980): In this case, the Supreme Court of India held that an obligation annexed to the ownership of property does not amount to an interest in the property but is an obligation that can be enforced against a transferee with notice or a gratuitous transferee. This judgment provided clarity on the nature of obligations imposed on trustees.
2. Hemchand v. Pyarelal (1950): The court ruled that a trust void for want of registration could be perfected through 12 years of adverse possession by the trustee, after which action against the trustee would be barred.

Conclusion

The Indian Trusts Act, 1882, provides a structured framework for the creation, administration, and termination of trusts in India. The process of creating a trust involves a series of legal steps, including the drafting of a trust deed, the transfer of property, and the appointment of trustees. The Act imposes specific duties on trustees, ensuring that they act in the best interests of the beneficiaries and manage the trust property with due care.