Extinction of Trust

Trusts play a pivotal role in legal arrangements across various jurisdictions, helping to manage assets for beneficiaries according to the specific intentions of the trust’s creator. While the formation of trusts is well-documented and widely discussed, their dissolution or extinction of trust is equally important but less frequently examined.

What is the Extinction of Trust?

The extinction of a trust is the termination or complete dissolution of a trust arrangement, effectively ending its existence and operations. This can occur under several circumstances as stipulated by law.

According to Section 77 of the Indian Trusts Act, 1882, a trust can be extinguished when its purpose is fully achieved, if the purpose becomes unlawful, if fulfilling the purpose becomes impossible due to reasons such as the destruction of the trust property or if the trust is explicitly revoked.

Once extinguished, the responsibilities of the trustees end and the trust property may need to be distributed or handled according to the terms of the trust or legal requirements.

Circumstances for Extinction of Trust

The extinction of a trust marks the cessation of its legal existence, typically when its predetermined conditions are met or altered by circumstances outlined in the governing legal framework, such as the Indian Trusts Act, 1882. This discussion explores the four primary circumstances under which a trust can be extinguished according to Section 77 of the Act.

1. Fulfillment of Purpose

The primary and most straightforward circumstance for the extinction of a trust occurs when its defined purpose has been completely fulfilled. This means that the objectives for which the trust was established have been achieved, rendering the trust’s continuation unnecessary.

Case Example: In the case of Amrit Lal Kohli and ors. vs Harbansh Lal Kohli and ors, the trust was set up in 1966 for the benefit of the settlor’s minor sons until they reached maturity and were well-established. The court ruled that the trust’s objectives had been met as the beneficiaries had grown up and settled, leading to the trust’s lawful termination.

2. Unlawful Purpose

A trust must be extinguished if its purpose becomes unlawful. According to Section 4 of the Indian Trusts Act, the illegality of a trust’s purpose can arise under various conditions:

• It is explicitly forbidden by law.
• It would defeat the provisions of any existing law if allowed to continue.
• It involves or implies fraudulent activities.
• It results in injury to the person or property of another.
• It is regarded as immoral or opposed to public policy.

When a trust’s purpose is declared illegal, it must be terminated to prevent the continuation of an unlawful activity.

Legal Framework: If a trust has mixed purposes, where some are lawful and others unlawful and these purposes are inseparable, the trust must be terminated entirely. However, if the lawful purposes can be distinctly separated from the unlawful ones, the trust can continue for those lawful purposes.

3. Impossibility of Fulfillment

A trust is also terminated when it becomes impossible to fulfil its purpose, whether due to the destruction of the trust property or other reasons that prevent the continuation of its activities.

Case Example: In Gela Ram vs District Board Muzaffarnagar (1923), a trust was extinguished when the land designated to connect a main road with a public garden was sold and the garden ceased to exist. The purpose of the trust became impossible to fulfil, leading to its lawful termination.

4. Revocation of Trust

Trusts can be revoked in specific situations, leading to their extinction:

• By Consent: If all beneficiaries are competent to contract, they can agree to revoke the trust.
• By Reservation: Trusts can be revoked if there is an express power of revocation reserved by the author of the trust, which can be exercised under the conditions specified at the creation of the trust.
• For Payment of Debts: A trust created for the payment of the author’s debts can be revoked at the author’s discretion, provided it has not been communicated to the creditors.

Legal Note: The burden of proof to demonstrate the irrevocability of a trust typically falls on the creditors, who must prove their assent and reliance on the trust’s provisions.

Extinction of Religious or Charitable Trusts

Religious and charitable trusts, once established, generally hold a permanent and irrevocable status. The creation of such trusts often involves dedicating property for the service and worship of a deity, a family or a public temple, making such dedications steadfast and unalterable.

This immutability is anchored in the principle that once a religious or charitable trust has been effectively set up, it becomes immune to revocation—even if the trustees fail to fulfil the intended objectives of the trust. This ensures that the trust’s assets remain perpetually dedicated to the designated religious or charitable purposes.

Moreover, Halsbury’s Laws of England notes that although charitable trusts can be declared with express powers of revocation, there is a lack of judicial decisions regarding the validity of such powers, specifically in relation to the rule against perpetuities.

This underscores the complex nature of revoking such trusts, further emphasising their generally permanent character. Consequently, the provisions for the extinction of trusts under Section 77 of the Indian Trusts Act, 1882, do not typically apply to religious or charitable trusts, reinforcing their enduring nature.

The Role of Trustees and Beneficiaries

Upon the extinction of a trust, trustees are required to settle any remaining obligations, distribute the assets according to the terms of the trust or legal directives and ensure a clear and documented end to the trust’s operations. Beneficiaries must be informed and involved, as appropriate, especially in cases where their consent is necessary for revocation.

Conclusion

The extinction of a trust under the Indian Trusts Act, 1882, is a process bound by legal stipulations designed to ensure that trusts serve their intended purposes without leading to perpetual obligations.

Each scenario for the extinction of a trust reflects a balance between fulfilling the settlor’s intent and adhering to legal and ethical standards. Understanding these conditions is crucial for trustees, beneficiaries and legal professionals involved in trust management and litigation.