A trust is an effective tool not only for tax-planning but also to safe-guard the interests of family members (beneficiaries) by protecting the rights of its beneficiaries and minimizing family disputes over the property.
The concept of a 'Trust' is not alien to society in fact crusading English Knights of the twelfth century often left their estate and manors in the care of trusted friends and family for safekeeping until their return.
A trust (as defined under the Indian Trusts Act, 1882) simply means to hold or manage property on behalf of another (beneficiary) in a fiduciary capacity for the benefit of that other for a specific object and purpose. All disputes related to the trusts need be settled before the court of competent jurisdiction as provided by the Indian Trusts Act of 1882.
Private Family Trust
In India, private trusts are generally created for the benefit of members of the family because of the arrangement under such trust, by which its author passes unto the beneficiaries, assets in a well-organized way as per the terms of the Deed. Such a trust is an effective tool not only for tax-planning but also to safe-guard the interests of family members (beneficiaries) by protecting the rights of its beneficiaries and minimizing family disputes over the property.
We will in lucid terms make an attempt to broadly explain the types of trust, its ingredients and incidence of tax for each type of trust under the legal provision of law. A trust can be a creature of law or a creature of contract created by the author either during his lifetime or under a will. There are broadly two types of trusts – specific and discretionary which may further be bifurcated into revocable/ irrevocable.
a. Author/settlor who sets up a trust;
b. A trustee who manages the trust;
d. Trust property/(ies);
e. Object of the trust, and its tenure;
Incidence of Tax
Under the Indian tax regime, the taxability of a private family trust depends upon the structure adopted for creation of the trust. Similarly, the point of incidence of tax will change depending upon the language of the trust deed and wishes of the author whether to create a specific or discretionary trust. Under the tax regime, tax may be levied in the hands of the author, the trustee or beneficiary depending on the intention of the author.
i. Specific Trust: An arrangement where the share of the beneficiary/(ies) is explicitly specified under the trust deed; and as the income of the trust is directly received in the hands of the beneficiary/(ies), all such income received will be taxable in the hands of the beneficiaries. If the beneficiary is a minor then such income will be clubbed with the income of the parent.
ii. Discretionary Trust: An arrangement where only the names of the beneficiaries are specified under the trust deed and not the proportion of the income/share in the property. The trustees have complete discretion, to decide the proportion in which the income/share in the property or the corpus is to be distributed to the beneficiaries from time to time and the extent of such distribution. In such an arrangement, there has to be more than one beneficiary and the income is taxed in the hands of the trustee in the representative capacity.
iii. Revocable Trust: The author can at any time during the tenure of such trust, revoke the trust. In the event such trust is revoked by the author, the property reverts to the author. As the discretion of revocation is with the author, the income of the trust will be taxable in the hands of the author by virtue of section 61 of the Income tax Act 1961. In the event author dies before the expiry of tenure of the trust, as per the provisions of law, the status of the trust automatically changes to irrevocable trust.
iv. Irrevocable Trust: This trust can only come to an end upon the object/tenure of the trust being fulfilled or the death of the beneficiary whichever is earlier (and in no other case). As the author does not have powers to revoke an irrevocable trust, all income in the hands of such trust shall be payable by the trustee in his representative/fiduciary capacity until the tenure of the trust expires. Upon expiry of the tenure of the trust, the property shall vest absolutely and shall be taxable in the hands of the beneficiary/(ies).
A Private family trust in the hands of a prudent author can serve as an effective tax planning and family planning vehicle which secures the interests of the beneficiaries (family members) in the event any calamity (financial or otherwise) befalling upon the author.
A private family trusts is useful mechanism which assists in the smooth and unhindered succession of assets; thereby protecting interests of family members and ensuring that their financial needs are well taken care of.
In recent years, due to an increase in the earning capacity, aspirations and general awareness among people, there has been a steady rise in the number of family trusts being set up. The veil of ignorance that previously impaired access to trust mechanisms has gradually lifted as the noble concept of trust continues to gain importance as medium of planning ones estate and varied or specific needs of marriage, education expenses etc. However, many people continue to be reluctant to create trusts. It is as they say, 'no trust on Trust' which is holding back the immense potential and benefits an individual can derive from carefully planning and using trusts effectively to manage his estate.
The author is partner of Rajani AssociatesThe Great Diwali Discount!
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First Published on Oct 25, 2016 04:21 pm