Indian Trust Act, 1882

Trusts are created for various purposes, primarily to manage, protect, and distribute assets efficiently. Here are the key reasons:

1. Estate Planning & Wealth Management

• Ensures smooth transfer of assets to heirs without legal disputes.
• Avoids probate (court process for asset distribution after death).
• Helps in succession planning for family businesses.

2. Asset Protection

• Shields assets from creditors, legal claims, or financial risks.
• Provides protection for minor or dependent beneficiaries.

3. Tax Efficiency & Planning

• Helps in tax-efficient wealth transfer and asset management.
• Certain trusts can benefit from pass-through taxation (e.g., AIFs).

4. Philanthropy & Charity

• Used to establish charitable trusts for education, healthcare, or religious purposes.
• Provides tax benefits under the Income Tax Act.

5. Special Purpose Trusts

• AIFs & REITs/InvITs use trusts as a legal structure for investment pooling.
• Used in corporate structuring to manage ESOPs, employee benefits, etc.

• Asset Protection

  • Shields assets from creditors, lawsuits, and financial risks.
  • Ensures long-term financial security for beneficiaries.

• Efficient Wealth Transfer & Succession Planning

  • Helps avoid probate and legal disputes over inheritance.
  • Ensures smooth transfer of assets to future generations.

• Tax Benefits & Optimization

  • Certain trusts offer pass-through taxation, reducing tax burdens.
  • Charitable trusts enjoy tax exemptions under the Income Tax Act.

• Control & Customization

  • The settlor can set specific rules for asset distribution.
  • Allows structured payouts instead of lump-sum inheritances.

• Confidentiality & Privacy

  • Unlike wills, trust details are not publicly disclosed.
  • Ideal for high-net-worth individuals (HNWIs) and businesses.

• Philanthropy & Social Impact

  • Charitable trusts support causes like education, healthcare, and religion.
  • Provides tax benefits for both the donor and the trust.

• Legal Flexibility

  • Trusts can be structured as revocable or irrevocable, based on needs.
  • Useful for investment structures like AIFs, REITs, and InvITs.

1. Private Trusts (Governed by the Indian Trusts Act, 1882)

Created for specific individuals or beneficiaries.
✅ Used for estate planning, wealth transfer, and asset protection.

🔹 Revocable Trust – Can be altered or canceled by the settlor.
🔹 Irrevocable Trust – Cannot be changed or revoked once created.
🔹 Discretionary Trust – Trustee decides how and when to distribute assets.
🔹 Non-Discretionary (Fixed) Trust – Beneficiaries have fixed entitlements.
🔹 Living Trust (Inter Vivos Trust) – Created during the settlor’s lifetime.
🔹 Testamentary Trust – Comes into effect after the settlor’s death (via will).

2. Public Trusts (Governed by General Law & State Laws)

Created for public welfare, charity, or religious purposes.
✅ Used for education, healthcare, religious institutions, and NGOs.

🔹 Charitable Trust – Promotes social causes (education, healthcare, relief funds).
🔹 Religious Trust – Manages temples, mosques, churches, and religious properties.
🔹 Corporate Social Responsibility (CSR) Trust – Set up by companies for CSR activities.

3. Special-Purpose Trusts

Used for investment, business, and corporate structuring.

🔹 Alternative Investment Fund (AIF) Trust – Used for pooling investments in private equity, hedge funds, etc.
🔹 Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (InvIT) – For real estate and infrastructure investments.
🔹 Employee Welfare Trust – Holds ESOPs or retirement benefits for employees.
🔹 Business Trust – Used in family business succession planning.

1. Private Trusts (Under Indian Trusts Act, 1882)

(Used for estate planning, asset protection, AIFs, etc.)

🔹 Taxed as per Beneficiary or Trustee

• If beneficiaries are identifiable & shares are defined → Taxed in the hands of beneficiaries at their slab rates.
• If beneficiaries are discretionary (undefined shares) → Taxed at the Maximum Marginal Rate (MMR) of 42.74% in the hands of the trustee.

🔹 Special Case: AIF Taxation

• Category I & II AIFs: Pass-through taxation (investors pay tax).
• Category III AIFs: Taxed at the fund level (MMR – 42.74%).

2. Public Charitable & Religious Trusts

(Governed by Income Tax Act, 1961 – Sections 11 & 12)

🔹 Exemptions & Benefits

• Income used for charitable/religious purposes is tax-exempt if:
  • At least 85% of income is applied for charitable activities.
  • Trust is registered under Section 12AB of the Income Tax Act.
• Donors get tax benefits under Section 80G for donations.

🔹 Taxability If Conditions Are Not Met

• If the trust fails to spend 85% of its income, the remaining portion is taxable at normal rates.
• Business income unrelated to charity is taxed at MMR (42.74%).

3. Tax Rates for Trusts

Yes, a trust can be revoked, but it depends on the type of trust:

1. Revocable Trust

• Can be revoked or modified by the settlor (creator) anytime during their lifetime.
• After revocation, the assets return to the settlor.
• Common in estate planning for flexibility in asset management.

2. Irrevocable Trust

• Cannot be revoked or altered once created.
• The settlor loses control over the trust assets.
• Often used for asset protection, tax benefits, and charitable purposes.
• Exceptions: It may be revoked only by a court order under certain conditions.

Revocation of Private vs. Public Trusts

• Private Trusts: Revocation depends on the trust deed terms.
• Public Charitable/Religious Trusts: Usually irrevocable, unless mismanagement or fraud is proven in court.

Tax Treatment of Offshore Trusts in India

1. Tax Based on Residency

   • Indian Residents: Taxed on global income, including offshore trust distributions.
   • NRIs: Only taxed on income received in India from the trust.

2. Trust Structure Matters

   • Revocable Trust: Taxed as settlor’s income.
   • Discretionary Trust: Undistributed income not taxed in India until received.

3. FEMA & Reporting

   • Indian residents must report foreign trust holdings in ITR (Schedule FA).

4. Black Money Act (2015) & Penalties

   • Undisclosed offshore trusts attract 30% tax on corpus + penalties.

Distributable Net Income (DNI) refers to the maximum amount of income that a trust or estate can distribute to its beneficiaries in a given financial year without being taxed at the trust level. It ensures that income is only taxed once—either at the trust or at the beneficiary level.

Key Points:

✔ Prevents double taxation by ensuring trust income is taxed only once.
✔ Includes interest, dividends, capital gains, and other income earned by the trust.
✔ Excludes corpus distributions (principal or original capital of the trust).
✔ For pass-through entities (e.g., AIF Category I & II), DNI is taxed at the investor's hands.

A perpetual trust (also called an endless or indefinite trust) is a trust that continues indefinitely without a fixed termination date. It is commonly used for:
✔ Wealth preservation across generations
✔ Charitable purposes (e.g., educational or religious trusts)
✔ Managing family assets and business succession

🔹 Private Trusts (Indian Trusts Act, 1882)

• Not allowed to exist perpetually unless created for a minor’s benefit.
• Must specify a definite timeframe or end when its purpose is fulfilled.

🔹 Public Charitable & Religious Trusts

• Can be perpetual if established for charity, religion, or public benefit.
• Must comply with Sections 11 & 12 of the Income Tax Act to claim tax exemptions.

To establish a trust in India, the following documents are required:

1. Trust Deed (Mandatory for Private Trusts)

• Name of the Trust
• Settlor's (Creator’s) Details
• Trustee(s) Details (at least one trustee)
• Beneficiary Details (or the class of beneficiaries)
• Objectives & Purpose of the Trust
• Trust Property/Assets being transferred
• Trustee Powers & Duties
• Rules for Trust Management & Dissolution

👉 Stamp Duty: Varies by state (usually a percentage of trust property value).

2. Identity & Address Proofs

• Settlor, Trustees, and Beneficiaries
  • PAN Card
  • Aadhaar Card / Passport / Voter ID
  • Utility Bill or Rental Agreement for Address Proof

3. Registration Documents

• For Private Trusts – Registered under Indian Trusts Act, 1882 (Not mandatory but recommended).
• For Public Charitable/Religious Trusts – Registered under:
  • Societies Registration Act, 1860 (for societies)
  • Section 12AB of the Income Tax Act (for tax exemption)
  • Section 80G (for tax benefits to donors)

4. Additional Documents (If Applicable)

✔ Bank Account Opening Documents – For trust operations
✔ Property Documents – If the trust owns immovable property
✔ FCRA Registration – If receiving foreign donations (for NGOs)