What is a Trust and how it is formed?

Section 3 of Indian Trust Act 1882 provides that  “A Trust is an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner”.

A trust can be formed for charitable or religious or educational or scientific purposes.    It can also be formed for regulating the affairs of a provident fund, superannuation fund or gratuity fund or any other fund constituted by a person for the welfare of its employees or Debenture-Redemption Fund Trust of a company for redemption of its debentures or for the welfare of the members of the family and/or other relatives, who are dependent on the settlor of the trust.

A trust created by means of written document known as trust deed.  The trust deed is prepared on a stamp paper (the requisite value of the stamp paper differs from state to state based on value of trust property). The trust deed contains important details such as object of the trust, names of trustees and power vested with them, the beneficiaries and terms and conditions to administer the trust property. The person who transfers his property to the trust is called “settler” or “author of Trust”. A trustee is a person who has a fiduciary duty to manage trust assets in the best interests of beneficiaries as outlined in the trust deed. A beneficiary of trust is the individual or group of individuals for whom a trust is created for.

The Trust formed for the promotion of public welfare is called Public Trust. The Trust which is created for charitable purpose is called a charitable trust. A trust created for the benefit of specified /definite ascertainable individuals is called private trust. The privileges and tax benefits that are enjoyed by the public trusts or NGOs are not enjoyable by these private trusts. There may be certain trusts known as Public cum Private Trusts whose part of the income may be applied for public purposes and a part may go to a private person or persons. Public-cum-private created on or after 1-4-1963 shall not be eligible for income tax exemption u/s 11 of IT act 1961.

The following are the prerequisites for creation of a Trust. (i) The existence of the author/settlor of the Trust or someone at whose instance the Trust comes into existence and the settlor to make an unequivocal declaration which is binding on him (ii) The settler must divest the ownership trust property in favour of the trustee/s for the beneficial enjoyment by the beneficiary (iii) The objects of the trust must be precise and clearly specified (iv) The beneficiary who may be particular person or persons. It is essential that both the settler (transferor of the property) and the trustees are competent to contract. The trustees shall give their assent to act as trustees to make the trust a valid one. Trustees have no forces to delegate their power to one or more unless the force of appointment is approved by the trust deed or is as per the bearings of the court on an application made by the trustees.

After valid trust registration, one shall go for 12A and 80G registration to get the Tax benefits. Donations up to specific amount to eligible charitable institutions are deductible from taxable income of the donor under section 80G. The trustees are also liable to tax in their representative capacity as ‘representative assessees’ [U/s 161].

In case of Charitable Trust/Institution/ public trusts, the following sections of Income tax Act 1961 deals with taxation.

Section 11 provides the manner in which income is exempt from income-tax.

Section 12 provides the income of trust or institutions from contributions.

Section 12A provides the conditions as to registration of trusts, etc.

Section 12AA provides the procedure for registration.

Section 13 provides section 11 not to apply in certain cases.

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Is registration of a trust statutorily necessary?

How to open Trust or foundation account in Bank?