What is Private Trust?
A person may set up a private trust under a written instrument; that is, either through a will (testamentary trust) or through a written trust deed during the person’s lifetime. A trust having immovable property and created through a non-testamentary instrument has to be declared through a registered written instrument (section 5 of the Indian Trusts Act 1882). Generally, there is no statutory requirement to create trust by any instrument. Supreme Court in the case of Radha Swami Satsung v. CIT, (1992) 193 ITR 321 (SC) held that no formal document is required to create a trust but still it is desirable to create trust in writing in the case of will or where an immovable property is Rs 100 and more.
A Private trust is formed for various purposes and can prove to be an effective vehicle for succession and estate planning. Private trust will cease to exist when the purpose of formation of trust is fulfilled or the object of formation of trust becomes unlawful or the trust is revoked or when there is a destruction of trust’s property.
What is Trust property?
Trust property refers to assets that have been placed into a fiduciary relationship between a trustor and trustee for a designated beneficiary. Trust property may include any type of asset such as cash, securities, real estate, or life insurance policies. Trust property is also referred to as “trust assets” or “trust corpus”.
Q. 1 Can a property owned by family trust be attached?
Yes, the property owned by family trust can be attached.
Private Trusts can help insolvency protection but If the settlor is a beneficiary, the share of the trust’s assets belonging to the settlor or beneficiary can be attached in case of bankruptcy.
Q.2 What are rules governing property owned by a trust?
The Indian Trusts Act, 1882, governs the creation and operation of private trusts. The Trusts Act must be read in conjunction with applicable real estate, tax and securities law that prescribe the procedure for the valid creation of the trust and settlement of assets into the trust. Similarly, public trusts (charitable and religious) must adhere to the applicable rules prescribed by the state legislations pursuant to which they are set up in addition to the Charitable and Religious Trusts Act 1920, the Religious Endowments Act 1863 and the Charitable Endowments Act 1890.
Section 3 of Trust Act defines a “Trust” as an obligation annexed to the ownership of 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.
Thus, trust is a declaration which is made by the owner of the property that going forward, the same will be held by him or some other person (say a trustee), for the benefit of someone (ie beneficiary) and will be handed over to that person immediately or in due course.
Section 9 in The Indian Trusts Act, 1882
- Who may be beneficiary.—Every person capable of holding property may be a beneficiary. Disclaimer by beneficiary.—A proposed beneficiary may renounce his interest under the trust by disclaimer addressed to the trustee, or by the setting up, with notice of the trust, a claim inconsistent therewith.
Although not rules per se, some considerations to be mindful of while setting up trusts are outlined below:
Parties to a trust: Ideally, all three parties should not be the same person. Necessary perspectives should be harmoniously balanced while identifying the parties (settlor/contributor, trustee or beneficiary). For instance, from a securities perspective, it is advisable that the trustee and beneficiary in some cases be individuals who belong to the promoter group. From a tax perspective, in an irrevocable trust there should be no overlap between settlor and beneficiary.
Regulator consent: At times, prior consent of the regulator may apply if there are sectoral regulations on whether a trust may own property and, if it may, the quantum of such assets as well as the eligibility criteria of the trustee (legal owner of the trust property) and consequent reporting – for instance, transfer of non-banking financial companies holding more than 50% of passive assets and earning more than 50% of passive income or shares of a private sector banking company above prescribed limits.
Tax and corporate compliances: From a tax perspective, the trust must obtain a tax identification number and file annual tax returns. Further, the trustee must also undertake necessary steps to comply with the US Foreign Account Tax Compliance Act, the Common Reporting Standard and corporate law based on assets owned by the trust.
Land regulations: If the trust owns agricultural or plantation land, the land laws that set out the eligibility for holding such land, as well as applicable exchange controls, must be complied with if NRIs are parties to the trust.
Q.3 How can a property owned by a trust attached?
If the trust is created solely for the purpose of defeating the claim of the creditor or for any unlawful purpose, then the property owned by a trust can be attached.
Sec. 4 of Indian Trust Act: Lawful purpose.—A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is
(a) forbidden by law, or (b) is of such a nature that, if permitted, it would defeat the provisions of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of another, or (e) the Court regards it as immoral or opposed to public policy. Every trust of which the purpose is unlawful is void. And where a trust is created for two purposes, of which one is lawful and the other unlawful, and the two purposes cannot be separated, the whole trust is .
Explanation.—In this section, the expression “law” includes, where the trust property is immovable and situate in a foreign country, the law of such country.
Illustrations
(a) A conveys property to B in trust to apply the profits to the nurture of female founding’s to be trained up as prostitutes. The trust is void.
(b) A bequeaths property to B in trust to employ it in carrying on a smuggling business and out of the profits thereof to support A’s children. The trust is void.
(c) A, while in insolvent circumstances, transfers property to B in trust for A during his life, and after his death for B. A is declared an insolvent. The trust for A is invalid against his creditors.
Section 155 of IBC : Estate of bankrupt:
(1) The estate of the bankrupt shall include,—
(a) all property belonging to or vested in the bankrupt at the bankruptcy commencement date;
(b) the capacity to exercise and to initiate proceedings for exercising all such powers in or over or in respect of property as might have been exercised by the bankrupt for his own benefit at the bankruptcy commencement date or before the date of the discharge order passed under section 138; and
(c) all property which by virtue of any of the provisions of this Chapter is comprised in the estate.
(2) The estate of the bankrupt shall not include—
(a) excluded assets;
(b) property held by the bankrupt on trust for any other person;
(c) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund; and
(d) such assets as may be notified by the Central Government in consultation with any financial sector regulator.
Section 158 of IBC: 1) Any disposition of property made by the debtor, during the period between the date of filing of the application for bankruptcy and the bankruptcy commencement date shall be void.
(2) Any disposition of property made under sub-section (1) shall not give rise to any right against any person, in respect of such property, even if he has received such property before the bankruptcy commencement date in—
(a) good faith;
(b) for value; and
(c) without notice of the filing of the application for bankruptcy.
(3) For the purposes of this section, the term “property” means all the property of the debtor, whether or not it is comprised in the estate of the bankrupt, but shall not include property held by the debtor in trust for any other person.
Q.4 What is the repercussion if there is element of fraud I am transfer of property to a trust?
A trust can be created only for a lawful purpose. If the purpose of trust is such that if permitted it would defeat the provisions of any law then the purpose cannot be regarded as a lawful purpose.
Every transfer of immovable property made with intent to defeat or delay creditors of the
transferor is voidable at the option of the creditors. A period of two years for claims has
been laid down in the Indian Insolvency Act.
Criminal concealment from police, customs, courts, etc?
Where the property, in respect of which the trust has been set up, has been acquired by fraud, such a trust is held to be unlawful and can be set aside. In such cases, applicable provisions of the criminal and customs legislations may be invoked in order to seize the trust property.
Section 65 of Indian Trust Act, 1882: Acquisition by trustee of trust-property wrongfully converted.- Where a trustee wrongfully sells or otherwise transfers trust-property and afterwards himself becomes the owner of the property, the property again becomes subject to the trust, notwithstanding any want of notice on the part of intervening transferees in good faith for consideration.
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