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CA SANDEEP KHANDELWAL
Under the Indian Trusts Act of 1882, trusts can be classified as private trusts and public trusts according to their nature and purpose:
Public Trusts: Public trusts are created for the benefit of the general public or a section of the public at large. They are usually built for charitable or religious purposes, such as the maintaining temples, schools, hospitals, or orphanages. Public trusts are managed by a board of trustees, who are responsible for the proper administration of the trust and the fulfillment of its objectives.
Private Trusts: Private trusts are created for the benefit of particular individuals or families. They are usually established for the purpose of providing financial security or support to beneficiaries, such as minor children, disabled persons, or aging parents. Private trusts can be further classified into two sub-categories:
- Trusts for specific purposes: These trusts are created for a specific purpose or objective, such as the maintenance of a family property or the education of a child.
2. Trusts for the benefit of specific individuals: These trusts are created for the benefit of specific individuals, such as a spouse, children, or other family members. They may be set up as testamentary trusts (created in a will) or inter-vivo trusts (created during the lifetime of the settlor).
In addition to these main types of trusts, there are also other specialized trusts recognized under Indian law, such as religious and charitable endowments, Wakf trusts (for the maintenance of Muslim religious or charitable institutions), and Debutter trusts (for the maintenance of Hindu religious institutions).
The main key differences between private and public trusts:
- Nature: A private trust is created for the benefit of particular individuals or families, while a public trust is created for the benefit of the general public or a particular community.
- Registration: Private trusts are not required to be registered with the Government, but public trusts are required to be registered under the Indian Trusts Act, 1882 or the equivalent state law.
- Trustee: In a private trust, the trustee is usually a family member or a close associate of the settlor. In a public trust, the trustee is appointed by the settlor and is usually a respected member of the community.
- Purpose: Private trusts are created for the benefit of the beneficiaries specified in the trust deed, while public trusts are created for charitable or religious purposes, such as the maintenance of a temple, school, hospital, or orphanage.
- Taxation: While public trusts may be eligible for tax exemptions if their activities fall under the definition of “charitable purposes” under Section 2(15) of the Income Tax Act, 1961. As for private non-discretionary trust, as the shares are owned by actual owners of the income i.e. the beneficiaries and therefore, the income can be taxed either in the hands of the beneficiaries directly or in the hands of the trustees in their capacity of representative assessee. The private determinate trust shall be subject same deductions and exemptions to which respective beneficiary are eligible for their respective share.
In the hands of the trustee as representative capacity u/s 161(1) r.w.s. 160 of the Act, tax shall be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.
It is important to note that the distinction between private and public trusts is not always clear-cut, and there may be trusts that have elements of both. In general, a trust is considered a public trust if it is created for the benefit of the general public or a particular community and is registered with the government under the relevant law.
In general, forming a private trust can be a useful tool for achieving specific goals, such as tax planning or asset protection and serves as an effective tool to avoid dispute among the beneficiaries. Following plannings can be done through a private trust: –
- Estate planning: Private trusts can be used as a tool for estate planning, allowing individuals to transfer their assets to the trust for the benefit of their family members or other beneficiaries. This can help reduce the tax liability on the estate and ensure that the assets are distributed as per the settlor’s wishes.
- Avoiding probate: By transferring assets to a private trust, individuals can avoid probate and the associated costs and delays. Since the assets are held by the trust, they do not form part of the individual’s estate and do not need to go through probate.
- Asset protection: Private trusts can be used to protect assets from creditors and other legal claims. By transferring assets to the trust, individuals can ensure that the assets are held by a separate legal entity and are not subject to legal claims against the individual.
Forming a private trust in India involves the following steps:
- Identify the purpose of the trust: The first step in forming a private trust is to identify the purpose of the trust and the beneficiaries who will benefit from the trust. Private trusts are usually set up for the benefit of specific individuals or families.
- Choose the trustees: The settlor (person creating the trust) needs to choose one or more trustees who will manage the trust and its assets on behalf of the beneficiaries. Trustees can be family members or trusted associates of the settlor.
- Create the trust deed: The settlor needs to create a trust deed that outlines the purpose of the trust, the beneficiaries, the assets that will be transferred to the trust, the powers and duties of the trustees, and other relevant details. The trust deed should be executed on a non-judicial stamp paper and signed by the settlor and the trustees.
- Transfer assets to the trust: The settlor needs to transfer the assets that will be held by the trust to the trustees. This can include cash, securities, real estate, or other assets.
- Register the trust: Private trusts are not required to be registered with the government, but it is advisable to register the trust to establish its legal existence and to avoid disputes in the future.
- Obtain a PAN and open a bank account: The trustees need to obtain a Permanent Account Number (PAN) from the Income Tax Department and open a bank account in the name of the trust.
- Comply with tax obligations: Private trusts are subject to income tax on any income earned from the trust assets. Trustees need to file income tax returns and pay taxes on behalf of the trust.
Factors to be considered for deciding formation of a Trust:
Purpose: Private trusts are usually created for the benefit of specific individuals or families. If the individual or family has specific needs or goals that can be met through a private trust, it may be advisable to form one.
Tax implications: Private trusts can have tax implications, both in terms of income tax and wealth tax. If tax planning is a priority, forming a private trust may be beneficial.
Asset protection: Private trusts can offer asset protection benefits by separating assets from personal liability. If asset protection is a concern, forming a private trust may be advisable.
Costs and complexity: Forming a private trust can be a complex and costly process, involving legal fees, stamp duty, and registration fees. If the benefits of forming a private trust do not outweigh the costs, it may not be advisable.
Alternative options: There may be alternative options to achieving the same goals as a private trust, such as creating a will, setting up a family arrangement, or forming a partnership or company.
How Can MNRS Help?
MNRS can be a trusted consultant for handling various aspects of a private trust. Our services to a private trust may vary depending on the needs and requirements of the trust. Some of the services provided by MNRS are as follows: –
- Trust Formation: We can help in the formation of a private trust by preparing the necessary documents such as the trust deed, and guiding the trustees on the legal and tax implications of the trust.
- Accounting and Bookkeeping: We can help in maintaining the books of accounts of the trust, ensuring that they comply with the relevant laws and regulations.
- Tax Planning: By using tax-efficient investment strategies and distributing income among beneficiaries, we can advise the trustees on tax planning strategies to minimize tax liability.
- Business Succession Planning: A private trust can be used as a tool for business succession planning. By transferring business assets to a trust, an individual can ensure that their business is passed on to their intended successors in a smooth and efficient manner.
- Tax Compliance: We can assist in the filing of various tax returns such as income tax, GST, and TDS returns.
- Investment Management: We can provide advice on investment management for the trust’s assets, including risk management, diversification, and tax-efficient investment strategies.
- Trust Administration: A CA can assist the trustees with various administrative tasks such as maintaining records, managing legal compliance, and communicating with beneficiaries.
- Audit and Assurance: Our firm can conduct an audit of the trust’s financial statements to ensure that they are accurate and comply with the relevant laws and regulations. They can also provide assurance services to the trustees on various financial matters.