Meaning of a ‘Trust’ ?
A ”Trust” is 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.
A trust is a convenient method whereby a limited number of persons may hold property on behalf of other persons, who may be a large or fluctuating body or who may include persons not yet born.
Once the property has been vested in the trustees, they own the property, but they are compelled by law to exercise their ownership for the benefit of the beneficiaries only.
It means that legal ownership vests in the trustee or trustees but beneficiaries have defacto ownership.
• Author of Trust :
The person who reposes or declares the confidence is called “the Author of the trust”
• Trustee :
The person who accepts the confidence is called the “Trustee”.
• Beneficiaries :
The person for whose benefit the confidence is accepted is called the “Beneficiaries”.
• Trust Property :
The subject matter of trust is called “Trust Property” or “Trust Money”.
• Instrument of Trust:
The instrument, if any, by which the trust is declared is called the “Instrument of Trust”.
Types of Trusts
- Charitable or Public Trusts
- Religious Trusts
- Private Trusts
Charitable Trust: It is the Trust/Society which has an objective of public charities. They are “not for profit” organisations and their objectives are public charities for the benefits of the Society at large without distinctions of caste, creed, sect or religion.
Section 2(15) of the Income-tax Act defines charitable purpose for the purpose of the Act and includes relief of the poor education, medical relief and the advancement of any other object of general public utility.
Accordingly, charitable purposes can be classified under four heads –
(a) relief to the poor
(c) medical relief
(d) preservation of environment (including water sheds, forests and wild life)
(e) preservation of monuments or places or objects of artistic or historic interest, and
(f) any other object of general public utility.
A purpose must, in order to be charitable, be directed to the benefit of the community or a section of the community, as distinguished from an individual or a group of individuals. Where the primary purpose of the settler is to benefit the members of his family and relations and only remotely and indirectly the general public, the trust is not a charitable trust. It has been held that a charitable purpose’ includes a ‘religious purpose’. Thus, the words ‘trust for charitable purposes’ would include even trust for advancement of religion.
The definition of the charitable purposes was enlarged by the Finance Act, 2011 by the addition of the following objects in its ambit:
• Preservation of environment (including water sheds, forests and wild life).
• Preservation of monuments or places or objects of artistic or historic interest.
Religious Trust: Religious Trusts has not been defined under the income tax act. The creation of Religious Trust is governed by the personal laws of the religion.
But in general connotation, it can be deemed as the Trusts which are involved in the activities of promoting religion or particular belief.
But in reality, most of the Religious Trusts also promote the charitable causes as well e.g. education, medical facility and other amenities.
In the case of private trusts, the beneficiaries are individuals or families and they are ascertained.
Laws Applicable to Trusts
Indian Trusts Act, 1882
Charitable & Religious Act, 1920
Sikh Gurudwara Act, 1925Indian Trustees Act, 1866.
Religious Endowment Act, 1863
Trustees’ & Mortgagees’ Powers Act, 1866
Society Registration Act, 1860
State acts like the Tamilnadu Societies Registration Act.
Indian Companies Act
Transfer of Property Act, 1882
Indian Registration Act, 1908
Income Tax Act, 1961
Foreign Contribution (Regulation) Act, 1976
Requisites for Creation of a Trust:
(i) There is a founder/settler/author of trust;
(ii) there should be person called trustee/trustees;
(iii) there is a property of the trust which the settlor gives;
(iv) there are beneficiaries who will enjoy benefits out of that property,
(vi) an intention of the author or founder to create a trust;
(vii) the purpose of the trust;
(viii) transfer of the property to the trustees.
Conditions for Creation of a Trust:
(i) The settlor has to give up ownership and all beneficial interests in the property,
(ii) the property should be clearly described,
(iii) the objects or purposes for creation of trust should be clearly indicated,
(iv) formal deed or any other writing not required – intention to create a trust may be shown through words.
(v) The settlor must be a person competent to contract.,
However, it is advisable to have a written trust deed for all legal and practical purposes.
What is Trust Deed?
The instrument by which the trust is declared is called the ‘instrument of trust’ or more popularly as the ‘trust-deed’.
Importance of the Drafting of Trust Deed
Drafting of the trust deed assumes utmost importance in view of the importance attached to it. As already stated, with effect from 1-4-1973, for claiming exemption under section 11, one of the conditions is that there should be an instrument creating the trust or establishing the institution. It is also provided that where the trust / institution has not been created/established under an instrument, there should be a document evidencing the creation of trust or the establishment of the institution.
Advantages of a Trust-Deed
Though a trust may be created orally in certain cases, however, a written trust-deed is always desirable, even if not required statutorily due to following reasons:
(a) a written trust-deed is a prima facie evidence to existence of a trust;
(b) it facilitates devolution of trust property to the trust;
(c) it clearly specifies the trust-objectives which enables to ascertain whether the trust is charitable or otherwise;
(d) a written trust-deed is essential for registration of conveyance of immovable property in the trust name;
(e) a written trust-deed is essential for obtaining registration under the Income-tax Act and claiming exemption from tax;
(f) a written trust-deed helps control, regulate and manage the working and operations of the trust;
(g) it lays down the procedure for appointment and removal of the trustee(s), his/their powers, rights and duties; and
h) it prescribes the course of action to be followed under any eventuality including determination of the trust.
Contents of a Trust Deed
A trust may be created by any language sufficient to show the intention and no technical words are necessary. A trust may even be created by the use of words which are primarily words of condition, but such words will constitute a trust only where the requisites of a trust are present.
Though the use of the word ‘trust’ is not needed to create a valid trust, the terms will have to make it clear that an obligation is actually annexed to the ownership of the trust property.
A trust-deed, generally, incorporates the following:
(i) the name(s) of the author(s)/settlor(s) of the trust;
(ii) the name(s) of the trustee(s);
(iii) the name(s) if any, of the beneficiary/ies or whether it shall be the public at large;
(iv) the name by which the trust shall be known;
(v) the place where its principal and! or other offices shall be situate;
(vi) the property that shall devolve upon the trustee(s) under the trust for the benefit of the beneficiary/ies;
Note: In terms of section 21 of the Indian Registration Act, a deed of trust relating to immovable property, must for the purposes of registration, contain a description of the property sufficient to identify it.
(vii) an intention to divest the trust property upon the trustee(s);
Note: intention. The intention should be expressed in unequivocal language and with a reasonable degree of certainty. Though no particular or technical words are necessary, yet the words used must be capable of definite meaning.
(viii) the objects of the trust;
(ix) the procedure for appointment, removal Or replacement of a trustee, their rights, duties and powers, etc;
(x) the rights and duties of the beneficiary/ies;
(xi) the mode and method of determination of the trust.
Who may Create Trust?
As a general rule, any person, who has power of disposition over a property, has capacity to create a trust over such property.
As regards, ‘power of disposition over property’, according to section 7 of the Transfer of Property Act, 1882, a person who is competent to contract and entitled to transferable property or authorised to dispose of transferable property not his own, is competent to transfer such property either wholly or in part and either absolutely or conditionally.
Thus, two basic things are required for being capable of forming a trust —
(i) power of disposition over property; and
(ii) competence to contract.
Under the Hindu law, any Hindu can create a Hindu endowment and under the Muslim law, any Muslim can create a public WAKF.
Public trusts can be created by any person under general law. But public trusts, whether endowment or wakfs, which are essentially of charitable or religious nature, can be constituted by any person without any distinction of caste or creed.
Besides individuals, a body of individuals or an artificial person such as an association of persons, an institution, a limited company, a Hindu Undivided Family through its Karta, can also form a trust.
Who may be a Trustee?
Every person capable of holding property may be a trustee; but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract. No one is bound to accept a trust. Any number of persons may be appointed as trustees. However, no trust is defeated for want of a trustee. Where there is no trustee in existence, an official trustee may be appointed by the court and the trust can be administered.
Author as trustee:
The author or settler of a trust may appoint! constitute himself as the sole trustee or as one of the several trustees.
Beneficiary Under Trust
The person or persons for whose benefit, a trust has been created, is called the beneficiary or beneficiaries, as the case may be.
While the trustees hold the legal title in the trust property the beneficiaries hold the beneficial interest in the property.
Who may be a beneficiary?
Beneficiary may be any person or persons, so specified by the author of the trust; a beneficiary may be general public or a class thereof.
Practical Tips on Drafting of Trust Deed of A ‘Public Charitable or Religious Trust’
It is particularly necessary for the person drafting the deed to bear in mind the three certainties of a valid trust which are —
(i) certainty of declaration, i.e. imperative nature,
(ii) certainty of subject matter, i.e. property in which it acts,
(iii) certainty of object or beneficiary.
Any one drafting the deed of a public charitable trust has to bear in his mind several enactments, particularly, the Indian Trusts Act, 1882, any local / state enactment relating to trusts, like the Bombay Public Trusts Act, 1950 for the State of Maharashtra and the Income Tax Act, 1961. He should also keep in mind the various judicial pronouncements dealing with the scope of “charitable purpose” and deciding whether a particular purpose is charitable, interpretation of the particular objects clauses of the trust deed to decide whether the same is charitable or not.
There should be sufficient clarity as to the working of the trust and detailed provisions should be made therefor so that there is no ambiguity.
With a view to providing proper safeguard, it is suggested that the instrument of trust or institution created or established to contain, inter alia, the following clauses:
- “ Nothing contained in this deed shall be deemed to authorize the trustees to do any act which may in any way be construed as violative or contrary to the provisions of sections 2(15), 10(23 B), l0(23C), 11, 12, 12A, 12AA and/or 13 of the Income Tax Act, 1961 and/or statutory modifications thereof and all activities of the trust shall be carried out with a view to benefiting the public at large, without any profit motive and in accordance with the provisions of the Income Tax Act or any statutory modification thereof.
- The trust is hereby expressly declared to be a public charitable trust and all the provisions of this deed are to be construed accordingly.
- The trust is irrevocable
- The activities of the Trust shall be confined to the territorial limits of India.“
How to get the benefit under the Income tax act?
For having the benefit of exemptions under the income tax act, 1961 the Charitable or Religious Trusts have to get themselves registered under the income tax act u/s 12AA.
If the objects of Trust has been modified later on from that of which was initially declared while taking the registration, then the Trust has to apply for the modification of the Registration Certificate of such Trust. If such modification is not been done then exemptions would not be allowed. [FA, 2017]
Also, Return must have been filed within due date.
If Gross Receipts exceeds Rs. 2,50,000/- then the accounts of Charitable or Religious trust must be audited to get the tax benefit available to the Trusts under the act.
The income of the ‘Public Charitable or Religious Trust’ gets exempted from the Income tax subject to following conditions mentioned u/s 11&12:
i. The trust shall expend 85% of the total donation received by it during the year in a year in which it has been received. If the 85% of the total receipts is spent for its purpose then rest of the 15% will not be treated as Income and thus it will be Exempt from the Tax.
ii. Trust can claim exemption even when it has not spent 85% of its income. If it sets apart the residual amount for the specific objects of the trust and passes a resolution to spend it in next 5 years. However the Copy of the resolution along with form No.10 shall be sent to the Assessing Officer before time specified u/s 139(1).
To claim the deduction of set apart amount the set apart amount shall be invested only in the securities Specified u/s 11(5) of the Act and within the prescribed time limit and in prescribed manner.