Private Trusts Formation And Income Tax Implications

While we understand that the taxation of a private trust majorly depends on what structure is being followed while forming and operating a trust, it is advisable that the real intention of the settlor be explicitly set out in the trust deed along with details regarding beneficiaries

In India, the creation, affairs of the trust, rights, obligations, removal, duties and legal remedies to seek redressal of grievances by the settlors, trustees and beneficiaries are governed by the archaic legislation, Indian Trust Act, 1882 (“Trust Act”). Settlement of property in private trusts for better estate management and succession planning offers several advantages, one of which is that private trusts qualify as bankruptcy remote structures, since the property settled by the author of the trust (after complying with the prescribed time period) no longer vests in the settlor, and hence the same cannot be attached in bankruptcy proceeding. It has always remained as an effective tool for inheritance planning since it allows flexibility in transfer of assets amongst the legal heir. Such settlement of family property helps in protecting and preserving the assets and safeguarding the interest of incapacitated or dependent family members/minors or senior citizens with assured income being set aside.

Declaration Of Private Trusts

A private trust can be declared either by execution of a nontestamentary instrument (if the trust is created during the lifetime of the settlor) or through a testamentary instrument (if the trust is to be created after the death of the settlor). For declaring a private trust during the lifetime of the settlor, a ‘trust deed’ or an ‘indenture of trust’ often referred to as the governing document of the trust is executed amongst the settlors and the trustees of the trust. It is advisable to have an odd number of trustees for better decision-making and distribution of power and also to appoint a corporate trustee as a professional and neutral party. This enables the longevity of the trust management and makes sure that the wishes of the founder or settlor as per the trust deed are fulfilled.