Trust Registration

Trust Registration in India

A trust is a legal arrangement where an individual, known as the trustor or settlor, transfers ownership of their property or assets to a trustee. The trustee is responsible for managing these assets for the benefit of a third party, called the beneficiary. This arrangement ensures that assets are used according to the trustor’s wishes, providing financial security, philanthropy, or long-term planning. In India, trusts are governed by the Indian Trusts Act, 1882, which primarily regulates private trusts. Public trusts, which serve charitable or religious purposes, are generally governed by state-specific legislation. The purpose of the formation of a trust can be managing family wealth to support charitable causes such as education, healthcare, poverty relief, etc. Trust registration provides legal recognition to the trusts, which allows the trust to function as an independent entity, own property, enter into contracts, and claim tax benefits.

What is a Trust?

According to Section 3 of the Indian Trusts Act, 1882, a trust is defined 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."

In simple terms, a trust is a legal set up where a person, called the settlor, transfers ownership of certain assets to another person, known as the trustee. The trustee is responsible for managing the assets of the settlor for the benefit and advantage of the third party, known as the beneficiary. The fiduciary relationship between the settlor and the trustee ensures that the trustee cannot use the assets for personal gain but must adhere to the terms set out by the settlor for the welfare of the beneficiary.

Who are the Parties in a Trust?

There are three main parties in a trust: settlor, trustee, and beneficiary.

1. Settlor/Author/Trustor/Donor: This is a person/entity that creates the trust. They transfer assets to the trustee for the benefit of the beneficiary by determining the terms and conditions of the trust. The settlor decides the distribution and regulation of the trust's assets.
2. Trustee: The person or organisation in charge of holding and overseeing the assets and property of the settlor or trustor is known as the trustee. The trustee has a fiduciary duty to scrupulously follow the provisions set forth by the settlor and act in the beneficiaries' best interests.
3. Beneficiary: Beneficiaries are those who benefit from the trust. They have the right to take advantage of the assets as outlined in the trust agreement. Depending on the purpose of the trust, beneficiaries can be individuals, organizations, or even the public at large.

Legal Framework Governing Trusts in India

In India, trusts are governed by the Indian Trusts Act, 1882, which governs the creation, operation, and management of private trusts established for charitable or religious purposes aimed at benefiting the general public and are generally regulated by state-specific legislation.

The Income Tax Act, 1961, grants some tax benefits and exemptions to registered trusts, and the Societies Registration Act, 1860, regulates the formation and functioning of societies that work alongside trusts for charitable purposes.

Who Can Create Trust?

Any individual who is able to enter into a contract may establish a trust in accordance with Section 7 of the Indian Trusts Act, 1882. Trusts can be created by any individual (who is competent to contract), partnership firms, body of individuals (BOP), associations of persons (AOPs), or even corporate entities like companies.  

Types of Trusts

In India, trusts are primarily classified into two main categories: private Trusts and Public trusts.

1. Public Trust: 

A public charitable trust and a religious trust are created for the benefit of the general public or a specific group of individuals. The state-specific legislation(s) governs the public trusts. The public trust can be divided into two main categories:

• Public Charitable Trusts: These trusts are formed to promote societal activities such as poverty alleviation, education, medical relief, and other public-benefit initiatives.
• Public Religious Trusts: These trusts are established to advance and support religious activities, including the maintenance of places of worship, religious education, and ceremonies.

2. Private Trust: 

A private trust is established with the aim of providing benefits to specific individuals or groups of individuals. Private Trusts have clear and identifiable beneficiaries. The Indian Trusts Act, 1882, governs the operations and administration of private trusts. Private trusts can be divided into two main categories:

• Private Specific Trusts: These trusts are also known as fixed or non-discretionary trusts, as they specify the exact distributions to beneficiaries. The trustee has no role in deciding the allocation of assets or income to the beneficiary.
• Private Discretionary Trusts: In these trusts, trustees have the discretion to decide how and when to distribute income or assets to beneficiaries.

3. Public-cum-Private Trust

A Public-cum-Private Trust serves two purposes. It is the most versatile kind of trust in India as the income it generates can be used for both public and private reasons. It provides benefits to the general public and the remainder to specific individuals or families. The governance and tax implications of such trusts depend on the proportion of public versus private benefits.

Advantages of Trust Registration

Registered Trust has several benefits, such as:

• A registered trust gains legal status, enabling it to enter into contracts, own property, and initiate legal proceedings in its own name.
• Registered trusts can avail of tax benefits in the Income Tax Act of 1961.
• A registered trust enjoys continuity irrespective of changes in trustees or management.
• Registered tax boosts credibility of trust among donors, beneficiaries, and the public.
• Registration of trust safeguards the interest of the settlor and the beneficiary.

Eligibility for Trust Registration in India

The below-mentioned criteria must be met to register a trust in India :

• At least two individuals must form a trust, and at least one trustee should be a resident of India.
• The objectives of the trust must be lawful and should not violate any existing laws in India.
• All individuals involved in the trust's formation must be legally competent and not disqualified under any prevailing laws of the nation.
• The Trust formation must not harm the public interest or violate any law of the nation.
• Trust activities should not cause any harm to individuals.
• Trust Activities must adhere to the memorandum of the Trust.
• The trust deed must be professionally drafted & reflect the interest of the parties.
• The trustee must act in the best interests of the beneficiaries.