ASSESSMENT OF PRIVATE TRUSTS
Section 3 of Indian Trusts Act, 1882 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:
A Private Trust is mainly created for the benefit of one or more than one person and is governed and regulated by Indian Trusts Act, 1882. It can be created during a person’s lifetime (Non testamentary trust) or by will (testamentary trust), either orally or under a written instrument, except where the subject matter of the trust is immoveable property, the trust would need to be declared by a registered written instrument.
A family trust set up to benefit members of a family is the most common purpose for a private trust. The purpose of the family trust is for the settlor to progressively transfer his assets to the trust, so that legally the settlor owns no assets himself, but through the trust, beneficiaries get the benefit of these assets. A family trust can be set up either while one is still alive (by a declaration of trust contained in a trust deed) or post death, in terms of a will.
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.
PARTIES IN A TRUST
Author/Settlor/Trustor/Donor: the person who reposes or declares the confidence is called the “author/settlor/trustor/donor of the trust”.
Trustee: the person who accepts the confidence is called the “trustee”.
Beneficiary: the person for whose benefit the confidence is accepted is called the “beneficiary”
Trust of immoveable property - No trust in relation to immoveable property is valid unless declared by a non-testamentary instrument in writing signed by the author of the trust or the trustee and registered, or by the will of the author of the trust or of the trustee.
Trust of moveable property – No trust in relation to moveable property is valid unless declared as aforesaid, or unless the ownership of the property is transferred to the trustee.
Who can form a Trust?
A Trust can be formed by any person competent to contract,
- above 18 years of age;
- of sound mind;
- not disqualified from entering into any contract by any law; or
- On behalf of a minor (only with the permission of a principal civil court of original jurisdiction).
Determinate/Specific: A Determinate trust is one where both beneficiaries and their beneficial interest are defined.
Indeterminate/Discretionary: An Indeterminate trust is one where only beneficiary is defined but the beneficial interest of each beneficiary is not determined.
Point 1: In the following cases, rates applicable to individuals will be charged:
- If the trust has been declared by way of will from which business income is derived; and
- It is exclusively declared for the benefit of any relative dependent on the settlor for support and maintenance; and
- The trust is the only trust so declared by the settlor.
Point 2: In the following cases, rates applicable to individuals will be charged:
- Where none of the beneficiaries have taxable income exceeding Basic Exemption Limit; or
- Where none of the beneficiaries are beneficiary under any other private trust; or
- Where the relevant income or part of the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; or
- Where the trust yielding the relevant income or part thereof was created by a non-testamentary instrument before 1-3- 1970 and the A.O. is satisfied that it was created bona fide for the benefit of the dependant relatives of the settlor, or where the settlor is HUF, exclusively for the benefit of the dependant members.
- Where the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund or pension fund or any other fund created bona fide by a person carrying on a business or professional exclusively for the benefits of his employees.
Taxability in case of Revocable trusts
In case of Revocable trusts, income shall be chargeable to tax only in the hands of the settlor. If there are joint settlors to a revocable trust, the income of the trust will be taxed in the hands of each settlor to the extent of assets settled by them in the trust. To summarize, the assets placed in a revocable trust remain the full property of the settlor until their death. They can sell these properties, remove them from the trust or gift them to individuals as they see fit.
Taxability under Section 56(2)(x)
As per Section 56(2)(x) of IT Act, any cash or property (immovable or movable property) received by a person from anyone without consideration or for inadequate consideration is treated as income of the recipient.
The last proviso (X) to Section 56(2)(x) states that the section will not apply to any sum of money or any property received from an individual by a trust created or established solely for the benefit of relative of the individual.
Thus if a trust (be it specific or discretionary, whether irrevocable or revocable or whether testamentary or non-testamentary) receives any sum of money or property from an individual solely for the benefit of relative of the individual, then trust should be exempt from provisions of Section 56(2)(x).
Taxability under Capital Gains
Section 47(iii) exempts transferor from capital gains tax any transfer of capital asset under an ‘irrecovable’ trust. If the trust is revocable trust, then exemption under Section 47(iii) is not available and such transfer would be subject to capital gains tax.
Considering above, the trust vehicle should be ‘private irrevocable trust’. This will be non-testamentary trust as it is formed during life time of settlor.
If the trust is testamentary (i.e happens on the death of the settlor) as a part of will, then one can take stand that transfer is under will and exempt in the hands of settlor under Section 47(iii).
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