A Private Trust is a legal structure in which an individual or entity, called the settlor or trustor, transfers assets to a trustee. The trustee holds and manages these assets for the benefit of specified persons or entities known as beneficiaries. Below is a brief overview:

Core Components of a Private Trust:
– Trustor (Settlor): The person or organization that establishes the trust and contributes assets to it.
– Trustee: The individual or entity entrusted with administering the trust assets in line with the trust deed.
– Beneficiaries: The persons or entities entitled to receive benefits from the trust.
– Trust Property: Assets placed into the trust by the settlor, such as cash, property, shares, bonds, or other valuables.
– Trust Deed: The legal instrument that defines the rules, rights, and responsibilities governing the trust.

Objectives of a Private Trust:
– Asset Protection: Safeguarding assets against creditors or legal claims.
– Estate Planning: Facilitating the structured transfer of wealth to beneficiaries.
– Tax Planning: Reducing potential estate and gift tax liabilities.
– Wealth Management: Enabling systematic and professional asset management.

Categories of Private Trusts:
– Revocable Trust: Allows the settlor to amend or revoke the trust during their lifetime.
– Irrevocable Trust: Once created, the trust cannot be changed or terminated by the settlor.
– Discretionary Trust: Grants the trustee authority to decide how income and assets are allocated among beneficiaries.
– Fixed Trust: Clearly defines the distribution of income and assets to beneficiaries in the trust deed.

1. Trust Structure

2. Overview of the Indian Trust Act, 1882

Section 3 of the Indian Trust Act, 1882 defines a Trust as an obligation imposed on the trustee by the settlor to deal with trust property for the benefit of the beneficiaries. A trust does not have a separate legal personality.

The Settlor/Author is the individual who establishes the trust and transfers assets to it. The settlor may also act as a trustee or be a beneficiary.
Trustees are entrusted with the duty of managing trust assets and are granted specific rights and powers for administration and distribution.
Beneficiaries are the persons for whose benefit the trust is created.

Key Sections of the Act:

Sections	Particulars
1 to 3	Preliminary provisions, title, and definitions
4 to 10	Conditions for creation of a trust
11 to 30	Duties and liabilities of trustees
31 to 45	Rights and powers of trustees
46 to 54	Disabilities of trustees
55 to 69	Rights and liabilities of beneficiaries
70 to 76	Vacation of trustee office
77 to 79	Termination of trust
80 to 96	Certain obligations resembling trusts

3. Strategic Considerations

– Structured and controlled succession planning
– Professional management of business and assets
– Protection of assets
– Creation of a consolidated investment pool
– Financial support and maintenance of the family
– Smooth transfer of wealth across generations

4. Roles of Settlor, Trustee, and Beneficiary

4.1 Role of the Settlor
– The settlor does not participate in day-to-day trust operations
– Determines the original trustee, trust structure, and initial beneficiaries

4.2 Duties and Powers of the Trustee
– Manage the trust strictly in line with its stated objectives
– Purchase or dispose of assets and invest trust funds while overseeing investments
– Distribute trust income or assets to beneficiaries
– Claim reimbursement for expenses incurred in fulfilling trust objectives
– Add or remove beneficiaries
– Appoint additional trustees

4.3 Rights of the Beneficiary
– Receive income or benefits from trust property
– Expect proper protection and administration of trust assets by the trustee
– Enforce due performance of duties by the trustee

5. Types of Trusts

– Revocable Trust vs. Irrevocable Trust
– Oral Trust vs. Written Trust
– Testamentary Trust vs. Non-testamentary Trust
– Specific Trust vs. Discretionary Trust

6. Private Trusts vs. Wills

Particulars	Private Trust	Will
Succession planning possible	✓
Naming beneficiaries for property	✓	✓
Transfer of property to minor children	✓	✓
Ability to revise document	✓	✓
Avoidance of probate	✓
Stamp duty on transfer of immovable property	✓
Effective only after death		✓

7. Taxation of Private Trusts

Tax rates applicable to individuals will apply if all of the following conditions are met:
– The trust is created by the settlor through a Will;
– The trust is established solely for the benefit of a dependent relative; and
– The settlor has not created any other trust of this nature.

Tax rates applicable to an Association of Persons (AOP) will be applied in the following situations:
– None of the beneficiaries has taxable income exceeding the basic exemption limit; or
– None of the beneficiaries is a beneficiary in any other private trust;

Or

– Where the whole or part of the relevant income is receivable under a trust created by a person through a Will, and such trust is the only trust declared by that person.

8. Gifts Received by Private Trusts

Tax Implication for the Donor:
As per Section 47(iii), the transfer of assets by way of gift to a private trust is not treated as a “transfer” for tax purposes.

Tax Implication for the Trust / Donee:

Meaning of “Relative” in the context of a Trust:
Section 56(2)(x) provides that the provisions of this section shall not apply to any money or property received:
– From a relative; or
– From an individual by a trust established exclusively for the benefit of the individual’s relatives.

Under Clause (i) of the proviso, the relationship is examined from the recipient’s point of view, meaning the donor must qualify as a relative of the recipient.

Under Clause (x) of the proviso, in the case of trusts, the relationship is evaluated from the donor’s perspective. This requires determining whether the beneficiaries for whose benefit the trust is formed qualify as relatives of the donor.

9. Declaration of Beneficial Ownership

Where a member of the reporting company is a trust (acting through its trustee), and the individual’s position is as under:

S. No.	Intimation to Company	Type of Trust
1	Trustee	Discretionary Trust or Charitable Trust
2	Beneficiary	Specific Trust
3	Author or Settlor	Revocable Trust

10. Ring-Fencing of Assets

Private trusts have become an efficient and reliable mechanism for succession planning, particularly for business families and business houses, by enabling effective segregation and protection of assets.

Transfer of personal assets to a trust is often undertaken to safeguard such assets from potential future defaults arising out of business activities. The Insolvency and Bankruptcy Code, 2016 has introduced a new regime that enables lenders to initiate recovery actions in a more streamlined manner.

The Supreme Court, in Lalit Kumar Jain vs. Union of India [2021] 127 taxmann.com 368 (SC), examined the impact of the IBC on the transfer of assets to trusts.

As per Section 164, any transaction carried out by a bankrupt within a period of two years preceding the filing of a bankruptcy application, which results in the commencement of the bankruptcy process, is treated as an undervalued transaction.

11. FEMA Aspects of Trusts – Overview

NRI Settlor with Resident and Non-Resident Beneficiaries – Trust in India

S. No.	Particulars	Gift to NR	Gift to Resident
1	Settlement of Assets
a	From NRO	Ntf. 13(R) – USD 1 million repatriation from NRO	Permitted
b	From NRE	Freely permitted from NRE	Permitted
2	Settlement of Foreign Currency (FCY) by remittance from abroad	FEMA not applicable, as there is no change in assets in India for NR	FEMA not applicable, as there is no change in assets in India for NR
3	Settlement of shares in Indian companies	FEM NDI Rules, 2019 – Permitted	FEM NDI Rules, 2019 – Permitted
4	Settlement of immovable property in India	FEM NDI Rules, 2019 – Permitted	FEM NDI Rules, 2019 – Permitted

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Resident Settlor with Resident and Non-Resident Beneficiaries – Trust in India

S. No.	Particulars	Gift to NR	Gift to Resident
1	Settlement of currency (INR)	LRS Scheme – Permitted to NRI relatives	FEMA not applicable
2	Settlement of shares in Indian companies	FEM NDI Rules, 2019 – Approval route, subject to conditions	FEMA not applicable
3	Settlement of immovable property in India	FEM NDI Rules, 2019 – Permitted to NRI relatives	FEMA not applicable

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NRI Settlor with Resident and Non-Resident Beneficiaries – Trust outside India

S. No.	Particulars	Gift to NR	Gift to Resident
1	Settlement of foreign currency	FEMA not applicable	Permitted
2	Settlement of shares in foreign companies	FEMA not applicable	FEM OI Rules, 2022 – Permitted
3	Settlement of immovable property outside India	FEMA not applicable

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Resident Settlor with Resident and Non-Resident Beneficiaries – Trust outside India

S. No.	Particulars	Gift to NR	Gift to Resident
1	Settlement of currency (INR) under LRS Scheme	LRS Scheme – Permitted to any NRI	LRS Scheme – Not permitted
2	Settlement of shares in foreign companies	FEM OI Rules, 2022 – Not permitted	FEM OI Rules, 2022 – Permitted
3	Settlement of immovable property outside India	FEM OI Rules, 2022 – Not permitted	FEM OI Rules, 2022 – Permitted
4	Settlement of assets held outside India under Section 6(4) of FEMA	FEMA not applicable	General permission under OI Rules