A trust can be created by the execution of a trust deed; there are two types of trust. A public trust (charitable trust) is created for the benefit of the general public whereas a private trust is created for the benefit of a particular group of individuals known as the beneficiary.
What is Trust?
A Trust is registered under The Indian Trust Act 1882 and provides for the provision related to Trust. The trust is a harmonization where the owner of the Trust transfers the property to a trustee. Here, the objective of transferring the property is to provide the benefit to a third party. The property is transferred to the trustee by the trustor along with a proclamation that the property should be held by the trustee for the beneficiaries of the trust.
What are the Parties Involved in the Trust Registration Process?
Below mentioned parties are involved in the Trust Registration Process-
What are the Types of Trusts?
There are two types of trusts in India: private trusts and public trusts. While private trusts are governed by the Indian trusts Act, 1882, public trusts are divided into charitable and religious trusts. The Charitable and Religious Trust Act, 1920, the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Bombay Public Trust Act, 1950 are some of the statutes for the enforcement of public trusts in India.
- Private Trust
A private trust is a trust that is constituted for the benefit of 1 or more individuals who are, or within a given time maybe, definitely ascertained. Private Trusts are regulated by the Indian Trusts Act 1882. These trusts may be created inter vivos or by will.
- Public Trust
A Public Trust is a trust which is established wholly for the benefit of the public at large. Key points for Public Trusts are given below:-
- Public trusts are basically charitable or religious trusts and are regulated by the General Law.
- The regulations of the Indian Trusts Act do not apply to Public Trusts.
- Similar to private trusts, public trusts may be established inter vivos or by will.
- Public-Cum-Private Trusts
The trusts whose part of the income may be utilized for public purposes and a part that may go to a private person or persons are known as Public-cum-Private Trusts.
Classification in Terms of Motive of Formation
Recently, trusts can also be used as a vehicle for investments, such as mutual funds and venture capital funds. These trusts are governed by the Securities and Exchange Board of India (SEBI). Classification in terms of the motive of formation is as follows:-
- Private Trust: Settlor creates a Trust primarily for benefit of one or more particular individuals as its Beneficiary.
- Public Trust: Beneficiaries are the general public or a class as a whole. It has some charitable end as its Beneficiary.
- Simple Trust: The trustee is just a passive depository of the Trust property. There are no active duties expected from the Trustee and no directions are given to him.
- Special Trust: The trustee is active and acts as an agent to execute the Grantor’s wishes. This Trust is operative.
- Express Trust: Here, the Settlor creates a Trust over his assets either in present or upon his death. It can be either by way of a will or Trust deed.
- Implied Trust: It is created where some legal requirements for an Express Trust are not met, but the intention on behalf of the parties is to create a Trust that is presumed to exist.
- Others depending on the type of object(s).
What are the Benefits of Trust Registration?
The benefits of Trust Registration are mentioned below:-
- To Involve In Charitable Activities: Charitable trusts are set up with the common objective of getting involved in charitable activities while collecting certain benefits for him, his heirs, and successors.
- Registered Trust Avails Tax Exemptions: The other main reason for setting up the registered Trust is to avail of tax exemptions. Such charitable trusts are nonprofit organizations and to avail all these perquisites, the charitable trust should have a legal entity.
- Provides Benefits To Poor People: The registered trust provides an advantage to the poor people and the public by exercising charitable activities fairly.
- Compliance With Law: By registering the trust, compliance would be maintained under the provisions of the Indian Trusts Act, 1882, which will directly keep the Trust safe from any legal hindrance.
- Preservation Of Family Wealth: Trusts may be utilized to own specific assets, such as land/an interest in a family-based company, which would not be suitable or practical for a settlor to split between individuals. The usage of trust allows such individuals to benefit from the assets despite the fact that they do not own them. A trust will also assist to preserve the capital value of such assets for potential generations.
- Avoid Probate Court: As the legal title of the assets surpasses from the settlor to the Trustee when they are “settled”, there is consequently no change of ownership when the settlor get dies, thus evading the need for probate of a will in terms of trust assets.Moreover, Grants of probate are a matter of public record, while a trust is a private agreement that does not have to be registered anyplace. The use of a trust can also avoid the economic adversity sometimes undergone by a surviving spouse even as waiting for probate to be granted.
- Immigration/Emigration Of Family: When a person and her/his family shift to another country, it is frequently an ideal/only time to set up a trust in order to evade taxation in the destination nation, thereby protecting the family’s wealth & providing flexibility in its organization. Such an organization requires detailed professional advice and guidance.
- Forced Heirship: The Residents of countries with fixed laws of legacy may be able to utilize trusts to get the flexibility they offer in respect of the distribution of part/all of their assets to beneficiaries who could otherwise not be permitted to benefit under the laws of their country of the residence. Such planning must be made under detailed professional guidance from legal experts in their nation of residence/nationality.
- Tax Mitigation: Trusts can be very effective in reducing taxation on capital and income. The trust may provide effective protection for the settlor, the beneficiaries, and the trust assets from punitive taxation. A frequent use for trusts is the mitigation or avoidance of inheritance tax in the settlor’s jurisdiction although this will, naturally, be subject to appropriate tax advice being obtained.
- Managing Assets: Trusts can be very effective in reducing taxation on capital and income. The trust may provide effective protection for the settlor, the beneficiaries, and the trust assets from punitive taxation.
What Documents are Required for Trust Registration?
Below-mentioned documents are required for Trust Registration-
- Proof of Identity for Trustor & Trustee-Aadhaar Card, Voter ID, Passport, Driving License
- Address Proof of Registered Office- Copy of Certificate of Property/Utility Bills (Telephone, Water, Electricity Bill)
- In the case of rented property, NOC from the Landlord is required.
- The objective of the Trust Deed.
- Particulars of the Trustee and settlor (Self-attested copy Id and Address Proof along with the information related to occupation).
- Trust Deed on Proper Stamp Value.
- Photographs of Trustee and settlor.
- PAN Card of Trustee and settlor.
In addition to that, the Trust deed contains the following information:-
- A total number of trustees.
- The Registered Address of the trust.
- Proposed name of the trust.
- Rules and regulations to be strictly followed by the Trust.
- Presence of settlor and 2 witnesses at the time of registration of Trust
What is the Procedure for Trust Registration?
The procedure for Trust registration involves the below-mentioned steps-
- Select An Appropriate NameThe very first step while registering the Trust is to select an appropriate name for the trust. An applicant must take into consideration that the name so suggested should not come under the restricted list of names as per the provisions of the Emblems and Names Act, 1950.
- Drafting Of Trust DeedFor Trust registration, the Trust deed should be drafted. A trust deed is a document that contains all the important information related to the registration and the deed must be present before the Registrar at the time of registration.
- Selecting Settlers And Trustees Of TrustThe next step is to select the settlor and Trustees of the Trust. However, there is no specific provision with regards to the number of settlers/authors. Further, there must be a minimum of two trustees to form a Trust.
- Preparing Memorandum Of AssociationFor Trust registration, it is important to formulate the Memorandum of Association as it represents the charter of the Trust.
- Paying The Requisite FeesThe next step is to pay a requisite fee for Trust registration.
- Collection Of A Copy Of Trust DeedOnce an applicant submits the papers, he/she can collect a certified copy of the Trust Deed within 1 week from the registrar’s office.
- Submission Of Trust Deed To RegistrarAfter obtaining a certified copy of the Trust Deed, submit the same with the local registrar. The Trust deed shall be submitted along with properly attested photocopies.
- Obtain Registration CertificateAfter submitting the Trust Deed with the registrar, the registrar keeps the photocopy and returns the original registered copy of the Trust Deed to the applicant, and also issues the certificate within seven working days.
What Penalties can get Imposed on Breaches in Compliances of Trust Registration?
- Civil And Criminal PenaltiesIn case of Breach of trust, both civil and criminal penalties may be imposed on the Beneficiary. Sections 405 to Section 409 of the Indian Penal Code 1860 deals with the specific provisions concerning criminal breach of trust.
- Application For Tax Deduction Account NumberThe Trustor Institution should make an application for allotment of tax deduction account number to the Assessing Officer or the prescribed authority, in form number 49B of Income-Tax Rules immediately on registration of the trust or institution and quote the same on all the challans for payment of sums under section 200, on all the TDS certificates and all the returns delivered under section 206, 206A and 206B. A penalty of Rs. 10,000/- has been prescribed by section 272BB in case of failure to do so.
- Failure To Furnish The Return Of IncomeFailure to furnish the return of income attracts a penalty under the Act. The return of income will not be considered as defective if the certificate for the tax deducted at source has not been furnished along with the return of income due to the default of the payer in not furnishing such certificate. The certificate is, however, required to be produced within two years from the end of the assessment year.
What is the Impact of Section 12AB on Trust Establishments?
To continue taking exemption under section 10 or 11 all the existing charitable trust or institutions are compulsorily required to get a fresh registration under Section 12AB which are already registered under the following section:-
- Section 12A
- Section 12AA
- Section 10(23C)
- Section 80G.
Additionally, the trust registered under section 10 (23C) or section 12AA shall renew their registration under section 12AB. Accordingly, Section 12AA which stipulates the registration process for the Trusts or Institutions will cease to exist and a new section 12AB will come into force with effect from the bellow mentioned period, whichever is earlier.
- The date of grant of registration under section 12AB or,
- The last date by which the application for registration and approval is required to be made.
Is it Mandatory to file the Return (ITR) for a Trust?
A trust must file a return electronically-
- With or
- Without a Digital signature.
- Under the Electronic Verification Code.
However, Trusts who are liable to get their accounts audited section 44ABshall furnish the return electronically.
Frequently Asked Questions
Q. Is it mandatory for the trust to get the registration done under section 12AB?
Yes, a trust must get registered under section 12AB of Income Tax Act, 1961 to claim an exemption under section 11.
Q. Is trust a separate Legal Entity?
In a strictly legal sense, a trust is not a separate legal entity, unlike a company. A trust gets created when the settlor hands over any property to the trustee to be used and employed for the benefit of the beneficiary. This legal arrangement is codified vide a trust deed.
Q. What are the Parties of a Trust?
- Trustee, and
Q. What are the different types of Trust?
- Private Trust
- Public Trust
Q. What is the Difference between Trustee and Trustor?
Trustor is the person who creates the trust, whereas the person who has the responsibility of managing the trust for the beneficiary is known as a Trustee.
Q. What is the governing law for a Trust?
The Indian Trusts Act, 1882, is a governing law for a Trust in India.
Q. What is a Public Trust and what is the purpose behind forming it?
By and large a public trust is made for setting up a school, universities, other instructive activities, clinic, mature age homes, halfway house, for the advancement of kid wellbeing and their strengthening, government assistance of more fragile segment of society, and for the satisfaction of Corporate Social Responsibilities (CSR) by organizations.
Q. What are the Documents Required During the Trust Registration process?
- Proof of Identity for Trustor & Trustee
- Address Proof of Registered Office
- NOC from the Landlord is required
- Particulars of the Trustee and settlor
- Trust Deed on Proper Stamp Value.
- Photographs & PAN of Trustee and settlor.
Q. How do I register a trust under Indian Trust Act 1882?
- Select an Appropriate Name
- Drafting of Trust Deed
- Selecting Settlers and Trustees of Trust
- Preparing Memorandum of Association
- Paying the Requisite Fees
- Collection of a Copy of Trust Deed
- Submission of Trust Deed to Registrar
- Obtain Registration Certificate
Q. What about Amendment in Private trust Deed?
It is extremely difficult to amend a trust deed since a trust by its inherent nature is irrevocable. Therefore, it is important to provide the amendment clauses in the trust deed itself. However, if the amendment clauses provided in the trust deed are too wide, then the trust may not be treated as irrevocable.