How to manage Wealth through Trust?

What is a Trust?

A Trust is used as an instrument to hold property for dependents and family members (intended beneficiaries), and alongside reducing the burden of tax. The law governing Trusts in India is codified and contained in the Indian Trust Act, 1882.

A Trust is one of the ways through which an individual can plan for his/her Estate. The other ways of Estate planning are Wills, Insurance, Gift, Power of Attorney, transfer of property and partition. It can be used for family tax planning purpose also.

[Estate is the process through which one arranges legal transfer of assets (in anticipation of death or incapacitation) with an intention to preserve the maximum amount of wealth possible for the intended beneficiaries].

Common examples of Trusts are Children specific Trusts - where the Trust corpus is handed over to them upon their attaining a specified age or upon their marriage. Another example is Retirement Trusts – they are set up by employers to provide retirement benefits to employees in the future (such as an EPF Trust).

What are the different types of Trust?

1. Private Trusts

A private trust is created for the benefit of specific individuals i.e., individuals who are defined and ascertained individuals or who within a definite time can be definitely ascertained.

A private trust does not work in perpetuity and essentially gets terminated at the expiry of purpose of the trust or happening of an event or at any rate eighteen years after the death of the last transferee living at the time of the creation of the trust.

A person can be settlor of a private trust if he has attained majority (i.e., has completed 18 years of age or in case of a minor, for whom a guardian is appointed by the court or of whose property the superintendence has been assumed by the court of wards the age of majority is 21 years) and is of sound mind, and is not disqualified by any law.

But a trust can also be created by or on behalf of a minor with the permission of a principal civil court of original jurisdiction. Apart from an individual, a company, firm, society or association of persons is also capable of creating a trust.

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.

Private family trusts may be set up either inter vivos i.e. during a person’s lifetime or under a will i.e. testamentary trust, either orally or under a written instrument, except where the subject matter of the trust is immovable property, the trust would need to be declared by a registered written instrument.

Private trusts may also be used as a collective investment pooling vehicles such as mutual funds and real estate investment trusts.

2. Public Trust:

A public trust is created for the benefit of an uncertain and fluctuating body of persons who cannot be ascertained any point of time, for instance; the public at large or a section of the public following a particular religion, profession or faith. A public trust is normally permanent or at least indefinite in duration.

As regards the public trusts, there is no Central Act governing formation and administration of such trusts. But various states such as Bihar, Maharashtra, Madhya Pradesh Orissa, etc., have enacted their own legislations prescribing conditions and procedures for the administration of public trusts. These Acts are more or less similar in nature though there may be certain variations.

A public trust is generally a non-profit venture with charitable purposes and in such cases it is also referred to as the charitable trust. A trust created for religious purposes is termed a religious trust and it can be either a private or a public trust. A religious endowment made via trustees to a specified person is a private trust and the one to the general public or a section thereof is a public trust. The creation of religious charitable trusts is governed by the personal laws of the religion. The administration of these religious trusts can either be left to the trustees as per the dictates of the religious names or it can be regulated to a greater or lesser degree by statute such as the Maharashtra Public trusts Act, 1950. In case of Hindus, the personal law provisions regulating the religious trusts have not been codified and are found dispersed in various religious books.

There are four essential requirements for creating a valid religious or charitable trust under Hindu Law, which are as follows:

1. valid religious as charitable purpose of the trust as per the norms of Hindu Law;

2. capability of the author of the trust to create such a trust;

3. the purpose and property of the trust must be indicated with sufficient precision; and

4. the trust must not violate any law of the country.

Who can form a Trust?

A Trust can be formed –

By any person competent to contract –

(i) above 18 years of age;

(ii) of sound mind;

(iii) 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).

Requisites to a Trust –

(i) Author of the Trust - someone at whose instance the trust comes into existence (also called as Settlor);

(ii) Purpose to form a Trust – to divest the ownership of the Author/Settlor of the Trust in favour of the Beneficiary/Trustee;

(iii) Trustee - every person capable of holding property can become a Trustee;

(iv) Beneficiary – to whom the Trust income/corpus is intended for;

(v) Subject matter of Trust - any asset capable of being transferred can be a subject matter of a trust.

All these requisites are required for a Trust to legally come into existence.

A Trust can be either:

1. Discretionary Trusts: A discretionary trust is a trust that has been set up for the benefit of one or more beneficiaries, but the trustee is given full discretion as to when and what funds are given to the beneficiaries. The beneficiaries of the trust have no rights to the funds, nor are the funds regarded as part of the beneficiaries’ estates.

Deep Analysis:

With most trusts, the beneficiaries are entitled to a certain proportion of the trust income, depending on the terms of the trust. They may receive a monthly allowance or receive the money when they reach a certain age. Because of this, the beneficiaries are considered beneficial owners.

A discretionary trust is different in that the beneficiary cannot claim or demand funds from the trust at any stage. The allocation of funds is entirely at the discretion of the trustee.

This has the effect of protecting beneficiaries who may not have the ability to use the funds wisely. It also provides protection against creditors, who cannot attach the trusts funds’ assets.

Beneficiary funds are good for situations when the beneficiaries are immature, disabled, mentally impaired, irresponsible, spendthrift, gamblers, or are in debt or bankrupt.

The trustee of a discretionary trust has complete control over the fund and is regarded as the legal owner. Even though the trustee cannot benefit from the fund, it’s possible that the trustee won’t adhere to the grantor’s wishes and, for this reason, a discretionary trust may have “appointers” who have the power to remove the trustee and appoint a new one. Another method of limiting the discretion of the trustee is to appoint a guardian who has the power to veto distribution decisions.

2. Non-discretionary Trusts: A trust in which the trustee has no ability to make investment decisions with regard to the assets in the trust and/or has no control over when and how the assets are distributed to the beneficiary. In a non-discretionary trust, the trustee simply sees to it that the grantor's wishes are carried out.

3. Revocable Trust: A trust that can be revoked (cancelled) by its settlor at any time during this life.

4. Irrevocable Trust: A trust will not come to an end until the term / purpose of the trust has been fulfilled.

What is the process of creating a Trust?

Following steps are followed for creating a Trust:

STEP-1: Prepare a family Trust Deed – A Trust Deed includes name of the Author, Trustees, Beneficiaries, purpose of the Trust, administration of the Trust, and other important clauses.

STEP-2: Transfer of Immovable Property to Trust - A registered (in writing) document is necessary to set up a trust if immovable property is being transferred to it. The trust deed should be made on stamp paper and registered with the Registrar of Assurances (under the Registration Act). The written document should contain complete description of the property so as to clearly identify the property; the title of property should be clear (free from mortgage and litigation) in order to be transferable to the Trust.

Transfer of Movable Property to Trust – For movable property, no written document or registration is necessary. A movable property can be transferred to a Trust by mere change of ownership of the property (by physically handing over the possession of the property) to the Trustee, with a direction that the property be held under Trust for the benefit of the Beneficiaries. For example, handing over the fixed deposit certificate of a bank to the Trust.

STEP-3: Once a Trust is set up, the settlor (for example, the parent) can contribute more funds to it as and when he/she wants to. Even the trustees (both parents) and also friends and relatives can gift funds to the trust. You can contribute more funds to it as and when you want to and there is no limit specified to it.

A written trust-deed is always desirable even if not required statutorily as it is an evidence of existence of a Trust, specifies the Trust-objectives, helps to control, regulate and manage the working and operations of the Trust, and lays down the procedure for appointment, rights, duties and removal of the Trustees.

Gift, Will or Trust–Which one to choose?

Gift, Will and Trust are unique instruments through which you can pass on assets to your loved ones. A Gift is used when you want to gift (assets) to your loved ones while you are alive; a Will is used to transfer the ownership of assets to the Beneficiaries after you are no more; A Trust is used when you would like to transfer ownership of assets to the Beneficiaries at a specific date in the future.

A Will has its own pros & cons – the con being that the execution of the Will is time consuming and can be contested in a court. However, a Will can be changed (modified) any number of times during your life, unlike a Trust Deed which cannot be revoked once made; that means it would be difficult to re-claim assets that have already moved to the Trust in case you need them back in the future.

Also, in a Trust, there is the possibility of the Trustees turning unfaithful. Therefore, it is important to appoint Trustees who are trustworthy. In case of Gifting, although it is much easier to just gift the assets to your loved ones, any income arising from such gifts will be clubbed with your income and taxed as per your income tax slab rate.

In India, although there is no inheritance tax, which takes some appeal off from forming a Trust (as a Trust reduces your tax liability but does not make you completely tax exempt), a person in the higher income tax slab can create a Trust if he/she is looking to transfer assets to their loved ones in distant time. This way, it helps one have control of their assets, create wealth for the Beneficiaries and also aid in saving taxes.

Appointment of Trustee

A trustee has a fiduciary obligation under law to hold the trust Property for the benefit of the Beneficiaries to the trust. In doing so, the trustee is given various powers (as described below) under the trust deed to manage the affairs and Trust Property of the trust. Accordingly, it becomes important to choose the most suitable trustee for the commercial requirements of the family and the assets intended to be contributed to the trust. For example, a trustee may be an individual, either a trusted family advisor or a member of the family itself. The trustee may even be the Settlor or one of the Beneficiaries of the trust so long as the individual acts only in his capacity as a trustee and fulfills his fiduciary obligations when managing the affairs of the trust. Alternatively, an institutional trustee may be favoured, especially in instances where neutral decision-making is a primary concern. The family may also consider setting up a Private Trust Company (“PTC”) with family members appointed as directors of the PTC to make decisions with respect to the trust. As a PTC is a separate legal entity under the Companies Act, 2013, any liability arising from the decisions of the board of directors of the PTC should be limited to the PTC and the directors should not be personally liable (unlike individual trustees) to the extent provided under law.

Important considerations to keep in mind when deciding whether to appoint an individual, institution, or PTC to act as trustee include:

a. the level of control the family would like to maintain in day to day operations;

b. neutrality of the trustee;

c. objective and term of the trust;

d. expertise with respect to the discharge of various fiduciary duties;

e. knowledge / expertise with respect to various administrative functions like record keeping, legal disclosures, regulatory compliances, etc;

f. annual costs.

What are the Powers of Trustee?

The powers of the trustee are captured in the trust deed. While the trustee’s powers can vary depending on the needs of the structure, generally a trustee has wide ranging powers that not only allow him to manage the daily operations of the trust and make distributions to Beneficiaries, but also empower him to amend the trust deed itself, add or remove Beneficiaries, make contributions to charities, or modify the term of the trust. In order to balance the powers of the trustee, the trust deed may provide for the appointment of a Protector. As discussed previously, the role of the Protector is purely advisory in nature; however, by requiring that the trustee consult the Protector before making key decisions may help to ensure that the family’s best interests and the Settlor’s wishes are being followed. Moreover, the Settlor may also provide the trustee with a Letter of Wishes (“LOW”), which outlines the considerations that the Settlor would like the trustee to keep in mind when making certain key decisions. 

Such key decisions may include determining the beneficial interest of each Beneficiary, making distributions, adding or removing Beneficiaries, etc. The LOW is a private document between the Settlor and the trustee, and while not legally binding, institutional trustees generally follow the guidelines set forth by the Settlor under the same.

While a single trustee may be appointed for the sake of efficiency and / or convenience, the trust structure may also provide for multiple trustees acting as co-trustees. The Trusts Act provides that if a trustee:

(i) deals with the trust-property as carefully as a man of ordinary prudence would deal with such property if it were his own;9 and (ii) takes all steps as would be reasonably requisite to preserve Trust Property, then such trustee should not generally liable for a breach of trust committed by his co-trustee provided that the trustee shall be liable if:

a. he has delivered trust-property to his co-trustee without seeing to its proper application;

b. he allows his co-trustee to receive trustproperty and fails to make due enquiry as to the co-trustee’s dealings therewith, or allows him to retain it longer than the circumstances of the case reasonably require;

c. he becomes aware of a breach of trust committed or intended by his co-trustee, and either actively conceals it or does not within a reasonable time take proper steps to protect the beneficiary’s interest.

In the event that multiple trustees are appointed to govern the trust, it becomes important for the trust deed to provide a mechanism by which the trustees will make decisions. For example, in case of two trustees, decisions may be made only with the unanimous consent of both trustees, and in case of deadlock either status quo is to remain or a third independent individual (or Settlor) is to be chosen by the trustees to break the tie. In the case of three trustees decisions may be made by majority vote. Alternatively, the trust deed may provide that certain trustees are responsible for only specific matters. In certain instances (especially in the case of revocable trusts), the Settlor may be empowered to direct the trustees or have veto rights. Further, the Trusts Act provides that a trustee may be discharged of his duties only by:

a. the extinction of the trust

b. the completion of his duties under the trust

c. appointment under the Trusts Act of a new trustee in his place

d. consent of himself and all the beneficiaries being competent to contract

e. the court to which a petition for his discharge is presented; or

f. whatever means provided under the trust deed.

Dispute Resolution Mechanism

Last year, the Supreme Court (“SC”) of India, in Vimal Shah & Ors. vs Jayesh Shah & Ors.13 , held that as beneficiaries are not signatories to a trust deed containing an arbitration clause, any disputes arising between beneficiaries or trustees of a trust cannot be referred to arbitration as such arbitration clause is not an “arbitration agreement” between the trustees interse, between the beneficiaries inter se or between the trustees and the beneficiaries for the purposes of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”). 

Furthermore, the SC clarified that even if the beneficiaries are considered to have accepted the trust deed vis-à-vis the settlor by accepting the benefits deed to provide a mechanism by which the trustees will make decisions. For example, in case of two trustees, decisions may be made only with the unanimous consent of both trustees, and in case of deadlock either status quo is to remain or a third independent individual (or Settlor) is to be chosen by the trustees to break the tie. In the case of three trustees decisions may be made by majority vote. Alternatively, the trust deed may provide that certain trustees are responsible for only specific matters. In certain instances (especially in the case of revocable trusts), the Settlor may be empowered to direct the trustees or have veto rights. Further, the Trusts Act provides that a trustee may be discharged of his duties only by:

a. the extinction of the trust

b. the completion of his duties under the trust

c. appointment under the Trusts Act of a new trustee in his place

d. consent of himself and all the beneficiaries being competent to contract

e. the court to which a petition for his discharge is presented; or

f. whatever means provided under the trust deed.

Trusts with cross-border elements

With the number of HNW families having members residing in various countries, the likelihood that a trust structure will have cross-border elements is increasing. Keeping in mind that the Reserve Bank of India has strict rules with respect to foreign exchange and the cross-border transfer of funds / immovable property, it becomes important to consider the residency status of the Settlor, Trustee and Beneficiaries of a trust.

For example, an Indian resident Settlor may set up a trust outside of India (“Offshore Trust”). In fact, the Foreign Exchange Management Act, 1999 (“FEMA”) of India has granted general permission to a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such ‘Foreign Currency Assets’ have been acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Such person may set up a trust in such jurisdiction or any other jurisdiction to which he could contribute the Foreign Currency Assets. 

However, remitting Indian funds to such Offshore Trust should be subject to India’s Liberalised Remittance Scheme (“LRS”), under which resident individuals are allowed to transfer up to USD 250,000 per person per financial year for permitted current and capital account transactions without prior RBI approval. These transactions include acquisition of immovable property shares or any other assets outside of India Funds transferred through LRS may even be used to set up a foreign company.

Further, taxation of such Offshore Trust should be subject to the tax laws of the foreign jurisdiction. From an Indian tax perspective, income of the Offshore Trust should be taxable in India only if all its beneficiaries are Indian residents, or the assets of the trust are located in India.

An Indian resident Settlor may also settle a trust in India for the benefit of both resident and NRI beneficiaries. Distributions to such beneficiaries should not require prior RBI approval; however Indian exchange control laws do not permit direct distributions to be made to NRI’s offshore account. In such event, an NRI may open an NRO account with an authorized dealer bank, and distributions by the trust should be permitted to such account.

Further, while the Trusts Act does not bar a nonresident from acting as a trustee to an Indian Trust, it does require that provide that where a trustee is absent from India for a continuous period of six months or leaves India with the intention of residing abroad, then a new trustee may be appointed in his place.

That being said, the Trusts Act also required that a trustee be able to hold property. Considering that Indian foreign exchange laws do not permit non-residents to directly hold immovable property, the trustee of a trust having immovable property would not be legally capable of holding such property on behalf of the trust and would therefore not be competent to act as trustee. Moreover, in the event that a trustee is non-resident, the trust should not be engaged in activities prohibited for non-residents under India’s foreign exchange regulations.

Is Trust is an effective vehicle for Succession & Estate Planning?

Income tax in India is governed by the Income Tax Act, 1961 (‘ITA’), which lays down provisions with respect to chargeability to tax, determination of residence, computation of income, transfer pricing, etc. Residents are ordinarily subjected to tax on their worldwide income, whereas non-residents are taxed only on their Indian source income, i.e. income that accrues or arises to them in India.

The growth in personal wealth fuelled by the overall growth in business in economy, especially mushrooming of affluent businesses governed by families, has created the need for structures that provide effective and hassle-free wealth management, asset protection and tax efficiency. In this respect, trusts are increasingly being recognised as a vehicle for effective succession and estate planning.

The law relating to private trusts is governed by the Indian Trusts Act ("Trust law"). A trust is basically a vehicle under which property is transferred from the original owner and held by the person to whom it is transferred for the benefit of another. The "author of the trust", the "trustee", the "beneficiary", the "trust-property", the "beneficial interest" and the "instrument of trust" are the integral elements of a trust. A trust can be created for any lawful purpose.

A trust, in relation to an immovable property, must be in writing and registered. A trust is created when the author of the trust indicates an intention to create a trust along with its purpose, beneficiary and the trust-property, and transfers the property to the trustee. A trust is different from a gift.

A trust structure comes with certain inherent advantages. A trust provides the flexibility to be set up in more than one form or in hybrid forms as per the requirement. A trust can be either private or public. As opposed to a public trust, a private trust is a trust generally for the convenience and support of individuals of families. Trust can be structured as revocable or irrevocable.

A revocable trust can enable the settlor to exercise control over the property but can be prone to clubbing provisions under the tax laws. An irrevocable trust can provide safeguard against future creditor claims on the assets in case of bankruptcy, since the settlor ceases to have the title to the trust property, yet at the same time enable indirect control over the property through terms of the trust deed.

This is one the prime benefits of a trust structure which allows ring fencinof wealth, the downside, however, being the settlor losing ownership.

Further, while settling equity stake of a loss making company in a trust to ensure asset protection, one may need to be careful of tax provisions due to which losses could lapse in case of a substantial change in stake. A trust can be further set up either as discretionary, where trustees can have the discretion as regards distribution of benefits to one or more beneficiaries and extent thereof which may be especially useful if the settlor is the trustee, or as determinate, where entitlement of Trusts can be set up inter vivos or by will. Both have their own characteristic advantages and purposes to serve. Multiple trusts can be set up to suit multiple purposes or even hybrid trusts combining various forms, thus, obviating the need to have multiple trusts.

Except for necessary governing provisions, the trust law provides enough flexibility in creating and managing a trust. Any person competent to contract can create a trust and any person capable of holding property can be a beneficiary including a minor. Any person capable of holding property can be a trustee. A trust can be an efficient tool for succession planning without the need for probate process through Court, thereby protecting privacy by preventing public disclosure.

Being governed largely by the terms of the trust deed, a trust structure can afford the necessary flexibility to capture commercial or family arrangements and at the same time enable imposition of necessary conditions by the settlor for the entitlement to benefits. Investment of trust moneys, apart from securities prescribed under trust law, can also be made in securities expressly authorised by trust deed.

The settlor, even though not the legal owner, can thereby specify an investment mandate in respect of trust property and exercise implicit control through the various covenants. The settlor can himself be the trustee, thereby exercising a greater control. A trust, therefore, can enable the settlor to exercise various degrees of control over the property even when divested of the legal title.

Further, it is feasible to transfer beneficial interests in the property from generation to generation as also realign family holdings inter-se, as per requirements. A trust enables segregation of ownership and control. Management of properties through a trust creates a legal framework within which assets can be protected and maintained effectively while safeguarding the interests of family members.

Challenges arising from cross-border movement of family members and need to exploit opportunities arising in the context of offshore properties can be met by creating offshore trust structures in efficient jurisdictions, subject to the foreign exchange restrictions in place including those relating to remittance limits and capital account transactions.

Besides, foreign contributions may require compliance with the law governing such contributions. As would be evident from the benefits which accrue, a trust structure can provide effective asset protection and enable distribution of income and wealth as envisaged by the settlor.

It can be especially beneficial to large businesses controlled and managed by same families from generation to generation or high net worth individuals who wish to effectively and securely manage substantial amounts of wealth even while ensuring asset protection.

While income of a determinate trust is taxable at rates applicable to beneficiaries, income of a discretionary trust is generally taxable at the maximum marginal rate ("MMR"). Cases of income consisting of profits and gains of business are generally taxable at MMR in both categories of trusts.

By careful planning, however, trust structure can lower the overall tax incidence attaching to the income from properties by availing the benefit of rates applicable to an association of persons or individuals. This can happen, for instance, by creating a discretionary trust declared by will where such trust is the only trust so declared by the settlor or by creating a discretionary trust where none of the beneficiaries has income exceeding the threshold exemption limit and none is a beneficiary under any other trust.

Similar benefit can be availed in case of a determinate trust where the beneficiaries are individuals. Income of the family can, therefore, be split through family trust arrangements to achieve overall lower tax incidence.

A trust can constitute a tax efficient structure, especially from a long term perspective. The concept of dividend distribution tax and minimum alternate tax applicable to a company is not applicable to a trust. Thus, income earned by a trust or that distributed to beneficiaries is not liable to such additional taxes. Transfer of property by the settlor to the trust is not eligible to capital gains where the trust is irrevocable.

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However, this exemption is not available in case of a revocable transfer in which case clubbing of income may also become applicable and, in case of subsequent transfer of asset by the trust, the cost base may relate to the original cost base of the settlor, thereby resulting in a larger capital gains liability. Apart from this, employing trust structure at an early stage could result in tax savings on future earnings on property and also a lower capital gains tax, if applicable, on transfer of property to the trust, considering possible enhancement in property value.

Further, an early settlement can also benefit in the sense that in case of a revocable trust, any further acquisition of assets can be made through trust itself thereby avoiding any possible capital gains tax upon subsequent transfer by the settlor to the trust. Option to settle business properties in a trust can be explored. In a multi-tier holding structure, the option of settling the ultimate holding into a private trust can be analysed so as to avail multifarious benefits offered by a trust structure.

In the overall analysis, as a vehicle for succession and estate planning, a trust has inherent advantages vis-à-vis other legal forms and the pros would, in most case, outweigh the cons.

Since a tax structure can take various forms, mostly complex, it is imperative that it is effectively structured with a long-term perspective in mind through appropriate professional advice. With proper planning and right mix of structure, timing and jurisdiction, one can benefit the most out of it.

Taxation provisions for Private Trust:

1. Irrevocable Determinate (Specific) trust

In such a trust, the beneficiaries are identifiable and their shares are determinate, a trustee can be assessed as a representative assessee and tax is levied and recovered from him in a like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him (i.e. the beneficiary). The tax authorities can alternatively raise an assessment on the beneficiaries directly, but in no case can tax be collected twice. 

While the income tax officer is free to levy tax either on the beneficiary or on a trustee in his capacity as representative assessee, the taxation in the hands of a trustee must be in the same manner and to the same extent that it would have been levied on the beneficiary, i.e., qua the beneficiaries. Thus, in a case where a trustee is assessed as a representative assessee he would generally be able to avail all the benefits / deductions, etc. available to the beneficiary, with respect to that beneficiary’s share of income. There is no further tax in the hands of the beneficiary on the distribution of income from a trust.

In relation to assets settled / gifted into an irrevocable trust (both determinate and discretionary), such contribution should not be taxable in the hands of the transferor. This is because such settlement / gift is specifically excluded from the ambit of “transfer” for the purposes of levy of capital gains tax. However, there has been conflicting views in relation to taxation in the hands of the trustee, i.e., the transferee, especially, where one / more beneficiaries of the trust are not “relatives” (as defined) of the transferor.

Up to FY 2016-17, receipt of fund / any property by any “individual” without consideration or for a value less than the fair market value of the property was taxable in the hands of the transferee individual, except where the transferors were “relatives” 3 of the transferee. In the context of certain facts, some rulings have held that income of trust should be taxed as the income of an “individual”. However, it may be possible that trust income is not taxed as income of an “individual” depending on the facts and circumstances. Further, considering that ‘trust’ is “an obligation annexed to ownership of property”, it is questionable as to whether settlement of property into a trust can be treated as transfer of property without consideration.

Based on recent amendments, from FY 2017-18, the provisions have been expanded such that they are applicable to all transferees and not only individuals. This expansion has been coupled with a specific exclusion for settlement into trusts set up solely for the benefit of “relatives” of the transferor. Therefore, it appears that settlements in other circumstances may be taxable in the hands of the transferee trustee. Having said that, the primary issue it is still unsettled, i.e., as to whether settlement of property into a trust can be treated as transfer of property without consideration.

2. Irrevocable  Discretionary trust

A trust is regarded as a discretionary trust when a trustee has the power to distribute the income of a trust at its discretion amongst the set of beneficiaries. In case of an onshore discretionary trust, with both resident and non-resident beneficiaries, a trustee will be regarded as the representative assessee of the beneficiaries and subject to tax at the maximum marginal rate i.e. 30%.

In case of an offshore discretionary trust with both resident and non-resident beneficiaries (including offshore charitable organisations), a trustee should not be subject to Indian taxes or reporting obligations. However, if all the beneficiaries of such discretionary trust are Indian residents, then a trustee may be regarded as the representative assessee of the beneficiaries and can be subject to Indian taxes (on behalf of the beneficiaries) at the maximum marginal rate i.e. 30%.

3. Revocable trust

Under the ITA, a transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor or it in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. Thus, where a settlement is made in a manner that a settlor is entitled to recover the contributions over a specified period, and is entitled to the income from the contributions, the trust is disregarded for the purposes of tax, and the income thereof taxed as though it had directly arisen to the settlor. Alternatively, even in a situation where a settlor has the power to re-assume power over the assets of a trust, the trust is disregarded and the income is taxed in the hands of the settlor. In the case of a revocable trust, 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. This arrangement is not specifically required to be recorded in a trust deed.

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