TRANSFER OF PROPERTY
THROUGH TRUST
A trust is an
arrangement by which the property of the author of the trust or settlor is
transferred to another, the trustee, for the benefit of a third person, the
beneficiary. In general terms, trusts fall into one of two categories, private
trusts and public trusts.
The India Trusts Act,
1882 (act) governs private trusts. Public trusts are further classified into
charitable and religious trusts, and the Charitable and Religious Trusts Act,
1920, (CRTA) the Religious Endowments Act, 1863, the Charitable Endowments Act,
1890, the Societies Registration Act, 1860 and the Bombay Public Trust Act,
1950 are the statutes most commonly relied upon to determine the recognition
and enforceability of public trusts.
Charities are mentioned
in schedule seven of the constitution and therefore both the central and state
governments have jurisdiction. Statutes of the state in which the charity is
registered therefore also apply.
Public trusts set up
and declared by means of a non-testamentary instrument, apart from any
state-specific legislation are required to be registered under the Registration
Act, 1908. While India has not ratified the Hague Trust Convention 1985, trust
laws give due recognition to the principles in it regarding the
characteristics, existence and validity of trusts. The act gives the author or
settlor and the trustee wide powers to respectively establish and manage the
affairs of the trust, particularly with regard to its property. This is
provided that the trust is established for a lawful purpose and does not
contravene the provisions of any other law.
The Trust creator,
sometimes known as the ‘Grantor’ or ‘Settlor’, is the person who started out as
the owner of the property that is to be transferred to and held by the Trust.
The Trustee is the
person or financial institution (such as a bank or a Trust company) who holds
the legal title to the Trust estate. There may be one or more trustees. The
trustee is obligated to act in accordance with the terms of the Trust for the
benefit of the Trust beneficiaries.
The beneficiaries are
the persons who the Trust creator intended to benefit from the Trust estate.
The rights of the beneficiaries depend on the terms of the Trust.
A person may set up a
private trust under a written instrument; that is, either through a will
(testamentary trust) or through a written trust deed during the person’s
lifetime. A trust having immovable property and created through a
non-testamentary instrument has to be declared through a registered written
instrument (section 5 of the Indian Trusts Act 1882).
India, being a common
law jurisdiction, not only acknowledges the concept of trust, but also
recognises trusts governed by other jurisdictions. Depending upon the need of
the settlor or family various trust structures are prevalent which include
discretionary, non-discretionary, revocable, irrevocable, specific, general,
determination linked to happening of an event or non-occurrence of an event. In
a private trust, one has to be conscious to address the rule against perpetuity
as provided for by Indian laws, which imposes a time limit on the age of the
trust.
Beneficiaries
and trustees
India does not
recognise trust as a separate entity (except for tax purposes). A trust is
identified as a legal obligation that is attached to the ownership of property
arising out of a confidence placed by the settlor in the trustee for the
benefit of the beneficiaries (as identified by the settlor), or the
beneficiaries and the settlor. The trustee is the legal owner of such trust
property, whereas the beneficiaries have beneficial interest in the trust
property.
Succession
Planning through a Private Trust:
Succession through a
Private Trust mechanism is a common mode of transition of assets as the Trust
provides better legal protection, certainty and flexibility. Also as a
practice, it is an accepted mode of implementing succession planning.
Trust
is governed by Indian Trust Act, 1882 ("Trust Act").
Section 3 of Trust Act
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.
Thus, trust is a
declaration which is made by the owner of the property that going forward, the
same will be held by him or some other person (say a trustee), for the benefit
of someone (ie beneficiary) and will be handed over to that person immediately
or in due course.
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:
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.
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.
Revocable Trust: A trust that can be revoked (cancelled) by
its settlor at any time during this life.
Irrevocable Trust: A trust will not come to an end until the
term / purpose of the trust has been fulfilled.
For succession
planning, the Trust usually used is a Private (non-testamentary) Trust - be it
specific or discretionary based on settlor' swishes and is implemented during
lifetime of the settlor.
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.
What are the disabilities of trustees?
The
disabilities of a trustee are:
1.
Once he has accepted the trust; he cannot refuse to act as a trustee.
2. A
trustee cannot delegate his duties to another or a co- trustee.
3. A
trustee should not use the trust property for his own profit or any other
purpose, unconnected with the trust.
4. A
trustee cannot buy the trust property on his own account or as an agent of a
third person.
5. A
trustee cannot act unilaterally but must consult his co-trustees, if any.
6.
Co-trustees should not lend the trust money to each other
How does a trust cease to exist?
A
trust ceases to exist:
1.
When its purpose is completely fulfilled; or
2.
When its purpose becomes unlawful; or
3.
When the fulfillment of its purpose becomes impossible by destruction of the
trust property or by any other cause; or
4.
When the trust is expressly revoked.
What are the rights of a beneficiary?
The
beneficiary has the right to:
1.
Enjoy the rents and profits of the trust property.
2.
Expect the trustee to transfer the trust property to one or more beneficiary.
3.
Inspect and take copies of the instrument of trust, the documents relating to
trust property and the accounts of the trust property.
4. If
for any reason the execution of the trust by the trustee becomes impracticable
the beneficiary may institute a suit for the execution of the trust.
5. To
expect the trustee to properly protect and administer the trust property.
6. To
compel the trustee to perform his duty properly.
7. To
transfer the benefits arising out of the trust to any other person after the
beneficiary attains majority.
How a trust can be revoked?
When a
trust is created by will, it is revocable at the pleasure of the testator, because it does not become effective during the lifetime of the testator.
Any
other trust can be revoked in the following ways:
1. By
the consent of all the beneficiaries.
2. By
the settlor in exercise of powers of revocation expressly reserved to him.
3. If the trust was created for repayment
of debts, the settlor can revoke the trust at any time irrespective of whether
the debt is repaid or not. However, if the debt is not repaid and the creditor
has knowledge of the creation of the trust, then, the trust cannot be revoked
without the consent of the creditor.
STEPS
FOR IMPLEMENTATION
Broad steps involved in
implementing a private trust are as below.
- The settlor
contributes his/her identified assets to a private trust formed for the
purpose.
- Settlor appoints a
trustee (can be individual, company or himself) to manage the trust properties.
- The trust deed will
list names and % share of beneficiaries in case of specific private trust. If
not, then the trust would be classified as discretionary trust where the names
and/or % share of beneficiaries are unknown or indeterminate.
- Once the property is
contributed by a settlor to the trust, then the property would be owned and
controlled by the trustee for and on behalf of benefit of beneficiaries. The
property can be any asset - be it cash or any other movable and/or immovable
assets.
- Depending on commercial
needs, there could be one trust or multiple trusts being used. Also there could
be Master trust and/or sub-trust for legal protection and fencing of assets.
For say Father and a son, there could be different Master trusts and sub-trusts
with different trustees and different beneficiaries. The settlor can be one
person say father or head of family.
Before executing the
succession planning, one needs to examine various tax, commercial and
regulatory implications to preserve and protect value of assets being
transferred/transitioned to the next generation.
These would include
mainly following.
- Income tax
- Stamp duty
- SEBI Takeover Code
(including Insider trading regulations)
- Foreign exchange
regulations
- Estate
duty/Inheritance tax.
Taxation
of Trust
This is further
discussed under following heads.
1. Taxation of beneficiary
2. Taxation of settlor/transferor of assets
3. General Anti Avoidance Rule
4. Taxation of Trust.
Taxation
of beneficiary - Income under Section 56(2)(x)
- when a property is
settled under a Trust, it is practically a gift and provisions of Section
56(2)(x) of Income tax Act (IT Act) are attracted.
- 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.
- In the first
instance, the settlor/recipient may argue that the trust is established as part
of family arrangement and for succession planning and hence, it is not without
consideration. The same may be litigative.
- Please note Section
56(2)(x) also lists down certain exceptions where the provisions of the section
are not applicable.
- 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. The term 'relative' is
defined as the same meaning assigned in Explanation to Section 56(2)(vii).
- 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).
- the exemption under Section 56(2)(x) applies
only if the trust is created solely for the benefit of relative of the
individual. What if one of the beneficiaries is settlor himself together with
his relatives? It appears that in a situation where the settlor is also one of
the beneficiaries, on strict interpretation, the exemption may not apply. This
is possibly not envisaged. Another argument could be that there cannot be tax
on 'self' when the settlor himself/herself is a beneficiary. A clarification
from Central Board of Direct Taxes (CBDT) would be appropriate in this regard.
Taxation
of settlor/transferor of assets:-
- Section 47(iii)
exempts transferor from capital gains tax any transfer of capital asset under
an 'irrecovable' trust. Please note 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) (taxation will be on representative assessee).
General
Anti Avoidance Rule (GAAR)
- Creation of multiple
trusts in the structure could be complex and Tax authorities could question the
same being subject to GAAR. However, the commercial rationale of having
multiple trust entities can be explained which would be for legal protection of
assets and done for family realignment. Also this is a normal practice adapted
for last several decades by families for succession planning.
- Interestingly, FAQ no
3 dealing with GAAR (dated January 27, 2017) issued by CBDT states that the
choice of entity for effecting an arrangement is the prerogative of the
assessee and does not per se attract GAAR only due to the choice being made.
- Section 2(31) of IT
Act defines the term 'person'. The term 'person' does not specifically cover
'trust' but the definition is inclusive in nature and hence, Trust should be
specifically taxed as an entity under IT Act even though it may not be a legal
entity as per Trust Act. There have been precedents that status of trust is
linked to status of Trustee. Thus, if trustee is an individual, then the
residential status of the Trust should be that of an individual. This
residential status of trust is a debatable issue in the past.
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.
STAMP
DUTY
Stamp duty is levied
under Indian Stamp Act, 1899 (Central Stamp Act). Power to levy stamp duty is
divided between central and state government. States do have the right to adopt
Central Stamp Act with or without modifications.
Stamp duty is levied on
the instrument of transfer and hence, location or state of transfer assumes
importance.
Relevant articles for
Trust in Central Stamp Act (Schedule I) are as below.
- Article 58 -
Settlement
- Article 64 - Trust
As per these entries,
stamp duty on instrument of transfer (ie Trust deed) attracts a stamp duty of
2-3% of value of assets transferred under the Trust deed. However, the State
Stamp Act will be the final authority to decide actual levy of stamp duty.
Generally, the duty is levied on transfer deed and there should be no further
duty on distribution of assets to beneficiaries in future.
It is to be noted that
gift of assets to relative (defined) attracts a very nominal stamp duty
irrespective of value of assets transferred e.g. Stamp duty on immovable
property being transferred in State of Maharashtra is 5% of value of the
property. However, if the same property is gifted to a relative, the stamp duty
is Rs.200. Similarly, in State of Karnataka, the stamp duty is approx Rs.1,000.
There is a possible view/argument that the same should apply to assets
transferred under Trust deed where the trust is formed for the benefit of
relatives. This has to be examined for the respective states before a call is
taken to form a Trust.
SEBI
TAKEOVER CODE REGULATION
- SEBI has prescribed
rules on substantial acquisition of shares beyond 25% of share capital and same
need to be adhered by Promoters of shares in a listed company. The acquirer
needs to make an open offer to existing shareholders of at least 26% of shares
at a price determined based on a formula.
- The Takeover Code
provides exemption from open offer in certain situations including 'inter se
transfers between promoters'. Also
Promoters can approach SEBI for Takeover Code exemption (ie open offer) by
making a specific application. The relevant rules are Rule 10 (prescribing
exemptions) and Rule 11 (making specific application for exemption). It is
understood that SEBI also provides informal guidance on this matter.
Considering that the
matter is complex in case of transfer of assets (assuming these include
substantial shares of listed company held as a promoter group/family), it would
be advisable to seek a specific exemption under Rule 11 from making an open
offer (rather than seeking recourse to Rule 10 and claim exemption) or in the
alternate, seek an informal guidance before the transfer is effected under
Trust deed.
SEBI has also
prescribed rules on Insider trading regulations which need to be strictly
adhered while the transfer of shares is effected under the Trust deed.
FOREIGN
EXCHANGE REGULATIONS
Provisions of Foreign
Exchange Management Act ('FEMA'), 1999 are relevant for creation of trust by a
settlor.
A trust outside India
(ie overseas trust) can be created by a resident owning a foreign asset for the
benefit of beneficiaries whether resident or non-resident. The overseas trust
can be specific or discretionary trust.
Similarly, a trust in
India can be created by a resident owning assets in India including a
non-resident beneficiary.
There are no specific
regulations under FEMA governing trusts. However, it appears that the transfer
of assets under Trust should be a 'capital account transaction' under Section
2(e) of FEMA.
Interestingly, Master
Direction on "remittance of assets" does make some reference as
below.
iii). in case of
settlement is done without retaining any life interest in the property ie
during life time of the owner/parent, it would tantamount to regular transfer
by way of gift' (emphasis supplied).
- Thus one argue that
settlement of property under trust is akin to gift and provisions dealing with
gift under FEMA may be applied (which in most situations are freely permitted).
- Having said that
there is no absolute clarity on the subject and a specific clarification from
RBI would be desirable.
- Also in the context
of a resident being a beneficiary in an overseas trust with overseas assets,
the long standing question is whether RBI approval is required when the
beneficiary may not be aware if he/she is the beneficiary in the trust (....if
done without his/her knowledge by the settlor) and certainty there is no
identification of share of income. Under Black Money law, such questions were
raised and Tax authorities' view was that such beneficial interest in
discretionary trust should be disclosed by the resident in the Return of
income.
ESTATE
DUTY/INHERITANCE TAX
India had estate duty on transfer of assets on death
of an individual but the same was abolished in 1985. Since then, there is no
estate duty or inheritance tax . Also currently, there is no wealth tax since
last few years.
There were talks of re-introduction of estate duty
or inheritance tax in India 5-6 years back but in the recent past, the same
have died down.
Having said that there is estate duty in developed
countries like USA and U.K. It is also possible that the same may be
re-introduced in future in India considering socio-economic objectives and
balancing wealth and removing inequalities. These are all hypotheses which may
or may not happen and difficult to predict future outcomes.
Succession Planning through Trust was one of the
important mechanisms to protect wealth being subject to estate duty during
estate duty days.
Also under erstwhile
Estate Duty Act (Section 6), gift done within 2 years of death of an individual
was ignored and was subject to estate duty. These aspects may be considered
while doing potential planning for estate duty or inheritance tax for future.
Therefore, transition of assets as early as possible could protect the same
from estate duty assuming similar provisions come into effect as and when the
law is re-introduced. On a parallel situation, it is understood that protection
under Insolvency and Bankruptcy Code, 2016 is not available for assets gifts
during last 2 years. Thus legislature considers 2 year window as reasonable
time frame.
If a settlor has set up
a revocable trust or is one of the beneficiaries in the trust, the estate duty
protection may not be available as per erstwhile Estate Duty Act.
Setting up a
discretionary trust without a settlor being a beneficiary would be ideal.
Gaining
traction among High Net Worth Individuals:
Trust formation is an
important tool in the hands of private client practitioners and is gaining
momentum in India as most wealthy families, high net worth individuals (HNIs)
and ultra high net worth individuals wish to adopt appropriate trust structures
to address the needs arising in the area of estate planning, family succession
and business succession. There is a growing need for a trust platform for
promoters or families to have a bankruptcy remote vehicle for wealth protection
and preservation by creating legally valid structures at the right time. A need
for trusts has also arisen owing to the large non-resident Indian population.
Trusts are subject to different laws in the respective jurisdiction where they
are located and people usually desire to address their succession issues by
creating suitably fitting structures in India. This need to set up private
beneficiary trusts has also gained momentum due to the various news items from
time to time related to the re-introduction of inheritance tax in India.
The benefits of having
a private trust are enumerated below:
better and efficient
control of assets;
planning for the family
needs present and future;
better succession
planning;
Better tax planning in
the event of inheritance tax being reintroduced;
Precautionary exercise
to avoid attachment of assets in the event of any liquidation / insolvency
threat etc.
A trust holding shares
of family business prevents/restricts disintegration as there is no scope for
the individual family members to transfer/dilute the shareholding of the family
business.
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:
the extinction of the trust
the completion of his duties under the
trust
appointment under the Trusts Act of a new
trustee in his place
consent of himself and all the
beneficiaries being competent to contract
the court to which a petition for his
discharge is presented; or
whatever means provided under the trust
deed.
In summary, succession
planning is a process and should be planned in an organised manner. Planned
succession can help in protection and smooth transition of wealth whereas an
unplanned succession can lead to erosion of family wealth and could create bitterness
and feuds in family. Finally, Trust is an established mechanism of succession
planning tool and provides protection, flexibility and transition of assets to
next generation.
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Very informative one.
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