Background:
The Indian Trust Act, 1882 (Act) was enacted on January 13, 1882 and went into effect on March 1, 1882 to define and revise the legal principles regulating Private Trusts and Trustees. The Act defines the term “trust” in the interpretation clause as “a duty undertaken with the ownership of property and arising from an assurance reposed in and acknowledged by the owner or confirmed and accepted by such owner for the benefit of another or another person and the owner.” A trustee is the one who acknowledges the confidence, while a beneficiary is the person to whom the confidence is granted.
Introduction:
The India Trust Act, 1882 is the law followed for private trusts in India. According to this Act, listed below are the parties in a trusteeship;
Author of trust/trustor (one who creates the trust);
The trustee (one who holds the trust with confidence of author) and;
The beneficiary (third party who benefits from the trust).
This Act regulates the formation of a trust, types, parties, and its dissolution. Section 3 of the Act defines a trust as “an obligation appended to the ownership of property, arising out of a confidence reposed in and accepted by the owner, or declared and acknowledged by him, for the benefit of another, or of another and the owner.” A trust is formed when one party (the trustor) invests their 'trust' or confidence in another party (the trustee) for the benefit of a third party (beneficiary). It gives the trustee the authority to hold assets on behalf of the beneficiary.
What can be treated as a property of trust?
Trust property is defined as assets put in a fiduciary relationship between an author and a trustee for the benefit of a specified beneficiary. Trust property can be any asset, such as cash, securities, real estate, or life insurance policies. Trust assets and trust corpus are other terms for trust property. Trust property can be moveable or immovable property under Section 5 of the Act if the following conditions are met:
1. If the trust constitutes immovable property then its transfer to the trustee must be through a written and registered document, signed by the settlor.
2. If the trust constitutes moveable property, delivery of such property to the trustee is enough and there is no need for a written document.
Who can be a trustee?
A trustee is a person who is appointed to manage the asset until it is transferred to the beneficiary. Section 10 of the Act states that “anyone capable of holding property may be a trustee; nevertheless, when the trust requires the exercise of judgement, he cannot execute it unless he is competent to contract.” In simple terms, Section 7 of the Act states that the first important criteria for becoming a trustee is to be competent to possess a property, which implies that he must have reached the age of majority and be of sound mind. If a trust is being formed by or on behalf of a minor, authorization from a Principle Civil Court of original jurisdiction is required before such trust can be constituted.
A trust may be administered by more than one trustee, who are referred to as co-trustees. When a person is offered the position of trustee, he or she is not required to accept or is obligated to take the position. However, the trust cannot be terminated if there is no trusteeship. If there is no trustee, the court may appoint one for administrative purposes.
Who can be a beneficiary?
A beneficiary is a person or individuals who are entitled to the benefits of a trust arrangement. A beneficiary is typically a natural person, however Section 9 of the Indian Trust Act states that “anyone competent of owning property may be a beneficiary." A potential beneficiary may renounce his participation in the trust by addressing a disclaimer to the trustee or by filing a claim conflicting with the trust with notice of the trust.” To simply state it, there are no restrictions on who can be a beneficiary of a trust. A beneficiary may be a minor or someone with a mental disability (in fact many trusts are created specifically for persons with those legal disadvantages). Trusts for unborn offspring are also permissible, but the trusts must vest during the appropriate perpetuity period. It is also absolutely conceivable for a firm to be the beneficiary of a trust, which occurs frequently in complicated commercial transaction arrangements. All trusts, with the exception of charity trusts and some special anomalous non-charitable purpose trusts, must have ascertainable beneficiaries.
What is the purpose of creating a trust?
Trusts are generally founded or created to achieve one or more of the following goals: to discharge the author’s or settlor’s philanthropic and/or religious emotions in a way that secures public benefit. It can also be used to seek income tax exemption under sections 10 or 11 of the Income Tax Act of 1961, depending on the situation, for income used for charitable or religious purposes.
A trust can also be established for the aim of good property management and preservation, or for supervising the business of a provident fund or other similar fund with the welfare of the employees in mind. Last but not least, for the benefit of family members or other relatives who rely on the trust’s settlor.
What are the benefits of creating a trust?
One of the key advantages of creating a trust is that it allows the trustor to manage his or her property with the assistance of another person for the benefit of a third party. A trust, as opposed to a will, makes it simpler to secure legal consent, certifications, or authorisation. This facilitates property management. Furthermore, a trust provides better security against a judicial action by someone who is dissatisfied with the dissolution of the trust property and minimises estate taxes that must be paid when transferring property after death.
In the event of any income derived from profits and gains from business and professions, trust may be used to claim exemption, and it also gives more anonymity to the dissolution of property, reducing the danger of inter-family conflicts.
How can one create a trust?
The formation of a trust is outlined in Section 6 of the Act. A person with contracting authority can form a trust, either explicitly or implicitly. When expressing desire to enter into a trusteeship arrangement, the author must disclose the purpose, beneficiary, and property of the trust. The trustee is responsible for safeguarding trusteeship property and may be reimbursed from the property if they pay to protect it out of their own pocket. If the trustee violates the trust, they are obligated to reimburse the beneficiary.
What are the rights and powers of the trustee?
The trustee has been vested with some right and powers. Section 31-44 of Act prescribes those rights and powers of the trustee. Below-mentioned are some of them.
Right to title– Under Section 31 of the Act, one of the primary rights of trustee is that he is entitled to possession of the trust deed and all the other documents with regard to title of the trust property.
Right to reimburse expenses incurred for trust purposes- Under Section 32 of the Act, the trustee has the right to be reimbursed for the expenses incurred by him for the purpose of the trust, like expenses incurred for the execution of the trust, for the preservation of the trust property, for the protection or support of the beneficiary, etc.
Right to be indemnified for breach of trust– Under Section 33 of the Act, in case there is breach of trust and other person has gained benefit from the breach, then he is bound to indemnify the trustee, but if the trustee was involved in the breach of trust, then no such indemnity will be available for him.
Right to seek Court’s opinion in managing trust property- Under Section 34 of the Act, the trustee has the right to apply to the Court, by way of a petition, to seek the Court’s opinion, advice, opinion or direction with regards to the management of the trust property.
Right to examine the accounts– According to Section 35 of the Act, once the duty of the trustee is completed, then he shall have the right to examine and settle the accounts of the trust property
General authority of trustee– Under Section 36 of the Act, every trustee has been given some general authority that is reasonable to protect, realize and benefit the trust property and even for the beneficiary who is not yet competent to contract.
Power to convey– Section 39 of the Act, gives this power to trustee and once the formalities of the sale are complete, the trustee is free to convey the property as may be necessary according to him.
Power to deal with the trust property– When there are number of trustees and any one of them disclaims the position or dies then according to Section 44 of the Act, the authority over the property shall be exercised by the continuing trustees, but it won’t apply in those cases where the deed has specifically mentioned the number of trustees required to deal with the property and its operations.
Power to sell trust property– Under Section 37 of the Act, if the trustee has been given the power to sell the trust property, then he may sell the property subject to the charges and trustee may sell the property in one go or even in installments or by conducting an auction or private one. But this can be done, only if it is explicitly mentioned in the trust deed.
What are the liabilities of the trustee?
The role of trustee is critical because trustees have a “fiduciary” connection with the trust's beneficiaries. This implies they are in a unique position of trust and have a lot of important responsibilities. Sections 23 -30 of the Act detail the trustee's obligations. If the trustee commits a breach of trust, they are accountable for the property harm they cause. If the breach results in a loss, the trustee will bear it, and if it results in an unjust advantage or profit for the trustee, the profit will be passed to the beneficiary.
In general, a trustee is not liable for a breach of trust by a co-trustee, but Section 26 of the Act prescribes the scenarios in which a trustee can be held liable, if the trustee delivered the trust property of his co-trustee without investigating its proper application, or if the trustee was aware of the intention of the co-trustee to breach or the breach was committed by the co-trustee and the trustee did not take any proper steps to protect the beneficiary’s interest.
What are the different types of trust?
Express trust- If the trust is made verbally or in writing in an explicit phrase, where the trust procedure is followed properly and a person is appointed as trustee of the trust, it is referred to be an express trust. If the property is transportable, it should first be registered and then legally transferred in the name of the trustee.
Implied trust- This trust is similarly made by parties, but in a covert manner, since the parties do not overtly announce that they are building a trust, but it is implied by the parties’ behavior. The actions of the parties will raise suspicion while also indicating a desire to build confidence.
Public and private trust- A public trust, by definition, is one established by the government for the benefit of the general public or a specified group of the general public. It is not required for the trust to serve the whole public; it may be founded for a specific type of public and yet be recognised as a public trust. Some of the most popular reasons for establishing a public trust include health, social services, medical facilities, education, and training. In contrast, a private trust is established for a specific individual to ensure that no one person benefits from the property. Only the intended recipient may enforce such a trust.
Secret trust- There is a trust in which nothing is disclosed, neither the existence of the trust nor its terms and conditions, and it is therefore referred to as a hidden trust. There are certain trusts in which the existence of the trust is disclosed but the conditions are maintained as closed, acting as a “semi-secret” trust. This type of trust, however, might be considered a misuse of the notion of “trust.”
When does a trust end?
The process to put an end to trust is specified under Sections 77 and 78 of the Act. A trust gets extinguished in the following cases:
When the purpose is fulfilled
When the purpose becomes unlawful
When fulfillment of purpose becomes impossible, for example by the destruction of trust property.
When the trust is revoked, if it is revocable.
When the purpose of a trust may be modified by the consent of all beneficiaries competent to contract.
Conclusion:
It is believed that the relationship of trust is like a glass. It is never the same once it has been broken. A cursory examination of the Indian Trust Act reveals that it addresses all issues with trusts, trustees, and beneficiaries. The trust formed with an unlawful aim is invalid, and if the trust is formed with two motives, one of which would contradict the goals of the law, the entire trust is illegitimate. It is also demonstrated how the parties are involved in the formation of a trust deed and how the trustee can use his rights over the property.
Aside from the legal components, the Act also provides obligations and powers with the goal of preserving the delicate relationship of trust, so that the trust may be retained and the intention with which the trust is created can be realized.
Witten By,
Kalpana Nailwal,
Intern, Chanchlani Law World
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