CREATION OF TRUST – PRIVATE TRUST

INTRODUCTION
The Indian Trusts Act, 1882, is a key legislative framework governing private trusts in
India. This Act lays down comprehensive rules and procedures for the creation,
administration, and management of trusts in India. It helps regulate the relationship
between the trustor, trustee, and beneficiaries, ensuring that trusts function effectively to
achieve their intended purposes. Trusts play a vital role in property management, estate
planning, charitable endeavours, and financial planning.
INDIAN TRUSTS ACTS, 1882 is an act related to private trusts & trustees.
Definition – According to Indian Trust Act, trust means an obligation annexed to the
ownership of property, & arising out of a confidence reposed in & accepted by the owner
for the benefit of another or for another and owner.
Key Definitions
 Trustor (Author of the Trust): The individual or entity that creates the trust by
transferring property to the trustee.
 Trustee: The individual or entity who holds and manages the trust property for the benefit
of the beneficiaries.
 Beneficiaries: The persons or groups for whom the trust has been created, and who are
entitled to the benefits of the trust property.
 Trust Property: The subject matter of the trust, which can be movable or immovable
property.
 Instrument of Trust: A document, often written, that clearly outlines the terms, purpose,
and operation of the trust.
Thus, a trust is an acceptance of an obligation by a person in against of some property
or funds to use it or hold it for the benefit for the person whom the trust is created.

Types of Trusts under the Indian Trusts Act, 1882

The Act classifies trusts into two broad categories: Public Trusts and Private Trusts.
1. Public Trusts: Public trusts are created for public welfare and serve purposes such as
charitable, religious, or educational activities. These trusts are meant to benefit a large
section of society. Public charitable and religious trusts are not covered by the Indian Trusts
Act, 1882, but by other statutes such as the Charitable and Religious Trusts Act, 1920.
2. Private Trusts: A private trust is created for the benefit of one or more specific individuals
or entities. These trusts can be established for personal purposes, such as managing family

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 wealth, safeguarding property for future generations, or ensuring the well-being of a family
member.
CREATION OF TRUST
The elements of valid trust are presented in section-6.
The act defines how the author could create the trust, assign trustees and give them his
monetary assets to be controlled by the trust. It may be express or implied. It includes-
 Intention of the author to create the trust.
 Purpose of the trust.
 The monetary asset is assigned for the benefit of the trustee.
 Gives control or transfer the trust property to the trustee which includes intention of the
author.
 Trustee can claim expenses & salary from the benefits from the trust of his work.
The requirement of the trust law is that the author should indicate by words or conduct with
the reasonable intention to create a trust.
The effect of the provision is a valid trust requires four certainties-
 Certainty of author’s intention,
 Certainty of object,
 Certainty of beneficiary &
 Certainty of trust property.
For example: A property transfer within the same family no valid trust will arise because
the beneficiary of the trust is not indicated with certainty similarly if the transferee
distributed the property amongst the member of same family, as he should think most
deserving, here there is also no valid trust because there should be no certainty about
beneficiaries but where a person transfer is property and his assets to another person for
payment of his creditor. This is not trust but a transfer on a condition mentioned under a
trust law in India.
SECTION 4 – Purpose should be lawful
Under the provision, sec4 states that a trust must be created for lawful purpose.
Where the purpose of law of trust is unlawful, the trust becomes void.
But as if the trust property is located in foreign country, the law of that country shall apply.
Trust Law in India requires that the purpose should be lawful.

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 Unless it is not being-
 It is forbidden by the law,
 It is fraudulent,
 It is of such nature that, if permitted it would defeat the provision,
 The court regards it as immoral or opposed to public policy.
Suppose for example- trust for fraudulent of creditors,
SECTION 5 – Nature of the property
Under this provision, properties which are transferred to the trustee may be moveable or
immoveable.
In case of immovable property, it may be valid if the author of the trust & the trustee being
signed on the instrument & by the will of the author of the trust
The provision of trust law in India cannot be used for the purpose of committing fraud.
(R/W Sec-4)
SECTION 7– Competent to contract
According to sec-7 of the trust law in India says that a trust may be created by every person
competent to contract. But where the trust is created on behalf of minor, permission from
civil court jurisdiction should be obtained first. SECTION 8 – About the subject matter
Under this provision, the trust law requires that the subject matter must be property & are
capable of being transferred to beneficiary.
SECTION 8 – About the subject matter
Under this provision, the trust law requires that the subject matter must be property & are
capable of being transferred to beneficiary.
SECTION 9 – Who may be beneficiary
Under the provision, every person capable of holding property may be a beneficiary. As if
the proposed beneficiary may renounce his interest under the trust he can by disclaimer
addressed to the trustee, by giving notice.
WHO MAY BE TRUSTEE UNDER THE TRUST LAWS
Section 10 says that every person who is competent to contract are capable of holding
property as trustee.
However no person is bound to accept a trust. When a person is appointed as a trustee, he
has the option to accept or reject the trust. He has to intend his acceptance by words,
written, spoke or by conduct. The assigned trustee may disclaim it also, but he must do with
in the reasonable time. His disclaimer will prevent the property to transfer to the trustee.
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 But in case of more than one proposed trustee & one of the trustees disclaim, the property
will vest to the other trustee & he will become the sole trustee vice versa. A proposed
trustee who accepts becomes the trustee from the date of the creation of trust. Where a
person by his will leaves certain property in trust for another & the proposed trustees prove
his will that amounts to acceptance of the trust on their part.
Under English law, the property becomes to the subject of two kinds of ownership. The
trustee becomes the legal owner & beneficiary regarded as beneficial owner.
Under Hindu law, provision clearly says that the trustee having possession of the property.
The beneficiary has certain rights under the trust under Indian trust law. Beneficial
ownership is also known as equitable ownership but it is not known in the trust law in
India.
Essentials for the Creation of a Trust
The process of creating a valid trust under the Indian Trusts Act, 1882, requires the
following key elements:
1. Author of the Trust: The trustor must be competent to create a trust. According to Section
7 of the Act, any person who is competent to contract under Indian law can create a trust.
This means that the individual must be of sound mind, not a minor, and not disqualified by
law. Additionally, companies and other legal entities can also create trusts, provided they
comply with the law governing their establishment and operation.
2. Intention to Create a Trust: The trustor must express a clear intention to create the trust.
This intention can be indicated through a written document (trust deed) or by actions that
demonstrate a commitment to establishing a trust. The intention to create a trust must be
unambiguous, leaving no room for doubt.
3. Lawful Purpose: The trust must be created for a lawful purpose, as specified under Section
4 of the Act. A trust is considered unlawful if its purpose is:
o Prohibited by law
o Defeats the purpose of any law
o Fraudulent
o Causes harm to individuals or their property
o Is immoral or contrary to public policy
4. If any part of the trust is unlawful, the entire trust may be deemed void unless the unlawful
purpose can be separated from the lawful one.
5. Trust Property: The subject matter of the trust, known as the trust property, must be
clearly defined. The property can be either movable or immovable, but it must be
transferable under law. A trust cannot be created for an interest that is not legally

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 transferable. According to Section 8 of the Act, the trust property must be sufficiently
identifiable and described to allow its proper management by the trustee.
6. Beneficiaries: The beneficiaries of the trust must be clearly identified or identifiable. Any
person capable of holding property can be a beneficiary. Beneficiaries can include minors,
companies, or even unborn persons (as long as the rule against perpetuity, under Section 14
of the Transfer of Property Act, 1882, is not violated). Beneficiaries have the right to
enforce the terms of the trust and can renounce their interest if they choose.
7. Transfer of Trust Property: For a trust to be valid, the trust property must be transferred
to the trustee. The trustor must relinquish ownership or control over the property and
transfer it to the trustee, who then holds it for the benefit of the beneficiaries. The transfer
can be done through a non-testamentary instrument (a document that is not a will) for
immovable property or through actual transfer for movable property.
8. Trust Deed: A trust deed is the legal document that establishes the trust. While it is not
mandatory to create a trust in writing (except for trusts related to immovable property), a
trust deed helps ensure that the terms and conditions of the trust are clear and legally
enforceable. It is essential that the deed contains details about the trustor, trustee,
beneficiaries, trust property, and purpose of the trust.
What are Private Trusts?
A private trust is a fiduciary relationship where a trustor transfers assets or property to a
trustee, who manages them for the benefit of the beneficiaries. The purpose of a private
trust is typically to manage and protect assets, provide financial security to beneficiaries
and ensure the trustor’s wishes are carried out.
Purposes of Private Trusts
Private trusts can be established for various purposes, including:
 Family Wealth Protection: To protect and manage family wealth, ensuring it is preserved
and passed on to future generations.
 Asset Management: To manage assets efficiently, often for minors, individuals with
disabilities or those unable to manage their assets.
 Tax Planning: To take advantage of tax benefits and exemptions provided under the law.
 Charitable Purposes: Though typically for public benefit, a private trust can be partially
used for charitable purposes, benefiting a specific group.
Legal Framework for Private Trusts in India
The creation, regulation and management of private trusts in India are primarily governed
by the Indian Trusts Act of 1882. This Act provides a comprehensive framework for the
creation, duties and obligations of trustees, as well as the rights of beneficiaries.
Indian Trusts Act, 1882
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 The Indian Trusts Act of 1882 lays down the foundation for private trusts, including:
 Creation of Trust: The Act stipulates that a trust must be created by a clear and
unequivocal intention, typically through a written document known as the trust deed.
 Duties and Powers of Trustees: The Act outlines the responsibilities and powers of
trustees, including the duty to act in good faith, manage the trust property prudently and
adhere to the terms of the trust deed.
 Rights of Beneficiaries: Beneficiaries have specific rights under the Act, including the
right to information about the trust, the right to ensure the trustee acts in accordance with
the trust deed and the right to seek legal remedy if the trustee fails to do so.
Other Relevant Laws
In addition to the Indian Trusts Act of 1882, several other laws may apply to private trusts,
including:
 Income Tax Act, 1961: This Act provides tax benefits and exemptions for trusts, including
those under Sections 12A and 80G for charitable trusts, which may also be applicable to
certain private trusts.
 Transfer of Property Act, 1882: Governs the transfer of property to the trust.
 Registration Act, 1908: Pertains to the registration of the trust deed, which is mandatory
for trusts involving immovable property.
Challenges in Private Trust Registration
Registering and managing a private trust can present several challenges, including legal,
administrative and financial hurdles.
Legal Challenges with Private Trust Registration
 Ambiguity in the Trust Deed: Vague or unclear provisions in the trust deed can lead to
disputes and legal challenges. It is essential to draft the deed with precision.
 Disputes Among Beneficiaries: Conflicts among beneficiaries regarding the distribution of
assets or the management of the trust can arise, leading to potential litigation.
 Regulatory Compliance: Keeping up with the ever-evolving legal and regulatory
framework can be challenging for trustees, especially in complex trusts with diverse assets.
Administrative Challenges with Private Trust Registration
 Management of Trust Property: Efficiently managing trust assets, especially when they
are diverse or geographically dispersed, can be administratively demanding.
 Record Keeping and Reporting: Maintaining accurate records and fulfilling reporting
requirements can be burdensome, particularly for large trusts with significant financial
activities.
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 Financial Challenges with Private Trust Registration
 Tax Implications: Navigating the complex tax landscape, including the impact of capital
gains, income tax on trust earnings and potential exemptions, requires careful planning and
expertise.
 Funding and Resource Allocation: Ensuring that the trust has adequate funds to fulfill its
objectives, while also preserving the capital for future beneficiaries, requires careful
financial management.
Termination of Trusts
Trusts can be terminated in several ways under the Indian Trusts Act, 1882. A trust may
come to an end if:
 The purpose of the trust has been fulfilled.
 The beneficiaries agree to terminate the trust (in certain cases).
 The trust is revoked by the trustor, provided the trust deed allows for such revocation.
 The court dissolves the trust if it becomes impossible to achieve its purpose or if the trust’s
objectives are illegal or immoral.

Landmark Cases on Creation of Trusts

1. Bai Dosabai v. Mathurdas Govinddas (1980): In this case, the Supreme Court of India
held that an obligation annexed to the ownership of property does not amount to an interest
in the property but is an obligation that can be enforced against a transferee with notice or a
gratuitous transferee. This judgment provided clarity on the nature of obligations imposed
on trustees.
2. Hemchand v. Pyarelal (1950): The court ruled that a trust void for want of registration
could be perfected through 12 years of adverse possession by the trustee, after which action
against the trustee would be barred.

Conclusion
The Indian Trusts Act, 1882, provides a structured framework for the creation,
administration, and termination of trusts in India. The process of creating a trust involves a
series of legal steps, including the drafting of a trust deed, the transfer of property, and the
appointment of trustees. The Act imposes specific duties on trustees, ensuring that they act
in the best interests of the beneficiaries and manage the trust property with due care.