Comparison of a private trust with a public trust

What is a Trust?
Trust is defined in section 3 of the Indian Trust Act, 1882 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. In other words, it is simply a transfer of property by one person (the settlor) to
another (the “trustee”) who manages that property for the benefit of someone else (the
“beneficiary”). The settlor must legally transfer ownership of the assets to the trustee of the
trust. In India trust is the second most popular form of registration.

Types of Trust
Generally, there are two types of trusts in India: private trusts and public trusts. While
private trusts are governed by the Indian trusts Act, 1882, public trusts are divided into
charitable and religious trusts. The Charitable and Religious Trust Act, 1920, the Religious
Endowments Act, 1863, the Charitable Endowments Act, 1890, the Bombay Public Trust
Act, 1950 are some of the statutes for the enforcement of public trusts in India.
Moreover, in recent times, trusts can also be used as a vehicle for investments, such as
mutual funds and venture capital funds. These trusts are governed by Securities and
Exchange Board of India (SEBI).

Who can form a Trust?

According to Section 7 of Indian Trusts Act, 1882, a trust may be created by the following
persons:
1. Every person competent to contract (given in Section 11 of Indian Contract Act,
1872);
2. By or on behalf of minor with the permission of a principal civil court of original
jurisdiction;
3. Hindu Undivided Family;
4. Association of Persons (AOP);
5. Trust by a woman;
6. Company

How to form a trust?

 One can make a trust with the help of a legal firm or a bank, for which a trust
document has to be drafted and this should state the type of trust it would be.
 It should clearly state the name of the settlor, the trustees and the beneficiaries, as
well as a list of all the assets the trust would hold.
  Apply for a permanent account number for the trust and open a bank account for it
as it is a separate entity.
 The trust may or may not be registered; registration is required only if an
immovable property is transmitted to the trust.

Who can be a Trustee?

As per Section 10 any person who is capable of holding property may be a trustee; except
to the condition of discretion of trust, in that case he cannot execute it unless he is
competent to contract.

Comparing Public and Private Trust

Public and private trust can be distinguished in a number of ways. A simple way to
differentiate between a public and a private trust is to know the beneficiaries of the trust.
If the beneficiaries make up a large or substantial body of public, then the trust in question
is public. A public trust exists “for the purpose of its objects, the members of an uncertain
and fluctuating body,” and is managed by a board of trustee. If, however, the beneficiaries
are a narrow and specific group such as the employees of a company, then the trust is
private. So the basic difference between both the trusts is that in the former, the interest is
vested in an uncertain and fluctuating body whereas in the latter, beneficiaries are definite
and ascertained individuals. Supreme Court in Deoki Nandan v. Murlidhar 1957 AIR 133
1956 SCR 756 also highlighted the difference between public and private trust. Supreme
Court said that in private trust, the beneficiaries are specific individuals, whereas, in the
public trust, they are general public or class thereof.

Public Trusts in India

Trusts designed for the benefit of a class or the public generally. In general, such must be
created for charitable, educational, religious or scientific purposes. As stated earlier there
is no Central Act applicable for Public trusts, but various states have enacted their own acts
suitable to their conditions and administration. Public trusts are popular because it is
relatively easy to register and manage them. All one needs to do is to draft a trust deed
stating the trustees, the objectives of the trust, and the intended beneficiaries who are a part
of the general public. The trust is then registered under the State Trusts Act, thereby making
the trust eligible for government tax rebates, namely the Income Tax Act. Generally, a
public trust is of a more permanent nature than a private trust.
Religious endowments and wakfs are variants of public trusts that come into being when
an endowment, usually, property, is dedicated for religious purposes. 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 by statute. In case of Hindus, the personal law
provisions regulating the religious trusts have not been codified and are found dispersed in
various religious books and epics.
Like the private trusts, public trusts may be created inter vivos or by will. The working of
such trusts can be regulated and supervised by both, the state and the beneficiaries. To
create a charitable trust three certainties are required which are:
1. Declaration of trust made by settlor which is binding upon him,
2. Setting apart certain property by settlor and thereby depriving himself of the
ownership rights, and
3. A statement of object for which the property is thereafter to be held, that is, the
beneficiaries.
It is essential that the transferor of the property viz. the settlor or the author and the trustee
are competent to contract. It is also necessary that trustees should signify their assent for
acting as trustees to make the trust a valid one. Once the trust is created and the property is
transferred to the trust it cannot be revoked.
In case of breach of public trust, either the Advocate General or two or more persons
having interest in the trust can institute a suit regarding following matters:
1. Removal of a trustee
2. Appointment of a new trustee
3. For vesting any property in a trustee
4. for directing a trustee who has been removed as a trustee to provide possession of
any trust property in his possession to the person entitled to the possession of such
property
5. for directing accounts enquiries

Private Trusts in India

A trust is called a private trust when it is constituted for the benefit of one or more
individuals who are ascertained. Private trusts are governed by the Indian Trusts Act, 1882.
A private trust may be created inter vivos or by will. If a trust is created by will it shall
subject to the provisions of Indian Succession Act, 1925.

Ingredients of a valid Private Trust

There are certain guidelines or ingredients one should keep in mind to open a trust. These
are:
1) Declaration made by the author or settlor of property who can set aside certain
property for the benefit of beneficiaries. Author of the trust is a person who declares
the confidence.
2) There must be a trustee who manages this property for the benefit of the
beneficiaries as per the trust deed, that is, the transfer of ownership by the author to
the trustee. The settlor can also become a trustee. Trustee is the person who accepts
the confidence by the author.
3) There must be a beneficiary or beneficiaries who can get benefits from the property
of settlor.
 4) There must be a properly demarcated trust property.
5) The objects of the trust must be clearly specified.
Private trusts are increasingly playing role in protection of wealth. As the trust route to
succession planning gains popularity in India, the rich are increasingly looking at asset
protection, rather than saving on taxes or passing on wealth to the next generation.
According to Barclays Wealth Insights report, 61 per cent of family disputes in India were
due to wealth distribution. Forming trusts can be a good alternative to these disputes
because, trusts can function even when one is alive but a person’s will comes into effect
only after his/her death.
Private Trusts can also help insolvency protection. If the settlor is beneficiary, the share of
the trust’s assets belonging to the settlor or beneficiary can be attached in case of
bankruptcy.
Generally, there is no statutory requirement to create trust by any instrument. Supreme
Court in the case of Radha Swami Satsung v. CIT, (1992) 193 ITR 321 (SC) held that no
formal document is required to create a trust but still it is desirable to create trust in writing
in the case of will or where an immovable property is Rs 100 and more.
Private trust will cease to exist when the purpose of formation of trust is fulfilled or the
object of formation of trust becomes unlawful or the trust is revoked or when there is a
destruction of trust’s property.

Registration of Public and Private Trusts

Registration of a trust is necessary when it is declared by a non-testamentary instrument.
This registration would be required even if the instrument declaring the trust is exempt
from the registration under the Indian Registration Act.
In the case of a Private Trust declared by a will, registration will not be necessary, even if
it involves an immovable property.
In case of Public Trust, whether in relation to movable property or immovable property
and whether created under a will or inter vivos, registration id optional but desirable.
In case of Charitable or Religious Trust in relation to an immovable property, for claiming
exemption under section 11 of the Income Tax Act, 1961 it is essential that the instrument
of trust is duly registered.

Taxation of Private and Public Trusts

Being an independent entity private trusts are taxed separately. Generally there are two
situations on which the income of the trust is taxed viz. share of a beneficiary/ specific trust
and discretionary trust. In case of a specific trust income is received by the trustee on behalf
of beneficiary while in case of latter, the shares of beneficiaries are not known as there are
more than one beneficiary. In case of discretionary trust income is determined by the
trustees rather than by a representative.
Public trusts are taxed as per the sections 11 to 13 of the Income Tax Act, 1961 which deals
with taxation of charitable Trust.
 Section 11 provides the manner in which income is exempt from income-tax.
 Section 12 provides the income of trust from contributions.
 Section 12A provides the conditions as to registration of trusts, etc.
 Section 12AA provides the procedure for registration.
 Section 13 provides section 11 not to apply in certain cases.
The basic condition for claiming exemption of income by the trust is that “Income should
be derived from the property held under a trust and the said income should be applied to
charitable or religious purpose in India”

Current scenario
Trusts today play a significant role in most financial and legal systems and are also
recognized under the Hague Convention. The government has also exempted non-residents
and private discretionary trusts from mandatory filing of income tax returns electronically.

Conclusion
Trust is a concept which generally features around the author, the trustee and the
beneficiary/beneficiaries having rights and obligations assigned to each of them. There are
many advantages of trust like protection of wealth, protection of insolvency, taxation,
welfare of family members, helps in succession of property and many more. If the trust is
formed with all the required legal procedures then it is for beneficial each of the organ of
a trust.