Private Trusts – A Starting Point
- Rashmi Shah
- Apr 1
- 3 min read
Estate Planning & Succession Series
Series 1 | Article 4
This article explores Private Trusts as a powerful estate planning tool under the Indian Trusts Act, 1882 (the "Act"). Though often viewed as complex, Trusts are highly adaptable legal structures that serve diverse personal and financial purposes. They can help safeguard assets from creditors and family disputes, optimise tax benefits when structured effectively, and ensure financial security for dependents with disabilities or special needs. While commonly associated with High Net Worth Individuals (HNIs) and Ultra High Net Worth Individuals (UHNIs), Trusts offer valuable solutions for anyone seeking to protect their assets and simplify estate distribution.
What is a Trust?
A Trust is a legal arrangement in which the owner of assets (the "Author of the Trust" or "Settlor") transfers them to a third party (the "Trustee") to hold and manage for the benefit of one or more individuals (the "Beneficiaries").
Creation of a Trust
To establish a valid Trust under the Indian Trusts Act, 1882, the following essential elements must be present:
Intention: The Settlor must have a clear and definite intention to create a Trust.
Purpose: The Trust must be created for a lawful purpose.
Subject Matter: The assets forming the Trust (trust property) must be clearly identifiable and transferable.
Beneficiaries: There must be identifiable individuals or entities who will benefit from the Trust.
Trustee: A person or entity capable of accepting the Trust and fulfilling its obligations.
A Trust can take effect either during the Settlor’s lifetime or after their death through a Will (Testamentary Trust). The Settlor’s instructions for creating the Trust are documented in a legally binding instrument known as the Trust Deed.
Types of Trusts
Private Trusts are categorised into the following:
Revocable Trusts: The Settlor retains the right to revoke or modify the Trust during their lifetime.
Irrevocable Trusts: Once constituted, the Trust cannot be revoked or altered by the Settlor.
Key Takeaways Under the Act
When creating a Trust, in addition to the essential elements mentioned earlier, the following considerations are important:
Fiduciary Duty of a Trustee
A Trustee must act in good faith, exercise due diligence, and avoid conflicts of interest. All decisions must align with the Trust’s purpose and prioritize the interests of the Beneficiaries.
Appointment of a Trustee
A Trustee is appointed through:
An express declaration by the Settlor in the Trust Deed.
The acceptance of the Trust by the Trustee, either explicitly (by words) or implicitly (through conduct).
Discharge of a Trustee
Under Section 71 of the Act, a Trustee may be discharged in the following circumstances:
Upon termination of the Trust, when its purpose is fulfilled.
Completion of duties assigned under the Trust.
As prescribed in the Trust Deed.
By appointment of a replacement Trustee.
By resignation, with the consent of the Beneficiaries (if multiple Beneficiaries, all competent Beneficiaries must consent).
By court order.
Appointment of a New Trustee
A new Trustee may be appointed in the following situations:
Resignation by the existing Trustee.
Death of the Trustee.
Absence from India for six months.
Relocation abroad with no intention to return.
Insolvency, as declared by a competent court.
Refusal to act as a Trustee.
Incapacity, including mental or physical unfitness.
Acceptance of an inconsistent Trust.
Remuneration of Trustees
Unless specified in the Trust Deed, Trustees are not entitled to remuneration. However, they may seek reimbursement for legitimate expenses incurred in managing the Trust.
Liability of a Trustee for Breach of Trust
Under Section 23 of the Act, a Trustee is liable to compensate for any loss caused by a breach of trust, except in cases where:
The breach resulted from fraud by a Beneficiary.
The Beneficiary knowingly consented to the breach.
Additionally, Trustees may be held accountable for interest or profits in cases of:
Unreasonable delays in handling trust money.
Failure to invest trust funds appropriately.
Misuse or improper employment of Trust assets.
Termination or Revocation of a Trust
A Trust may be revoked or terminated if:
Its purpose has been fulfilled.
The Beneficiaries consent, provided they are competent to contract.
The Trust Deed allows for revocation under specific conditions.
Each of these considerations is crucial for Settlors to ensure their Trust is legally sound, efficiently managed, and aligned with their estate planning objectives.
In upcoming articles, we will explore other modes of succession.
About the Author
Rashmi Shah has been with MZD Legal Consultancy since 2019 and has been practicing law since 2014. Rashmi is a part of the Estate Planning, Succession, and Real Estate practices at the firm. Rashmi also has an expertise in trade mark law and disputes. She can be contacted at rashmi@mzdlegal.in
About MZD Legal Consultancy
MZD Legal Consultancy is a boutique law firm in Mumbai, India. The firm was established in 2011 and comprises professionally qualified lawyers with varied levels of experience and expertise in specific practice areas. To know more, click here www.mzdlegal.in
