A trust is a fiduciary relationship in which one party, known as a Settlor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the Settlor, and to avoid or reduce inheritance or estate taxes.
- Structure of Trust
- Components of Trust:
a.) Settlor: A settlor is one who creates the trust and reserves important powers with respect to the trust.
b.) Trustees: Who have fiduciary responsibility to manage the trust assets for the benefit of the beneficiaries as per the Trust Deed
c.) Protector: An individual or a body who has limited powers to have an oversight over the working of the Trustees. Has the power to remove the trustees in the event of Trustees working against the interest of the beneficiaries without going through the court process.
d.) Beneficiaries: Individual or a class of individuals who will receive the benefit from the Trust Funds. It can be of two types — Income Beneficiaries and Corpus beneficiaries. Same individual can be both or they can be separate depending on how the Trust Deed defines it.
e.) Trust Deed: It is a legal document written on the instructions of the Settlor (owner of the Assets). The Trust Deed contains details on who the beneficiaries are, how and when they will get the income or the corpus (capital), and instructions on how the assets should be managed.
f.) Trust Property: The property held by the trust is called the trust principal (aka trust corpus, trust res). The trust can only exist if it has property, since if it holds no property, it serves no purpose.
Beneficiaries may receive only the income from the trust or may also receive some of the principal. However, once all the property has been transferred to the beneficiaries, the trust naturally terminates.
- Different Types of Trust:
The Trusts can be primarily categorized on the basis of two factors; i.e. Public/Private or Revocable/Irrevocable in nature of application.
i. Private Trust — Private trust is a trust created for the benefit of individuals other than a public or charitable purpose. It is created for the financial benefit of one or more designated beneficiaries rather than for the public benefit.
ii.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; a section of the public following a particular religion, profession or faith.
iii.Revocable Trust — A revocable trust is a trust whereby provisions can be altered or cancelled dependent on the settler. During the life of the trust, income earned is distributed to the settlor, and only after death does property transfer to the beneficiaries
iv. Irrevocable Trust — An irrevocable trust is a type of trust where its terms cannot be modified, amended or terminated without the permission of the settlor’’’’’’’’s named beneficiary or beneficiaries. The settlor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust.
v. Discretionary -An arrangement where the trustee may choose, from time to time, who (if any-one) among the beneficiaries is to benefit from the trust, and to what extent
vi Determinate -The entitlement of the beneficiaries is fixed by the settlor at the time of settlement or by way of a formula, the trustees having little or no discretion