Testamentary trust

A trust is a legal arrangement that holds assets on behalf of one or more beneficiaries. The person who creates it decides its terms.

Most trusts are set up while that person is alive. A testamentary trust is not. It is created through the Will.

So it comes into existence on the death of the settlor, as part of the Will taking effect.

That has one immediate consequence. Such trusts are subject to the rulings under the Will, which means they also go through the process of probate.

And it has two useful tax consequences. Settling property into a trust through a Will attracts no stamp duty. And the transfer is exempt from capital gains, because it happens as per the Will.

So the trade is a delay against a cost saving. The trust cannot start working until probate is done, but it costs nothing to fund.

What it is. Trusts hold assets on behalf of a beneficiary or beneficiaries, and the person who creates the trust decides its terms. Trusts can also be created through the Will, and that is known as a testamentary trust. Section 15.2 of the next chapter confirms the same thing from the Will's side: Wills are made for disposing of properties, for appointing executors, for creating trusts, and for appointing a guardian of the children.

The procedural consequence. These trusts are subject to the rulings under the Will, which means they also go through the process of probate. So the trust's terms can be read only as the Will is read, and it cannot be administered until the Will has been proved.

Stamp duty. Under the Indian Stamp Act, 1899, stamp duty is levied on the instrument of transfer. For a trust that is Article 58 of Schedule 1, which deals with settlement under a trust structure, so duty is payable when the trust deed is registered. Because stamp duty is a state matter, the actual rate is decided by the state Stamp Act. Duty is levied on the transfer deed, so no stamp duty applies when assets are later distributed to beneficiaries.

Where immovable property is settled into a trust, stamp duty is levied - but the workbook is precise about when: that provision applies where the immovable property is transferred during the lifetime of the settlor through a registered document under the Registration Act, 1908. Any settlement of property in the trust through Will does not attract stamp duty.

Capital gains. In the general course a transfer of assets from one person to another attracts capital gains tax. The trust, being a pass-through entity, gets relief in certain situations:

So the cost comparison is stark. Settling a property into a trust during the settlor's lifetime can mean stamp duty at state rates on the value of the property, and capital gains unless the trust is irrevocable. Settling the same property by Will costs neither.

What it costs instead. Time and privacy. A lifetime trust operates from the day it is funded. A testamentary trust waits for death and then for probate, and a Will admitted to probate is a court proceeding rather than a private arrangement.

Where it sits among the elements of an estate plan. Section 14.3 lists the components of an estate plan: a Will, a trust, a Power of Attorney, a Living Will, and nomination and beneficiary designations. A testamentary trust is the point where the first two of those meet.

Illustrative figures; the workbook states the rules without a worked example.

Mr Sanghvi owns a commercial property in Surat, bought years ago for Rs 40,00,000 and now worth Rs 3,20,00,000. He has a son with a disability and wants the property held in trust for him, with a professional trustee.

Assume state stamp duty on a settlement deed of 5%.

Route A - settle it into a trust now, during his lifetime.

Route B - create a testamentary trust in his Will.

On these assumptions Route B saves Rs 16,00,000 against an irrevocable lifetime trust, and Rs 51,00,000 against a revocable one.

The 12.50% is the workbook's long-term rate for immovable property. Because Mr Sanghvi bought the property well before 23 July 2024, Annexure 1 gives him a second option on a sale on or after that date: 20% after indexation, and he pays whichever of the two is lower. The revocable-trust figure could therefore be below Rs 35,00,000. Nothing changes for Route B, where the gain is exempt either way.

What Route B gives up. The trust does not exist until Mr Sanghvi dies, and then not until the Will has been through probate. Until that is done, the Rs 3,20,00,000 property is not being administered by any trustee for his son's benefit. If he wanted the professional trustee in place and running the arrangement while he is alive - and, in a case like his, watching it work before he dies is the point - Route A is the only one that delivers it, stamp duty and all.

And one thing neither route pays. When the trustee later distributes assets to the beneficiary, no stamp duty applies. Duty sits on the transfer deed, not on the distribution.

Chapter 14 (Basics of Estate Planning), section 14.3, introduces the testamentary trust among the elements of an estate plan, with its probate consequence. Chapter 15, section 15.6.13, Stamp Duty and Capital Gains Tax on asset transfer, gives Article 58 of the Indian Stamp Act, 1899, the no-stamp-duty position for a settlement through a Will, section 47(iii) for an irrevocable trust, the taxable position for a revocable trust, and the exemption for a testamentary trust. Expect a question contrasting the three routes on capital gains, or one asking whether a trust created by Will needs probate - it does.

• A testamentary trust goes through probate. It is subject to the rulings under the Will, which is the price of creating it that way.
• Three routes, three capital gains answers. Irrevocable trust: exempt under section 47(iii). Revocable trust: taxable. Testamentary trust: exempt, because the transfer is as per the Will.
• The stamp duty exemption is specific to settlement through a Will. A lifetime settlement of immovable property through a registered document does attract duty, at state rates.
• Stamp duty is on the transfer deed, not on the distribution. Nothing further is payable when the trustee distributes to beneficiaries.
• Article 58 of Schedule 1 of the Indian Stamp Act, 1899 is the entry for a trust settlement, and the rate is a state matter.
• Testamentary is not the same as irrevocable. They reach the same capital gains answer by different routes, and a testamentary trust is created by a Will while an irrevocable trust can be created at any time.
• It cannot be changed after death, but it can be changed before. The Will that creates it can be revoked or altered by the testator at any time while competent, so the trust is not fixed until he dies.
• A Living Will is not a testamentary trust. A Living Will is an advance directive written primarily for physicians about end-of-life care.