Trust
Also written Trust (section 3)
A legal arrangement in which property is transferred to trustees, who hold legal title and control it for identified beneficiaries on terms set out in a trust deed.
In plain language
A will says what happens to your property after you die. A trust lets you decide how property is to be used for someone's benefit, and puts people in place to make sure it happens — during your life and after it.
The workbook's definition: a legal arrangement that allows the owner of property to define how the property is to be used, for the benefit of identified beneficiaries of the trust.
Three roles make it work. The settlor creates the trust and transfers property to it. The trustees hold the legal title and control the property. The beneficiaries are the people for whose benefit it is held. In estate planning the workbook lists trusts as the tax-efficient structure for managing an estate and making periodic payouts to beneficiaries.
How it works
Creation. A trust is created through a trust deed, which must:
- clearly state the intention to create the trust, with certainty
- clearly identify the property to be transferred
- identify the beneficiaries
- list the trustees and record their acceptance of the responsibility
The deed also defines the trust's purpose and the powers of the trustees.
The property. It may be movable or immovable. Ownership must be transferred to the trust when the trust is created — a trust that has not received the property holds nothing.
Who can be a trustee. The settlor, the beneficiaries, and any other persons they can depend on to give effect to the trust's purpose.
Registration.
| Property in the private trust | Registration |
|---|---|
| Movable property only | Not required |
| Includes immovable property | Must be registered under the Registration Act, 1908 |
Protection. An irrevocable trust is protected from the bankruptcy of the settlor, which the workbook describes as a way to protect the interests of dependents.
A trust you already use. The NPS Trust itself is a trust set up under the Indian Trusts Act, with the PFRDA as its settlor, holding subscribers' assets for their beneficial interest.
A worked example
Illustrative figures. Mr and Mrs Menon, both retired, have a son with a disability who will always need financial support. They worry about what happens to him after they are gone, and about their own business debts from years ago.
They create a private irrevocable trust:
| Element | In their trust |
|---|---|
| Settlors | Mr and Mrs Menon |
| Beneficiary | Their son |
| Trustees | Mrs Menon's brother and a family friend, who sign their acceptance |
| Property | Mutual fund units worth Rs 60 lakh |
| Purpose | A monthly payout for the son's care and living expenses |
Because the property is movable only, the trust does not need to be registered. The units must actually be transferred into the trust's name at creation.
Two years later they add their second flat, worth Rs 90 lakh, to the trust. Now it holds immovable property and must be registered under the Registration Act, 1908.
Trust property = 60,00,000 + 90,00,000 = Rs 1,50,00,000
Because the trust is irrevocable, it is protected from the bankruptcy of the settlor: if Mr Menon were ever declared bankrupt over his old business debts, the Rs 1.5 crore held for his son is the protected structure the workbook describes. Neither a nomination nor a will does this job — a nominee receives money only on death, as a trustee for the legal heirs, and a will takes effect only on death.
Why NISM asks about it
Chapter 8, section 8.1.6 (Estate Planning), lists trusts among the tools for estate planning and defines the arrangement, and section 8.2.7 sets out what a trust deed must contain and when a private trust must be registered. Chapter 4 describes the NPS Trust as a trust under the Indian Trusts Act. Expect questions on the roles of settlor, trustee and beneficiary, the registration rule for immovable property, and the bankruptcy protection of an irrevocable trust.
Common exam traps
- Trustees hold the legal title, not the beneficiaries, and exercise control in the beneficiaries' interest.
- Ownership must transfer at creation. An intention to transfer later does not constitute the trust property.
- Registration turns on immovable property. A private trust with only movable property need not be registered; one with immovable property must be, under the Registration Act, 1908.
- Bankruptcy protection is for an irrevocable trust. The workbook does not extend it to trusts generally.
- The settlor can also be a trustee, as can a beneficiary. The roles are not mutually exclusive.
- A trust is not a nomination. A nominee receives money as a trustee for the legal heirs; a trust is a standing arrangement defined by its deed.
Where this is taught
- Series X-B · Chapter 15: Tools for Estate Planningintroduced here
- Series XVII · Chapter 8: Special Considerations in Retirementintroduced here
- Series X-A · Chapter 19: Ethical Issuesintroduced here
Related terms
- NominationThe account holder's written direction naming who receives the securities on death — up to ten nominees for a demat account, with percentages that must total 100, mandatory for single holdings.
- Trust deedThe registered instrument, executed by the sponsor in favour of the trustees, that constitutes a mutual fund as a trust, names its first trustees and governs its operations under clauses SEBI prescribes.
- Estate planningDeciding during your lifetime who is to receive which of your assets after your death, and documenting it — mainly through a Will and nominations — so heirs can claim them easily and cheaply.
- Irrevocable trustA trust whose settlor cannot take the property back, which is why the workbook records that it is protected from the settlor's bankruptcy and usable to secure the interests of dependents.
- WillA written legal declaration of how a person wants their assets distributed after death. Registration is not compulsory but preferable; without a Will, assets pass under personal laws.
- SettlorThe party who brings an AIF trust into existence — executing the trust deed with the trustee and conveying the initial sum that becomes the trust's first asset.
- Revocable trustA trust the settlor can revoke at his discretion or with the beneficiaries' consent. Income from a revocable transfer is taxed as the transferor's, so an AIF set up this way gets no pass-through.
- GiftA voluntary transfer of movable or immovable property without consideration from a donor to a donee — usually irrevocable, and exempt from tax when received from specified relatives, on marriage or under a will.
- Encumbrance certificateA document issued by the sub-registrar's office listing every recorded transaction on a property — sales, purchases and mortgages — used to confirm the seller genuinely holds clear title.
- EstateEverything a person owns and owes at the time of death — real estate, investments, insurance policies, bank accounts and items of value — the pool that estate planning organises for distribution.
- Residuary clauseA clause in a will that directs any asset not specifically named in it to one identified beneficiary, so nothing is left without a named recipient.
- POA registrationRegistering a power of attorney with the authorities — mandatory only where it creates an interest in immovable property, and valuable otherwise because a registered POA cannot easily be challenged later.
- Testamentary trustA trust created through a Will, which takes effect on the death of the settlor - it is subject to the rulings under the Will and therefore goes through probate, but attracts no stamp duty and no capital gains.
- Trust perpetuitiesThe rule that a trust cannot last for ever: Indian law caps the period within which gifts in a trust must vest, and limits the accumulation of trust income to the transferor's lifetime or 18 years.