What is a Family Trust? - Network FP
February 18, 2020

What is a Family Trust?

A Suresh
Executive Director, PropSevaⓇ

What is a Family Trust?

A “Trust” is an obligation annexed to the ownership of the 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 owner. (Sec 3 of Indian Trust Act, 1882)

The person who reposes and declares the confidence is called the ‘author of the trust’; the person who accepts the confidence is called the ‘trustee’; the person for whose benefit the confidence is accepted is called ‘beneficiary’; the subject matter of trust is called ‘trust property’ and the instrument by which the trust is declared is called the ‘the instrument of trust or trust deed’.

In simple words, a “trust” is a relationship where the property is held by one party for the benefit of another party.

A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is

  • Forbidden by law
  • Defeat the provisions of any law
  • Forbidden by law
  • Involves or implies injury to the person or property of another
  • Immoral or opposed to public policy

A Family or Private Trust can be created for any lawful purpose where the beneficiaries are family members of the Author of the trust. The purpose of creating a family trust is to protect and manage family assets for current and/or future generations.

Trust is one of the options to be considered in Succession Planning. A Family Trust can be created for the benefit of Spouse, Minor Children, Dependent Parents, Disabled Dependents or for the benefit of other relatives.

  1. Spouse: A trust is one of the most appropriate alternatives to protect and manage the assets for the benefit of the spouse where the spouse is incapable of managing such assets or spouse is spend-thrift. Trust on Trust when you don’t trust the spouse’s competence in the management of assets. The expertise of trustees can be a great value in the management of the estate.
  1. Minor Children: A trust may be created for the management of assets on behalf of minor child/children. This is one of the appropriate alternatives especially for a single parent with minor children. In the event of demise of the parent, a trust can take control and management of assets of the minor child and safeguard and protect the assets.
  1. Dependent Parents: Where parents are financially dependent, a trust provides an effective mechanism to provide financial support especially in the event of the demise of son/daughter. Unlike WILL, the assets are not transferred to the parents absolutely, but the benefits of the assets held by the trust are provided. Such an arrangement provides simple management of assets for the benefit of parents.
  1. Disabled Dependents: One of the major concerns for the parents/guardians of specially-abled and intellectually challenged child is to provide financial security in the absence of parents. Succession to the property through WILL is not the right approach as these children are not capable of managing the assets nor leaving the estate meant for this child with the other family members. Family Trust is the most effective alternatives to provide financial security and provide for the welfare of such child.
  1. Other dependent relatives: Trust is the best option to provide financial support where relatives are financially dependent. The objective of this trust is to provide for the welfare of the dependent relatives and upon their demise the property held by the trust can be conveyed to legal heirs of the Author of the trust.

Succession Planning, by way of trust, to provide the benefits and transfer of estate is a simple and effective way than intestate and by way of WILL. The benefits of family trust:

  • Protect certain assets against the claim of creditors
  • Preservation of wealth
  • Income Tax benefits
  • Flexibility in the distribution of income and assets held by the trust
  • Avoidance of Probate
  • Minimize disputes among family members

A trust can be a ‘living trust’ or ‘testamentary trust’. Living Trust is such trust which comes into effect during the lifetime of the author of the trust. A testamentary trust is created by way of WILL and comes into effect upon the death of the Testator.

A trust can be created with whatever resources one has. There is no minimum requirement of corpus. The corpus of the trust can be augmented with further contributions and with returns earned on the assets held by the trust. A trust also can receive gifts from well-wishers and others.

A well thought out Succession Plan can help in minimizing the conflicts and holistic distribution of assets to the family members. Private family trust would fit the needs with few administrative hassles and can be a tax-efficient in having an effective Succession Plan.

You must trust and believe in people or life becomes impossible………… Anton Chekhov


5 Thoughts to “What is a Family Trust?”

  1. PRAMOD BAJAJ says:

    Very well articulated in simple language.

  2. RAJESH JOGDAND says:

    I want to know, whether, can a Family Trust be formed for all the families or for all the members ( parivar) of one ‘ Surname’ members? Like ‘ pura khandan ka ek trust’ Is it beneficial to form a Full parivar trust?

  3. Romil says:

    Can a private or family trust get 100% tax exemption on income via 12AA ?

    Can a Private Indian Trust acquire assets overseas?

  4. Ajay Sehgal says:

    Yes, but one person needs to be settlor of the trust and all others can be beneficiary of the trust. In addition to Settlor and Beneficiary, trust needs to have the Trustees who will be the custodian of the Trust Assets and also works as executer of trust. Trustees can be family members or any corporate who is willing to join the trust as Trustees. It is always recommended to have corporate Trustees to ensure there is no conflict of interest at the time of distribution of Trust Assets.

  5. Sadique Neelgund says:

    This is a wonderful writeup. Thanks for sharing

Leave a Reply

Your email address will not be published.