Indian Trusts Act: Regulating of trusts and their operation

Trusts are not-for-profit organisations formed for charitable purposes. In India, the Indian Trusts act 1882 governs Private trusts.

Trusts get established for charitable purposes like providing relief for poverty, education, employment, medical facilities, etc.

A trust is a relationship where the owner or trustor (i.e. first-party) of the property assigns its property to the trustee (i.e. second party) for the benefit of the beneficiary(i.e. Third-party).

Trust refers to a fiduciary relationship between two parties in which one party confers the right over property or an asset to another party.

Establishing trusts protects the trustor’s property or assets to distribute among the beneficiaries according to the trustor’s wishes.

It is mainly done to save time, hassle-free distribution, and avoid inheritance and estate taxes.

The interest of beneficiaries is written under the instrument of trust and is called a trust deed. A settlor executes a trust deed to constitute a trust.

Definitions In Indian Trusts Act

As per the Indian trusts act 1882, section 3 trust gets defined as:

“an obligation annexed to the ownership of 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 the owner“.

A trustor or donor of a property is also known as the author of trust property. An author of trust property is also called a settlor of property.

A trustee gets conferred with property rights and is responsible for distributing or dividing the On completion of the trust’s purpose, the trust gets dissolved.

The term trustee gets defined under this act as the person who accepts the confidence is called the “trustee” who enjoys the benefits of the property or the particular asset.

The beneficiary is the person for whose benefit the trustee holds the property or assets so that beneficiary gets benefited from it in the future. A beneficiary can be an individual or group of individuals.

The “beneficial interest” or “interest” is his right against the trustee as owner of the trust property.

An instrument by which the trust gets declared is called the “instrument of trust”.

Why should society get formed?

A society is an organised group of people who join to achieve particular purposes like promoting charity, education, literature, scientific work, etc.

Society has a democratic set-up with membership and an elected body to manage the society.

Societies are established and governed under the societies registration act 1860.

A minimum of seven persons is essential to incorporate a society to sign a memorandum of association and file it to the registrar of companies.

The memorandum of the association consists of all the required details of the society with its objectives signed by the consent of all the members forming the society.

A managing committee or governing council usually manages societies. These societies mainly get formed by memorandum of association. There is a minimum of seven people required to form a society.

Society is obliged to file a list of names, occupations, addresses of the managing committee to the registrar annually. It is also a non-profit organisation. It is an organisational body, and this body can be elected to manage it.

If any of the body members wants to exit the body, society prescribes a feasible procedure for the exit of its members.

The members of a society existing at the time of registration can be in the body according to their wish and can opt-out anytime, which trustees are not entitled to do so.

Dissolution of a society

A society will exist till perpetuity, but its members and objects can get changed. The consent of all partners can wind up a society.

Dissolution by consent

A society can be dissolved easily with the consent of 3/5th of the total no. of partners. After the partners agree to dissolve the company, the settlement of claims and liabilities should occur promptly.

If any dispute arises between the governing body and members of society, then the matter should get referred to the principal court of original civil jurisdiction in the society’s jurisdiction.

Suppose any government is the member, sponsor or major contributor to a society registered under the society registration act. In that case, 1860, then, it cannot be dissolved without the consent of the concerned government.

Dissolution by court

A court can dissolve a society referred under section 13 of the act under the following grounds:-

1. Society contravened any provision of this act or any other law for the time being in force.
2. The number of members of the society is below seven.
3. Society gets defunct for more than three years preceding the date of such application.
4. The society fails to pay its debts or meet its responsibilities and is declared insolvent.
5. The activities or proposed activities of the societies are opposed to public policy.

Matters of profit after the dissolution

As per the societies registration act 1860, section 14, the members do not have the entitlement to draw profits from the property left out from settlement after the dissolution.

If any property is left out after settling all the society’s debts and liabilities, it will not settle upon its members. As per the provisions of this section, the left out or remaining property will go upon any other society, decided by the consent of at least three-fifths of the total number of members.

Why is it essential to form a Trust?

It requires mainly two members to form a trust, so even two family members can form a trust.

If the trustor wants the trustee to hold the office till the lifetime, then the election is not an option. There is flexibility and transparency in the division of benefits of the property and assets.

It is an arrangement between parties whereby one party confers the rights of his property and assets over another party for the benefit of any third party.

The private trusts are governed by the Indian Trusts Act, 1882 in India. The general laws apply to public trusts except for a few states, such as Gujarat and Maharashtra, which have state laws.

It is a non-governmental organisation and non-profit organisation working for charitable purposes and the welfare of society.

It gets constituted by a trust deed entered into by the trustor and trustee. And it prescribes the guiding principles for the division of benefits of the property among the beneficiaries.

It is easy to run a trust as there is no compliance to be made by a trust annually.

Dissolution of trust

A private trust created may either be inter Vivos or ambulatory (revocable). And to dissolve or extinguish, specific grounds are essential, like:

• On completion of purpose of the trust, the trust gets dissolved.
• If there is a certain prescribed period in a trust deed, the trust relationship will be valid until that period and will end after such a period.
• If the property gets used for a purpose other than the one for which trust is made, the trust comes to an end.
• If the objective of the trust deed becomes unlawful after the introduction of new legislation, it automatically gets dissolved.
• If a property given for trust gets dissolved, the trust gets dissolved in itself.
• When the settler expressly revokes the trust, it comes to an end.

A trust cannot get revoked unless it is expressly declared in the trust deed to be revocable at the time of its creation. The conditions based on which trust can get revoked are:

• If the beneficiaries are legally competent to contract,
• If it got expressly declared in the non-testamentary instrument or orally that the author of the trust may revoke the trust
• The author of the trust property can revoke the trust at any time in case of debts before it gets conveyed to the creditors.
• If the trustor feels that there will be uncertainty in the existence of trust property, then he can dissolve the trust.
• The trust will get revoked if found that it gets obtained by fraud, undue influence or misrepresentation, etc.
• If the trust deed gets executed under any mistake or misapprehension

An irrevocable trust can get revoked with the consent of both the settlor/trustor and the beneficiary. If the trustor/settlor dies, the beneficiary’s consent is required, which should be done in the court of law.

Suppose a trust property is conferred to the trustee by a will created by the property owner. Then the owner is entitled to revoke the trust at any time during his lifetime. After the death of the settlor, the trust becomes irrevocable.

Key Differences between trust and society

Trust vs Society

There are noticeable differences between trust and society. These are:-

• A trust is a legal relationship where the owner/settlor/trustor of the property (i.e. first-party) transfers the property or asset to the trustee (i.e. second party) for the benefit of the beneficiary (i.e. third party).

  Society is an association of persons registered to satisfy literary, scientific or charitable purposes.

• Trusts are formed and registered under the Indian Trusts Act, 1882 while,

  Societies get incorporated under the Societies Registration Act, 1860.

• There should be a minimum of two members in a Trust while,

  A minimum of seven members in society are required in a society.

• A Trust is constituted by a Trust deed while,

  A Society is constituted and regulated by its Memorandum of Association and Rules & Regulations.

• A trust can get controlled only by one person, i.e. trustee whereas,

  In the case of a society, a democratic control in the society where decisions are taken by voting.

• A trust gets managed by a centralised system of its board of management containing trustees only,

  In the case of society, committees, trustees, councils, directors, governors, etc., are responsible for its governance.

• The appointment of a trustee depends on the will of the trustor while,

  In the case of society, appointments of members can be made by-election.

• Trusts are not allowed to comply with any mandatory requirement while,

  Societies are required to file the list of names, occupations and addresses of the managing committee members of the society to the Registrar annually

• A trust can get registered in front of the deputy registrar of the state while,

  A society can get registered by the registrar or deputy registrar of the state.

Brief on Indian Trusts Act

Private trusts are governed in India by the Indian Trusts Act, 1882.

The general laws mainly govern public trusts, and specific states like Gujarat and Maharashtra govern the public trusts.

The Indian trusts act 1882 defines trusts under section 3 of the act. Chapter II of the act also prescribes the provisions for creating trusts between trustor(s) and trustee(s).

It also mentions the rights and powers of trustees simultaneously with the duties and liabilities of trustees.

It prescribes the provision for disabilities of trustees and grounds for vacating the office of trustee.

Even the beneficiary has some rights and liabilities as per the provisions of this act.

Indian trusts act handles the creation of private trusts for the charitable purposes of designated beneficiaries instead of being used for public benefit.

Conclusion

Both the societies and trusts get recognised as legal entities as well as receive tax benefits.

A trust is a system of the relationship of a particular property or assets among trustor, trustee and beneficiary for donation, safekeeping and use of that property and asset.

In this relationship, the property gets transferred by transferring the ownership to the trustee, who becomes the property’s new owner. Ownership gets transferred when the trustee should comply with the objective for which property gets transferred to the trust.

Trust is a legal arrangement between parties while society is an association of persons, but both get formed to achieve similar objectives, i.e. charitable purpose.

Unlike societies, trusts are easy to constitute with a minimum requirement of two members only.

Trusts cannot easily get wound up, as it is revocable, but societies can get dissolved by prior permission of three-fifths members.

Indian trusts act prescribes the duties, liabilities and disabilities of trustees, in contravention of which trust agreement gets revoked.