Creation of trust in a will - a legal eye view
Everyone needs to ensure that he has earned enough to maintain a comfortable life and following his death what might happen to his property. A person through a Will can make certain that how his property should transfer and to whom it shall transfer. In case a person deceases without leaving behind his Will, his property would be relinquished by the means of law through intestate succession and not testamentary succession. Therefore, it is favorable that one should create a Will to ensure that his/her actual preference is followed and the property is transferred. Will is a consequential testamentary instrument through which a testator entrusts his property as per his wish. The significance and influence of a will can be observed through the dispute which arose concerning the will of Priyamwada Birla, widow of M.P.Birla, which decided the fate of the Birla Group of Industries. Any person who is above 21 years of age in India can make a will. It is always sensible to write your will in your handwriting, as the same can be substantiated later in event of any query raised by the relatives. Although the majority of the private asset-holding trusts are initiated during the lifetime of the settlor, there is another categorization of trusts widely known as testamentary trusts. Testamentary trusts (or the ‘Will-trusts’) are established through testamentary instruments for instance a Will is efficacious only upon the demise of the creator. This article strives to provide an overview of Trusts in a Will within the ambit of Indian law, and proffer cognizance with respect to their creation, purpose, advantages, and disadvantages.
A trust is a legal regime for splitting the ownership and the profitability of an asset. By way of illustration, if you hold your property in a trust for somebody else, you would have legitimate ownership, but they will be having the right to live or collect any rental income from the property. Trustees are the people who have legal ownership of an asset, while the beneficiaries gain something from the property. Trustees take charge of the assets of the trust as a representative of the beneficiaries, and it is requisite for them to act in their interests. Every trust is made by formal paperwork. Speaking of a will trust, the will itself is the trust documentation. A will trust is any trust that is created by a person’s will and comes into force succeeding his death.
A testamentary trust (Trust under Will or a Will Trust) rises upon the demise of the testator, which is set down in his/her will. A will can comprise multiple testamentary trusts and may address all or any portion of the property.
For the sake of clarifying a valid testamentary trust, the person making it (testator/settlor) must prepare a well-grounded will. Under the Indian Succession Act, 1925, a person of sound mind, who has attained majority, may make a valid Will in writing and the presence of two attesting witnesses. Furthermore, it’s mandatory to make a Will in the exercise of the testator’s free agency, and not under the influence of coercion or fraud.
To formulate a well-grounded will, one has to neither pay for a stamp duty nor a registered Will. Private trusts come under the purview of The Indian Trusts Act, 1882 (“Trusts Act”). The India Trusts Act, 1882 (act) governs private trusts. Public trusts are further classified into charitable and religious trusts, and the Charitable and Religious Trusts Act, 1920, (CRTA) the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Societies Registration Act, 1860 and the Bombay Public Trust Act, 1950 are the statutes most commonly relied upon to determine the recognition and enforceability of public trusts. Under the aforementioned Act, to create a testamentary trust, the testator must entrust all or part of his property under the Will to a trustee for holding and using it for stated grounds, for the interest of one or more beneficiaries.
Hence, a testamentary trust must meet the specific obligations for formulating a valid trust, listed as follows:
i.) Resolution – The intention to work out a trust must be perceptible through the language of the Will, in other sense; it must be ‘expressed’, and not ‘inferred’. There must be absolutely no obscurity in the language used to formulate a trust in the Will.
ii.) Objective – The purpose for the formulation of the trust should be distinctly demonstrated in the Will. While implementing the terms of the trust, the trustee is obliged to attain the objective of the Will.
iii.) Beneficiaries – The Will should also point out with rational reliability that the persons for whose benefit the trust is created namely, beneficiaries. In India, a private trust must prevail for determinable beneficiaries; it cannot prevail only for a purpose.
iv.) The subject under consideration – The asset for which the trust has been formulated must be mentioned and delineated with reasonable certitude.
It is predominant for the aforementioned themes as well as the fundamental terms and principles governing the trust to be outlined in the subject matter of the Will, or as an enclosure to the Will.
TYPES OF TESTAMENTARY TRUSTS
Conventionally, trusts are a way of transferring assets and additionally, they can be bifurcated into various types, contingent upon one's objective. A family trust holds property for your family, while a spousal testamentary trust holds assets for a living spouse. If the purpose of the trust is to aid a spouse’s future estate value, then it might be a bypass trust. In case the testamentary trust holds an endowment for a beneficiary with exclusive purposes, then the person may lookout for a special needs trust. The majority types of trust according to a person’s preference can be created as a testamentary trust. Nevertheless, a complex trust might require painstaking working.
TESTAMENTARY TRUST VS LIVING TRUST
A living trust is created when the grantor is breathing and the document can be amended, whereas a testamentary trust is created when the grantor is dead, so it cannot be amended. Living trusts are generally revocable, while testamentary trusts are irrevocable. An additional difference is that a living trust provides more seclusion because assets that are mentioned in the trust never go through probate. The stipulations of the trust, as in, the identity of the trust beneficiaries, and what assets they acquire— are safeguarded from the public and in due course become part of the public archives.
ADVANTAGES OF A TESTAMENTARY TRUST
One may ask, “What are the actual benefits of a Testamentary Trust?” Well, the Testamentary Trusts can be the best way possible to strengthen the none’s Estate Planning and corroborate that the assets are dispensed according to his/her preference. Some of these advantages are listed below:
I. Asset Protection: The foremost benefit considered is the legal protection accorded to one’s assets subsequent to his/her death. Such Trusts can safeguard the property against legal repercussions or possibly irrational financial decisions made by the beneficiaries.
II. Taxable Perquisites: Testamentary Trusts do not need beneficiaries to pay taxes on income rendered from the trust. However, there are income taxes to appraise the undistributed income.
III. Unlimited Beneficiaries: There can be an unlimited number of beneficiaries while formulating Testamentary Trusts. Further, with different Trusts, these proportions can be personalized.
IV. Unaltered Pension: Under the present pension rules, the decided amount will not be conditional upon the actuality of a Trust or not. In other respects, one's child would still be eligible for the above-mentioned pension despite obtaining funds from the estate.
V. Circumventing Transfer Fees: There are no additional taxes deducted when assets are passed on from an executor to the trustee. Trusts can also facilitate circumventing taxes on any proceeds from life insurance payments.
DISADVANTAGES OF A TESTAMENTARY TRUST
The drawbacks of testamentary trusts are that they are not helpful when it comes to curtailing taxes or circumventing probate.
1. Cost – Testamentary trusts are convoluted, they cost high to produce and involve ongoing accountancy as well as other fees during their performance.
2. Intricacy – Testamentary trusts are complicated, difficult to interpret and they have more complicated administration prerequisites than a conventional will.
3. Uncertainty- They lack certainty on the grounds that the profits of a testamentary trust will always remain in existence. This is remarkably significant in respect of the potential tax benefits.
Managing Trustees, Nagore Durgah v. Commissioner Of Income-Tax, Madras - On behalf of the appellant, it was contended that as the properties vested in the managing trustee and he received the income in his own right and not on behalf of the beneficiaries, though for their benefit, the concerned income in the hands of the managing trustee fell outside the purview of Section 41 of the Act. In the Muslim Wakf case, the property vests in the Almighty; even so the mutawallis are brought under the section. Thus, for a few people enumerated in the section property vests and in others it does not.
Padmavathi And Another v. Raghu Tippanna Ruge andOrs.- A trust is not complete until the trust property is vested in trustees for the benefit of the cestui que trust. If there was only the manager he would be holding it on behalf of the owner but, in the case of a trustee, he would not be holding it on behalf of the owner or on behalf of the beneficiary, but for the benefit of the ‘cestui que trust’. The distinction between ‘ownership’ and ‘legal ownership’ is clarified in the observation made on page 50 of Mulla’s T.P. Act. The legal ownership is referred to as the legal estate in this observation. The observation is ‘Thus in a trust of land the legal estate is in the trustee and the interest of the cestui que trust or beneficiary is an interest in the land called the equitable interest.’ Hence, what vests in the trustee is only the legal estate or the legal ownership as held in the decision of the Supreme Court cited above.
Mahant Shri Srinivas Ramanuj Das v. Surjanarayan Das andAnr.: In the said case the apex court clarified the distinction between the Public Trust and Private Trust as under:-
‘The distinction between a public trust and a private trust is, broadly speaking, that in public trust the beneficiaries of the trust are the people in general or some section of the people, while in the case of a private trust the beneficiaries are an ascertained body of persons. The beneficiaries of math are the members of the fraternity to which the math belongs and the persons of the faith to which the spiritual head of the math belongs, and constitute, therefore, at least a section of the public. Maths, in general, consequently, are public maths. We say nothing as to whether there can be private math or not. Mukherjea states at P.390, in his ‘Law of Endowments’, By private math should be meant those institutions where the head or superior holds the property not on behalf of an indeterminate class of persons or a section of the public but for a determinate body of individuals, viz., the family or descendants of the grantor.’
Several people who undertake estate planning prefer a Will, but there are few exceptional cases. Altering a Will becomes problematic if the testator becomes mentally or physically challenged. Hence, a will leads to conflict among the beneficiaries. One can steer clear of this nuisance by going for a trust which can be private or public. A Trust can be used as a source to curtail estate tax during transfer. It can also be used as a defense that permits to disparate the assets. In case a person goes bankrupt or encounters other financial crises, then the lender avail himself of the assets which are mentioned within the Trust. People, for their entire lives, strive and struggle to create assets for their family members. Notwithstanding the fact that they hardly contemplate the sanctioned way by which their assets should be passed on to the upcoming generation. What will happen to these assets on your sudden loss of life? This is the major apprehension for the majority of people amidst the coronavirus pandemic. Henceforth, estate planning comes into play. It is not just worthwhile for the extremely wealthy people, but for every other citizen. This is not just a post-demise or a post-retirement arrangement. Everyone must be prepared for unexpected possibilities and prepare adequately ahead of time. Consequently, with estate planning, delegation is effectively administered.
The article first published on Lexology.com and the same can be accessed here.