Estate Planning |
December 11What is a Trust ?
A trust is a fiduciary relationship in
which one party, known as a Settlor, gives another party, the trustee, the
right to hold title to property or assets for the benefit of a third party, the
beneficiary. Trusts are established to provide legal protection for the
trustor’s assets, to make sure those assets are distributed according to the
wishes of the Settlor, and to avoid or reduce inheritance or estate taxes.
a.) Settlor: A settlor is one
who creates the trust and reserves important powers with respect to the trust.
b.) Trustees: Who have fiduciary
responsibility to manage the trust assets for the benefit of the beneficiaries
as per the Trust Deed
c.) Protector: An individual or
a body who has limited powers to have an oversight over the working of the
Trustees. Has the power to remove the trustees in the event of Trustees working
against the interest of the beneficiaries without going through the court
process.
d.) Beneficiaries: Individual or
a class of individuals who will receive the benefit from the Trust Funds. It
can be of two types – Income Beneficiaries and Corpus beneficiaries. Same
individual can be both or they can be separate depending on how the Trust Deed
defines it.
e.) Trust Deed: It is a legal document
written on the instructions of the Settlor (owner of the Assets). The Trust
Deed contains details on who the beneficiaries are, how and when they will get
the income or the corpus (capital), and instructions on how the assets should
be managed.
f.) Trust Property: The property
held by the trust is called the trust principal (aka trust corpus, trust res).
The trust can only exist if it has property, since if it holds no property, it
serves no purpose.
Beneficiaries may receive only the
income from the trust or may also receive some of the principal. However, once
all the property has been transferred to the beneficiaries, the trust naturally
terminates.
- Different Types of Trust:
The Trusts can be primarily
categorized on the basis of two factors; i.e. Public/Private or
Revocable/Irrevocable in nature of application.
i. Private
Trust - Private trust is a trust created for the benefit of
individuals other than a public or charitable purpose. It is created for the
financial benefit of one or more designated beneficiaries rather than for the
public benefit.
ii.Public
Trust - A public trust is created for the benefit of an uncertain and
fluctuating body of persons who cannot be ascertained any point of time, for
instance; a section of the public following a particular religion, profession
or faith.
iii.Revocable
Trust - A revocable trust is a trust whereby provisions can be
altered or cancelled dependent on the settler. During the life of the
trust, income earned is distributed to the settlor, and only after death does
property transfer to the beneficiaries
iv. Irrevocable
Trust - An irrevocable trust is a type of trust where its terms
cannot be modified, amended or terminated without the permission of the
settlor''''''''s named beneficiary or beneficiaries. The settlor,
having effectively transferred all ownership of assets into the trust, legally
removes all of their rights of ownership to the assets and the trust.
v. Discretionary
-An arrangement where the trustee may choose, from time to time,
who (if any-one) among the beneficiaries is to benefit from the trust, and to
what extent
vi Determinate
-The entitlement of the beneficiaries is fixed by the settlor at the
time of settlement or by way of a formula, the trustees having little or no
discretion