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Business News/ Money / Calculators/  De-jargoned: Trust
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De-jargoned: Trust

A trust's basic objective is to protect interests of beneficiaries

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The word “trust" means the ability to believe in another entity or person. In legal parlance, a trust is an arrangement where a person or an entity can act and hold assets on behalf of one or more beneficiaries. In India, trusts are governed by the Indian Trusts Act, 1882. There are three parties involved. First is the person who originates or starts the trust and declares confidence; the author of the trust or the settlor. The second is the person who accepts the responsibility or the confidence—the trustee. Then there is the person for whom the trust is set up, the beneficiary.

Trusts are of broadly two types, private and public, with the basic objective of protecting interests of beneficiaries.

Private trust

As the name suggests, a private trust is around individuals and is created for the benefit of one or more persons. A common example is a family trust; a parent may create one for her children who aren’t yet adults or the purpose could be to create and protect a pool of investments from creditors, and so on.

Usually, the purpose of the trust is defined, like creating a pool of funds for a child’s education or a medical trust for parents. Such trusts come to an end when the purpose for which they were set up is achieved, or the defined time has expired. If none of the above has transpired, they compulsorily expire after 18 years of the death of the last beneficiary living at the time of creation of the trust.

A private trust is governed by the Trusts Act but is not applicable on property of a Hindu Undivided Family, Waqf and religious and charitable endowments.

A family trust can be set up by the settlor while she is living or as part of a will. Mutual funds are also a form of private trusts, created to manage a portfolio of securities for defined beneficiaries. In India, they are created under the trust umbrella and regulated by the Securities and Exchange Board of India.

Public trust

These are created with an objective to benefit an uncertain group of people who can’t be defined at any particular point in time. A very common example is a religious trust created for followers of that religion under an established religious entity. Unlike private trusts, which can come to an end in a matter of years, typically, a religious trust is permanent.

More often than not, a public trust is created for charitable purposes. Such trusts are governed by relevant personal laws. If religious and charitable trusts fulfil all conditions for charitable purposes, then their income is tax exempt.

A trust helps in creating a tax effective structure, among other things. In case of a private trust, since the trustee acts on behalf of the beneficiary, all benefits and deductions for tax are availed by the trustee and there may be no further taxes to be paid by the beneficiary on receipt of income from trust.

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Published: 19 Mar 2014, 06:46 PM IST
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