A Brief Overview Into The India Trusts Act, 1882

KEY TAKEAWAYS

• The India Trusts Act, 1882 is the law followed for private trusts in India. A trust allows the trustee to hold assets on behalf of the beneficiary.
• The parties in a trusteeship are; Author of trust/trustor (one who creates the trust); the trustee (one who holds the trust with confidence of author) and; the beneficiary (third party who benefits from the trust).
• A trust can be created by a person who is competent to contract, in an explicit or implicit manner. The author must communicate the purpose, beneficiary, and property of the trust when showing intention of entering into a trusteeship agreement.
• The trustee is responsible for preserving the trusteeship property, and may get reimbursement from the property if they pay from their own pocket to protect it. If the trustee breaches the trust, they are liable to compensate the damage to the beneficiary.

INTRODUCTION

The India Trusts Act, 1882, is the law that governs private trusts and trustees in India. The Act addresses the creation of a trust, types of trust, parties to a trust, and the dissolution of trusts.

A trust, as provided under Section 3 of the Act is 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”. Simply understood, a trust is created when one party (the (trustor) places their ‘trust’ or confidence in another party (trustee), for the benefit of a third party (beneficiary). It allows the trustee to hold assets on behalf of the beneficiary.

One of the primary benefits of establishing a trust is that it allows the trustorto manage his property with the help of another person for the benefit of a third party. It is easier to obtain legal consent, certificates or authorization in a trust, distinguishing them from ‘wills’. This makes the management of property easier. Moreover, trusts are often used for charitable purposes.

THE PARTIES IN A TRUST

1. Trustor/ Author of the trust: This is the entity that creates the trust. They declare their confidence in the trustee.
2. Trustee: The person appointed to control the administration of the asset, until it is transferred to the beneficiary. A trustee should be a person who is competent to contract under the Indian Contract Act 1872. This means they should have attained the age of majority, should not be of unsound mind, or should not have been disqualified from contracting by any law. Trusteeship is voluntary and a potential trustee can choose to reject it, but if the trusteeship is accepted, then all rights, duties, and liabilities of a trustee are entrusted to the trustee.
3. Beneficiary- This is the party for whose benefit the trust is created. They will benefit from the trust in the future. They have the right to profits and rents obtained from the trusted property. They may also compel the trustee to do or not do something to prevent the breach of trust. The beneficiary can be anyone capable of holding property (Section 9).

RIGHTS AND LIABILITIES OF THE TRUSTEE

Rights

The trustee is entitled to the title of the trust deed and other related documents. (Section 31)

The trustee may reimburse themselves from the trust property for all expenses incurred while preserving the property, or protecting the beneficiary. (Section 32)

If a person other than the trustee breaches the trust from which they gain a benefit, the trustee has the right to get indemnified for the loss. (Section 33)

At the end of the trusteeship, they may examine and settle the accounts related to the trust property. (Section 35)

They also enjoy some authority over the property to maintain and protect the property. (Section 36)

In some cases, the trustee may have the power to sell the trust property in parts or whole, via an auction. (Section 37-38)

Liabilities

The liabilities of the trustee are given in Sections 23-30 of the Act. If the trustee is involved in a breach of trust, they are liable for paying the damage they caused to the property. If the breach causes a loss, it will be borne by the trustee, if it causes some unfair benefit or profit to the trustee, the profit will be transferred to the beneficiary. Generally, a trustee is not liable for breach of trust by a co-trustee, but Section 26 prescribes the scenarios where the trustee may be made liable.

ESSENTIALS TO CREATE A TRUST

The trust must be permitted by law. A ‘lawful trust’ is defined by Section 4 of the Act which asserts that a trust must be “permitted by law; not against the provisions of law; not fraudulent in nature; not regarded as immoral or against the public policy; and, should not involve any kind of injury or harm to any person or property of another”.

It can be created by any person competent to contract. Section 6 delineates the creation of a trust. It reads:

“A trust is created when the author of the trust indicates with reasonable certainty by any words or acts (a) an intention on his part to create thereby a trust, (b) the purpose of the trust, (c) the beneficiary, and (d) the trust-property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust-property to the trustee.”

This Section suggests that trusts can be implied, but in the communication by the author must include the intention to create the trust, the purpose for which the trust is created, who will benefit from it, and what property it will cover.

A further reading in the Act shows that the subject matter of the trust must encompass property that can be transferred to the beneficiary, and must not be a beneficial interest under an already subsisting trust. (Section 8)

EXTINCTION OF TRUSTS

The process to put an end to trust is specified under Sections 77 and 78 of the Act. Section 77 states a trust will be ‘extinguished’ or dissolved when it fulfils its purpose; or the purpose for which the trust was created becomes unlawful; or fulfilment of the purpose becomes impossible. The final way to end the trust is by revocation which is given in Section 78.

CONCLUSION

The India Trusts Act is the law governing private trusts in India. It allows the trustor to give up their rights over a property and hand it over to the trustee until the beneficiary is in a position to receive benefits. In 2015, the Indian Trusts Amendment Bill (2015) removed some “archaic” provisions of the Act. This amendment provided more autonomy to trustees and allowed them to invest in securities notified by the Government by repealing Sections 20 and 20A of the Act. This amendment removed restrictions on the investment of assets by the trust, and at the same time, it enabled the Government to scrutinize the trusts' investments at will.