What is a Trust, How Does a Trust Work

• Public trust
• Private trust

 

A public trust is created for religious and charitable purposes or for community development. This trust cannot be used ttransfer wealth tyour beneficiary (children).Nformal deed is required for creating a public trust.
A private trust is used ttransfer wealth tyour heirs (children).These trusts have tbe compulsorily created/registered and Governed under the Indian Trusts Act 1882.

In a private trust you (Settlor) can transfer your movable property such as a car as well as immovable property such as property or land tthe trustee (person whholds the property on behalf of your beneficiary/children). A formal document or an agreement is necessary if the trust holds your immovable property such as land or property. This agreement is not necessary for movable property such as a car.

You can transfer shares/mutual funds, fixed deposits, cars, land, apartments/house, gold, art as well as antiques tthe trust.

What are the benefits of a trust?

How does a trust work?

In a trust you the settler (owner of the property) transfer your assets ta trustee (could be your lawyer) thold them on behalf of your beneficiary (children).The trustee is the executor (manager of the assets) on behalf of your beneficiary and ensures that your wealth reaches the beneficiary irrespective of what happens tyou.

Revocable trust: The trust can be revocable where your assets even though transferred tthe trust are still yours. You can change the beneficiaries of the trust. If you have been estranged (separated due ta fight) from one of your sons and daughters and left him/her out of the trust and now you are back on friendly terms you can make him/her a beneficiary (share in your property) if the trust is revocable.

Irrevocable trust: In an irrevocable trust after you transfer your assets tthe trustee you nlonger are the owner of your assets. The trustee is the owner of the assets on behalf of your beneficiary. You nlonger own these assets and they now belong tyour children. The trustee will hand over these assets tyour children at the specified time say when the child is 18 years of age.

If you have transferred your property tyour children and left one of your child out of your property due ta fight which is now patched up (over) you cannot add him/her as a beneficiary unless your other children agree tthis if the trust is an irrevocable trust.

An irrevocable trust protects your assets as in case you suffer a business loss or a divorce your assets which have been transferred reach your children as your creditors or your separated wife cannot touch these assets.

What should you take note of when creating a trust?

How is the private trust taxed?

In a non discretionary trust all income obtained from the instruments (property or land) transferred tthe trust is taxed in the hands of the beneficiaries (your children).
If your child is a minor this income is clubbed teither your income or your spouse’s income depending on whearns more and taxed.
In a discretionary trust the income from your assets transferred tthe trust are taxed in the hands of the trust.