#TaxmannPPT | Taxation and Other Aspects of Private Trusts

Taxation and Other Aspects of Private Trusts

Presentation Prepared by Nitin Satani Ayush Agarwal

CA ROHAN SOGANI Speaker

DISCUSSION POINTS

Introduction to Private Trust Structure for Succession Planning

Overview of the Indian Trust Act, 1882

Tax Implications at the Time of Settlement of the Private Trust

Taxation of Income

earned by the Private Trust

Tax Implications on the Distribution of Assets on Termination of Trust or Otherwise

Effective Vehicle for Ring-fencing of assets

Implications under the Companies Act when a Private Trust holds Equity Shares

Applicability of FEMA on Private Trusts

TRUSTSTRUCTURE

Beneficiaries

Fiduciary Capacity to manage the TrustAssetsfor the benefit ofBeneficiaries

Tr ust Trustees

Settles/ Contributes the Trust Property

Settlor/ Contributories

SShhaarreess// IInntteerreessttssiinn eennttiittiieess Shares/ Interests in entities Physical Assets

ADVISORY BOARD TO SUPERVISE THE TRUSTEES

INDIAN TRUST ACT, 1882

• Section 3 of the Indian Trust Act, 1882 defines ‘Trust’ as: “an obligation annexed to the ownership of the property, arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefitoftheanother,orofanotherand theowner”

• Trust is not a separate legal entity. It is an obligation casted on the trustee by the settlor to employ the trust assets for the benefit of the beneficiaries

• Settlor / Author is the person who settles the trust. He can be a trustee or a beneficiaryaswell.

• Trustees are the persons who are bestowed with the responsibility of managing the assets of the trustandrightsand powersforwealthdistribution

• Beneficiaries are the persons for whom the trust has beensettled.

STRATEGIC CONSIDERATIONS

ROLES OF SETTLOR/TRUSTEE/BENEFICIARY

• ROLEOFTHESETTLOR

- Settlorhas no roletoplayintheoperations oftheTrust

- Settlortodecideon theOriginalTrustee,theTrustframeworkand initialbeneficiaries oftheTrust

• DUTIES&POWERSOFTHETRUSTEE

- TooperatetheTrustas pertheobjectsoftheTrust

- Tobuy/sellpropertyandinvesttheTrustmoneyandmonitor theinvestments

- Todistributeincome/assetsoftheTrust

- TogetreimbursementofexpensesincurredwhileexecutingobjectsoftheTrust

- Toaddorremovebeneficiary

- ToaddfurtherTrustees

• ENTITLEMENTSTOTHEBENEFICIARY

- EnjoyprofitsoftheTrustproperty

- ToexpecttheTrusteetoproperly protectand administerTrustproperty

- TocompeltheTrusteetoperformhis dutyproperly

TYPE OF TRUSTS

Type of Trusts

PRIVATE TRUSTS Vs. WILL

Particulars Possibility of Succession Planning

Name beneficiaries for property

Leave property to young children

Revise your document

Avoid probate

Attracts stamp duty on transfer of Immovable Property

Comes into effect after death

Imperative to structureSuccession Planning to mitigate levy of Estate Duty

TAXATION OF PRIVATE TRUSTS [1/2]

Specific Trust

Where Trust’s income does not include business income

Section 161(1)

• Trustees are taxed in the like manner and to the same extent as the beneficiaries

• Assessment to be in same status as thatof each of beneficiaries

Where Trust’s income includes business income

Section 161(1A)

• Taxable at MMR –subject to certain exceptions

Discretionary Trust

Where Trust’s income does not include business income

Section 164(1)

• Taxableat MMR –subject to certain exceptions

Where Trust’s income includes business income

Proviso to Section 164(1)

• Taxableat MMR –subject to certain exceptions

Trustee may be taxed in representative capacity in both specific and discretionary trust

TAXATION OF PRIVATE TRUSTS [2/2]

RATES APPLICABLE TO INDIVIDUALS WILL BE CHARGED IF ALL THE FOLLOWINGCONDITIONSARESATISFIED:

• Trustisdeclaredbyasettlorbyway ofaWill;and

• Trustisdeclared exclusivelyforthebenefit ofanydependent relative;and

• SuchTrustistheonlytrustsodeclared byhim

RATESAPPLICABLE TOAOPWILLBECHARGED INACASE WHERE:

• Noneofthebeneficiaries:

– hastaxableincome exceeding theBasisExemption Limit;or

– isabeneficiary under anyotherprivateTrust or

• Where the relevant income or part of the relevant income is receivable under a trust declared byanyperson byWilland such trustistheonlytrustsodeclared byhim;

GIFT RECEIVED BY PRIVATE TRUST

• TAXABILITY IN THEHANDS OF DONOR –Section47(iii)-Transaction Not regarded as“Transfer”

• TAXABILITY IN THEHANDS OF TRUST/DONEE:

• “Relative” incaseofTrust

• Section 56(2)(x) :

Provided that this clause shall not apply to any sum of money or any property received— (I) from any relative; or… (X) from an individual by a trust created or established solely for the benefit of relative of the individual;

• clause (i) of proviso –Relationshipto betested from recipient’sperspective i.e.itneedstobetested whether thedonor qualifiesasa‘relative’from theperspective ofrecipient

• clause (x) of proviso –For trusts, relationshipneedsto betested from donor’s perspective andnot from recipient’sperspective i.e.itneedstobetested whether beneficiaries for whose benefit the trust issettledqualifyas‘relative’from the perspectiveof donor

Where the member of the reporting company is a trust (through trustee), and the individual,-

RING-FENCING OF ASSETS [1/2]

• Private Trust has emerged as an effective vehicle for succession planning for BUSINESS HOUSES.

• Transfer of Personal Assets to Trust, so that these assets can be insulated against possible future defaults of the businesses.

• Insolvency and Bankruptcy Code, 2016 has ushered new framework which provides easier mechanism for lenders to initiate recovery proceedings.

Transfer of Personal Assets

Private Family Trust

RING-FENCING OF ASSETS [2/2]

• Supreme Court in LALIT KUMAR JAIN VS. UNION OF INDIA [2021] 127 taxmann.com 368 (SC) held that “Guarantors obligation is not absolved for the balance amount dues due to involuntary process, i.e. by operation of law or due to liquidation or insolvency proceedings”

IBC - IMPACTING TRANSFER OF ASSETS TO TRUST:

• Section 164 states that any transaction entered by the bankrupt during the period of 2 years, ending the filing of application for bankruptcy, which causes bankruptcy process triggered, shall be considered as an undervalued transaction.

“In such scenario there would be heavy onus on such individual, to prove that transfer of assets/ property by him to private trust was out of a bonafide arrangement.”

FEMA ASPECTS OF TRUSTS – OVERVIEW

FEMA ASPECTS OF TRUSTS –