Difference between Testamentary Trust & Private Trust

KIN~WILL

Creation Timeline

Private Trust: Established during the settlor's life. The settlor actively transfers ownership of assets to a chosen trustee through a trust deed. This deed acts as a binding legal document outlining the purpose, terms, and beneficiaries of the trust.  For immovable property (land, buildings), registration of the trust deed is mandatory under the Indian Trusts Act, 1882.

Testamentary Trust: Comes into existence upon the settlor's death. The terms of the trust are embedded within the individual's Will. The Will dictates the assets to be transferred to a designated trustee and specifies how these assets should be managed and distributed for the benefit of designated beneficiaries. 

Beneficiary Designation

Private Trust: Beneficiaries are explicitly identified in the trust deed. This allows the settlor to exercise greater control over the distribution of assets and ensure their wishes are met during their lifetime. The beneficiaries can be individuals, a group of individuals, or even institutions.

Testamentary Trust: Beneficiaries can be named directly in the Will or identified through conditions set forth within the document. This approach offers some flexibility as the settlor can potentially account for future circumstances like births or marriages. However, it also introduces an element of dependence on the Will's proper execution and legal interpretation.

Legal Framework

Private Trust: Governed by the Indian Trusts Act, 1882 . This act defines the essential elements of a valid trust, the duties and obligations of the trustee, and the rights of the beneficiaries.

Testamentary Trust: Established through a Will, following the provisions of the Indian Succession Act, 1925. This act deals with the inheritance of property through intestate succession (without a will) and testamentary succession (through a will). 

Registration

Private Trust: Registration is mandatory for immovable property unless the trust is created through a will. This ensures transparency and public record of the trust's existence.

Testamentary Trust: No separate registration is required as the trust is established through a registered will. The will itself goes through a probate process after the testator's death, which validates its authenticity and ensures proper execution.

Tax Implications

Private Trust: The tax treatment depends on the nature of the trust assets and the income they generate. Generally, income distributed to beneficiaries is considered taxable in their hands. However, there might be specific tax exemptions or deductions applicable depending on the nature of the trust.

Testamentary Trust: Assets transferred through a Will are typically not subject to additional capital gains tax upon the settlor's death. This offers a tax advantage compared to direct inheritance. However, any income generated by the trust itself might be subject to taxation depending on the nature of the income and the trust's structure.

Additional Considerations

Forced Heirship: In the case of individuals governed by Muslim personal law, a specific portion of the estate must be distributed to legal heirs as per inheritance rules. This can impact the flexibility of testamentary trusts, as they need to comply with these restrictions. Private trusts, however, are not bound by such limitations.

Flexibility: Private trusts offer greater flexibility in terms of managing assets and distributing them to beneficiaries. The trust deed can be structured to include specific conditions, timelines, and even the appointment of multiple trustees for succession planning.

Control during Lifetime: Testamentary trusts can be a suitable option when the settlor wants to retain control over their assets during their lifetime. The assets become part of the trust only after the settlor's death, and the terms of the trust dictate the distribution to the beneficiaries.

Consultation with a Legal Professional

It's crucial to remember that this information provides a general overview and shouldn't be misconstrued as legal advice. The complexities surrounding trust creation and management necessitate seeking guidance from a qualified legal professional. They can assist in navigating the legal framework, ensuring proper documentation, and addressing any specific questions or concerns you may have regarding private or testamentary trusts under Indian law.

Posted On: 2024-04-15