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Creation andLearn
Extinction
more of Trusts
A historical and legal document from British India regarding Trusts Full description
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Table of Cases
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Table of Statutes
Introduction
“Of all the exploits of equity the largest and the most important is the invention and
development of the trust” - Maitland
Origin of Trusts[2]
Trusts originate when assets are transferred to another person with instructions that the
assets are used to benefit a third party.
The question that arises is how can the use of the assets and the benefit of another be
guaranteed? Originally it couldn’t; the transfer was the end of the matter and, despite
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the undertaking by the recipient to use the property to benefit others, advantage was
taken of that position. The recipient had been endowed with the legal ownership of that
property and those who anticipated receiving the benefit from that property could be in
difficulty.
How this was overcome marks the development of English law over all other systems.
A disappointed beneficiary could not hope to succeed by appealing to the law courts.
He wouldn’t get very far. The legal ownership had been transferred and he had no legal
title at all to the assets. Instead he appealed to the Lord Chancellor. In the early days the
Lord Chancellor was a cleric and was known as “Keeper of the Kings Conscience”. The
Lord Chancellor was a powerful person. He had jurisdiction over spiritual matters and
matters affecting peoples’ conscience. He could not deny the authority of the law in the
common law courts, and the rights that they conferred on others in respect of the prop-
erty transfer. However, by an ingenious step, although whilst not denying the legal
ownership, the Lord Chancellor could exercise his jurisdiction by saying to that person
that if he did not honour his obligation this would damage his conscience. The Lord
Chancellor would therefore feel he should take action to prevent this. He would enforce
the beneficial rights of the person who the transfer was intended to benefit.
These beneficial rights become part of the title to the property; English law, therefore,
adopted a split concept of ownership. There was the legal ownership by the person
holding the assets, who became known as the trustee, and there was the equitable, or
beneficial ownership held for the person, who became known as the beneficiary.
This is a simple explanation of a complex historical process but, nevertheless, upon this
distinction between the legal and equitable ownership, the modern law of trusts has de-
veloped. This split in ownership is unique to the English legal system and is unknown
in civil law systems.
Types of Trusts
Many kinds of trusts are available. Trusts may be classified by their purposes, by the
ways in which they are created, by the nature of the property they contain, and by their
duration. One common way to describe trusts is by their relationship to the trustor’s life.
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In this regard, trusts are generally classified as either living trusts (“inter vivos” trusts),
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or testamentary trusts.[3]
Living trusts are created during the lifetime of the trustor. Property held in a living trust
is not normally subject to probate (the court-supervised process to validate a will and
transfer property on the death of the trustor)[4].
Testamentary trusts are created as part of a will and must conform to the statutory re-
quirements that govern wills. This type of trust becomes effective upon the death of the
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person making the will (the “decedent”) and is commonly used to conserve or transfer
wealth. The will provides that part or all of the decedent’s estate will go to a trustee who
is charged with administering the trust property and making distributions to designated
beneficiaries according to the provisions of the trust[5].
Most trusts involve a number of technical legal concepts relating to ownership, taxes
and control. In creating a trust, one should consider several factors and obligations, in-
cluding[6]:
This project focuses on and performs a comprehensive study of the various legal issues
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and aspects involved in ‘The Creation and Extinction of Trusts’. The law of trusts has
proved to be versatile and adaptable and in today’s world the law of trusts is only gain-
ing in importance and stature. Trusts are making their presence felt in almost every
walk of life including international finance. Thus emphasis on the basics of the law of
trusts viz. ‘Creation and Extinction of Trusts’ assumes an even greater importance as it
will enable a fuller and more comprehensive understanding of the legal niceties in-
volved in trust law and will equip one to face the challenges posed by the ever develop-
ing law of trusts in today’s dynamic world.
Research Methodology
Nature of Project
The project is analytical as well as descriptive in nature. However majority of the project
is analytical in nature.
Sources of Data
The sources of data used are primary as well as secondary in nature. A host of leading
textbooks relating to the law of trusts have been referred to. Legal encyclopaedias have
also been referred to. Case reporters like All England Reports and All India Reporter
have also been used. Electronic information sources like Westlaw and Manupatra have
been accessed. Information has also been accessed from the information superhighway.
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Limitation
The scope of this project is limited to performing a comprehensive study and analysis of
the Indian law relating to creation and extinction of trusts. Relevant English case law
and principles have been incorporated and analysed but American law relating to the
creation and extinction of trusts has been ignored. Moreover with respect to religious
trusts only Hindu religious trusts have been dealt with. Trusts relating to other religions
and wakfs have not been dealt with.
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Research Questions
The research questions are:
What is a trust?
What is the origin of the law of trusts?
What are the different kinds of trusts?
What are the various factors and obligations that must be kept in mind while creat-
ing a trust?
Why are trusts created and extinguished?
Which are the relevant statutory provisions in India which deal with creation and
extinction of trusts?
Who are competent to create trusts?
What are the essential requirements for a valid trust?
How can a trust be extinguished?
Why are trusts extinguished?
How can a trust be revoked?
How do the provisions relating to creation and extinction of trusts apply to reli-
gious and charitable trusts?
How is the law of trusts developing today?
Mode of Citation
A uniform mode of citation has been adopted throughout the course of the project.
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Tax Avoidance: One of the most important reasons for the creation of a trust is to
avoid or mitigate the settlor’s liability to tax. There are many ways in which this
objective may be achieved. Subject to statutory provisions to the contrary, the sett-
lor, having exhausted his personal relief from income tax may alienate his income
by way of a trust in favour of another who may use his relief to reduce the amount
of tax payable, for example, a settlor may transfer 50000 shares in a company to
trustees for the benefit of his nephew N. Trustees pay income tax at the basic rate
of tax. On distributing the income, the beneficiary, N is entitled to set off his per-
sonal relief against the income liable to tax.
To Protect Spendthrift Beneficiaries: The settlor may believe that an outright trans-
fer of property to a donee may result in the dissipation of the fund by the donee.
To avoid this the settlor may create a trust under section 33 of the Trustee Act, 1925
in favour of the child. The protective trust is a determinable life interest in favour
of the beneficiary which terminates on the happening of any course of events
which is capable of prejudicing the interest of the beneficiary.
To Avoid Adverse Publicity from a Published Will : On death, a testator’s will is
published and transfers as well as the identity of the beneficiaries may become
public. In order to avoid adverse publicity a testator may create a fully secret trust
by transferring property under his will to a person whose identity is not a source of
embarrassment. Before his death the testator will make a bargain with the person
to the effect that following the receipt of the he will be required to hold the proper-
ty on trust for the secret beneficiary. Thus, the existence of the trust and the identi-
ty of the beneficiary will be concealed on the face of the will.
To Protect Purchasers Entering Into Commercial Transactions: A customer who
makes an advance payment for goods may be entitled to utilise the trust concept in
order to secure the return of the purchase money in the event of the company go-
ing into liquidation.
Clubs and Unincorporated Associations: Unincorporated associations have no sep-
arate legal existence. Such bodies are not entitled to own funds separately for their
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members. The funds are owned by the members and the trust is treated as the col-
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lective alter ego of the members. The members may appoint or elect officers of the
club. The officers may hold the club’s assets and income as trustees for the purpos-
es declared in the constitution of the association.
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It mustmore
be created for a lawful purpose[9]
If it relates to immoveable property, it must be declared by a non-testamentary in-
strument in writing signed by the author of the trust or trustee and registered, or
by the will of the author of the trust or of the trustee. If it relates to movable prop-
erty it must be declared as in the case of immoveable property; or, in the alterna-
tive, the ownership of the property must be transferred to the trustee[10].
The author of the trust must indicate with reasonable certainty by any words or
acts an intention on his part to create a trust, the purpose of the trust, the beneficia-
ry and the trust property[11].
Unless the trust is declared by will or the author of the trust is himself to be the
trustee, the trust property must be transferred to the trustee[12].
The subject matter of a trust must be property transferable to the beneficiary; but it
cannot be a mere beneficial interest under a subsisting trust[13].
The author of the trust, the trustee and the beneficiary must all be competent per-
sons within the meaning of section 7 of the Indian Trusts Act, 1882.
The words used must be so couched that, taken as a whole, they could be regarded
imperative.
The subject matter of the trust must be certain.
The objects or persons intended to be benefited must be certain.
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Certainty of Words
No formal language is necessary to create a trust. But what is required is an unequivocal
or unambiguous expression of intention on the part of the author of the trust to create a
trust[15]. The language used must make it certain that the settlor intended to constitute
a trust binding on in law on himself, or the person to whom the property was given;
that he intended to bind definite property by the trust and that he intended to benefit a
definite person or persons in a definite way[16].
The language used must be such as to disclose with certainty the purpose to create the
trust. And a Court will not raise a trust from where the words used and all the circum-
stances it is of the opinion that a trust was not intended. In determining whether or not
a trust has been created, courts will take into consideration the situation and relations of
the parties, the character of property and the purpose which the settlor had in view in
making the declaration. It is sufficient if the language used shows that the settlor intend-
ed to create a trust, and clearly points out the property, the beneficiary and the disposi-
tion to be made of the property. The use of the words ‘trust’ or ‘trustee’ is not essential
to the creation of a trust[17].
No positive rule can be laid down which shall determine in all cases what terms or ex-
pressions will carry a beneficial interest or what will create a trust[18].
Precatory words such as wish, hope, desire etc. should be avoided[19]. In Adams and the
Kensington Vestry, Re[20] , where there was a gift by a person to his wife in full confi-
dence that she would do what was right as to the disposal between the children. It was
held that there was no trust in favour of the children.
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When no specific property is earmarked but only a direction to spend out of general in-
come is given there is no trust but only a charge[24].
In Ram Ran Vijay Prasad Singh v. Province of Bihar[25] where neither any land was set
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apart for the maintenance and support of the institution mentioned in the instrument of
trust and nor was the income from any particular property earmarked for the objects of
the trust, it was held that there was no valid trust.
Certainty of Object
Certainty of Object is an essential requirement for a valid trust. This rule is founded on
the principle that the trust must be one which a court can control and enforce[26]. Cer-
tainty of object implies that the beneficiaries must be identifiable with reasonable cer-
tainty. Moreover there must also be certainty regarding the nature and quantity of inter-
est which the beneficiaries have and the manner in which the trust is to be
performed[27].
Applying the rule of certainty of object- where a testator gave leaseholds to his brother
hoping ‘he will continue them in the family’, it was held that the object of the trust was
uncertain and that no trust was created[28]. In Subhash Chandra Bose v. Gordhandas
Patel[29] where the will provided that after applying certain legacies the residue of the
testator’s assets should be handed over to a certain person to be spent by him or by his
nominee for the political upliftment of India and preferably for publicity work on behalf
of India’s cause in other countries it was held that trust was vague and could not be en-
forced by the court. It was further held that a trust for the attainment of political objects
is invalid not because it is illegal but because the court has no means of judging whether
any proposed political change will or will not be for the public welfare or benefit.
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Section 7 of the Transfer of Property Act, 1882 is analogous to this section[30]. It follows
therefore that a person must be competent to contract and he must further be entitled or
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authorised to transfer property in order to create a trust.
English Law provides that[31]: Every person who can hold and dispose of any legal or
equitable estate or interest in property can create a trust in respect thereof.
It is to be noted that the capacity of a minor to create a trust is different under English
Law and different under Indian Law[32]. This is because under Indian Law a contract
entered into by a minor is void whereas under English Law a contract by a minor is
void able. Thus in India a minor is not competent to enter into any contract whatsoever,
and, therefore, no trust can be created by him except as provided in section 7 of the Indi-
an Trusts Act, 1882.
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Hindus have been dedicating property for religious and charitable purposes since times
immemorial. These can be broadly classified under two heads- Istha and Purtta. Istha
works like vedic sacrifices, gifts to priests, preserving the vedas and hospitality are ex-
hausted as soon as the sacrifice is completed or the gift made and no trust arises since
there is no obligation imposed on any person to do or continue to do something for the
accomplishment of a particular purpose. The Purtta signifies works of public utility such
as tanks, wells, groves, gifts of food, schools and temples etc. The purtta works can be
duly carried out only when an institution is founded or when somebody is trusted with
the duty of performing the acts. It is thus, the purtta works wherein a trust, properly
speaking, comes into being[38].
A religious endowment is one which has for its object the establishment, maintenance or
worship of an idol or deity or any object or purpose subservient to religion. A charitable
endowment is one which has for its object the benefit of the public or of mankind. There
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