A charitable trust is an arrangement formed with the purpose of accomplishing charitable objectives. The individual or legal entity who is starting or registering trust can be an individual person or an organisational entity like a company or an organisation. Similarly, the trustee can take the form of an individual, a collection of individuals, or a legal entity. The beneficiaries are open to both individuals and groups.
The reason behind charitable trusts lies in benefiting charitable organisations. The trustee undertakes the management, with the charity serving as the recipient. The originator of the trust can decide whether it should persist indefinitely or disband after a certain timeframe. In this blog, we will see pros and cons of setting up a trust in India.
Trusts in India
The term “charitable” holds a legal connotation and doesn’t exclusively denote trusts formed for religious or altruistic intentions. In legal terms, it signifies any trust that aligns with the charitable purpose as legally defined.
Diverse Purposes of Trusts
Before coming to the pros and cons of setting up a trust, let us first look at the purposes a trust serves. Trusts are useful instruments serving several objectives, such as:
- Caring for Family Members with Disabilities
Trusts can be employed to ensure the financial security as well as care of family members who have disabilities, special needs.
- Property Management for Incapable Beneficiaries
Trusts are useful for managing property on behalf of beneficiaries who are either underage or lack the capability to manage it independently.
- Tax Liability Reduction
Trusts offer a means to diminish the tax liabilities tied to specific properties, contributing to effective tax planning.
In India, the pros and cons of setting up a trust include a broader legal context, encapsulating trusts established not solely for religious or altruistic reasons, but for any purpose falling within the ambit of legal charity.
Types of Trusts in India
The different types of trusts must be understood first to realise the pros and cons of setting up a trust. The following list of trust types is covered by the law for trusts in India:
Express Trust
An express trust is what happens when a person is named as the trust’s trustee and the trust is established verbally, in writing, or in another express word. If the asset may be moved, it must first be registered and then physically transferred to the trustee.
Implied Trust
A party’s action can also produce an implied trust. It appears based on the parties’ actions.
The actions of the party raise suspicion and reveal the parties’ intentions.
Public & Private Trusts
In India, a public trust is one that is established for the general welfare. The public generally does not refer to the entire population.
A private trust is essentially created for a certain person so that no one else can benefit from it. A private action by the intended recipient can make a trust of this type enforceable.
Pros of Setting Up a Trust in India
In the discussion for pros and cons of setting up a trust, let us first see the pros. The pros of setting up a trust are given below:
Asset Protection
While discussing the pros and cons of setting up a trust, a primary advantage of a trust is its capacity to safeguard assets from potential creditors. When assets are positioned within a trust, the estate of the initial owner gains protection from creditors pursuing reimbursement. This protective measure guarantees that the designated beneficiaries can enjoy, utilise, and manage the property without the weight of outstanding debts.
Supplemental Gifting
A trust provides the flexibility to make additional gifts to the beneficiaries beyond the original assets. For instance, parents can establish a trust to save for their child’s college education. This feature enables the trust to serve as a long-term financial tool, assisting loved ones during important milestones or challenging times in their lives.
Financial Security
When someone you care about is facing financial difficulties, setting up a trust can provide a lifeline. By safeguarding their assets, you can help secure their future and alleviate the burden of financial strain. It acts as a safety net, ensuring that your loved ones are supported even during challenging circumstances.
Estate Planning
A trust can play a crucial role in estate planning, protecting family members from inheritances burdened by unpaid bills or debts left by the original owner. By passing assets through a trust, you can mitigate the risk of financial instability for future generations, ensuring a more seamless transfer of wealth and property.
Emergency Fund
The unpredictable nature of life means that unexpected expenses, such as medical bills or funeral costs, can arise suddenly. By utilising a trust, you can create an emergency fund that shields your loved ones from being financially devastated by these unforeseen circumstances. It provides peace of mind, knowing that your family’s financial well-being is secure.
Cons of Setting Up a Trust in India
In the discussion for pros and cons of setting up a trust, let us now see the cons. The following are the disadvantages of setting up a trust in India:
Irreversibility
In discussing the pros and cons of setting up a trust, a major disadvantage of a trust is that once a trust is established, undoing the procedure has significant difficulties. Opting to create a trust demands thoughtful contemplation, as it usually constitutes an enduring commitment. As such, seeking guidance from financial advisors or legal professionals becomes pivotal. This ensures a comprehensive comprehension of the consequences and empowers an educated choice.
Risk of Asset Loss
Although trusts are crafted to shield assets, an element of risk persists. Variables like market instability, mishandling, or unexpected events may result in potential losses. The meticulous selection of trustees and consistent evaluation of the trust’s performance are vital to alleviate these risks effectively.
Suitability for Small Estates
The benefits of setting up a trust may not be as significant for individuals with small estates. The costs associated with establishing and maintaining trust might outweigh the advantages in such cases. It is important to assess your personal financial situation and consult with professionals to determine whether a trust aligns with your needs.
Time-Consuming Process
Creating a trust can be a multifaceted and time-intensive undertaking. It demands meticulous strategising, thorough documentation, and adherence to legal prerequisites. While the involved stages might appear overwhelming, leveraging online resources or enlisting aid from professionals can streamline the procedure and alleviate the linked difficulties.
Final Thoughts
The pros and cons of setting up a trust highlight the importance of careful consideration and professional guidance. Trusts provide invaluable benefits, including asset protection, supplemental gifting, financial security, estate planning and emergency funds.
However, it is essential to weigh these advantages against the potential drawbacks, such as irreversibility, asset risk, suitability for small estates and the time-consuming nature of the process.
