What Is A Family Trust And What Are The Pros And Cons

Neha Mehta

27 Nov 2020
Family Trust

Family trusts serve to protect the assets in favor of family members beyond one's lifetime. When family assets don't have legal ownership, the trustees take care of the assets for the benefit of family members.

People generally set up a family trust to get some advantage personally, not occupying an asset.

Create a family trust, it can be helpful :

  • If a person wants to protect preferred assets from claims and creditors – for example, to protect a family house with an eye to a potential loss of a business project.
  • If he sets aside money for private purposes, such as the education of children
  • If he inevitably wants to keep his inheritance among his children. (not their spouses),.
  • If he wants to avoid the hazards of undesirable claims after his death.

Create The Trust

What is a family trust and why it is? Well. A family trust or a family trust fund works as a legal weapon to prevent probate, curb or delay taxes, and, most importantly, protect assets.

Here we will discuss the relevance of trusts, their terminology, what we can attain from them, and how they generally perform.

Fundamental Terminologies

A trust is a legal treaty, where an individual transfers his assets to a third party, who takes care and supervises them for the benefit of his preferred members.

Here are a few fundamental phrases you must to know to realize the nature and purpose of the trust:

  • A settlor is a specific person who builds trust. A person who reposes or declares the confidence is called the author of the faith or settler.
  • A beneficiary is a person for whose sake the trust is established. He or she either may be typically a partner, or spouse, or child, or grandchild, or other kins of the settlor; or a charitable organization determined by the settlor or the settlor himself.
  • The person who accepts the confidence is called the trustee. He is the third-party appointed in the procedure to manage and operate the assets of the trust. It can be a single person, or a business organization like a bank or a trust surveillance firm, or two or more joint trustees, or the beneficiaries themselves. In some instances, the grantor may also be one of the trustees.
  • A trust agreement is a document that organizes trust. The trust agreement can also be called or a Trust Deed or a Deed of Trust, It assigns the trustee and the beneficiaries, gives directions regarding the asset time-consuming and administers the beneficiaries.
  • The subject matter of the trust is a method by which the trust is declared. It is also called the instrument of faith.
  • In addition to those elements of a trust, there may be a Protector of confidence or trust advisor.

In India, trust is legislated by the maintenances of the Indian trust act 1882, and it is applicable throughout India except for some provinces like Jammu and Kashmir and Andaman- Nicobar IslandsIsland. Tru s can be of two types: Public trust and Private trust. Public trust is formulated for the sake of some specific individuals for a definite time. In contrast, public trust is developed for the benefit of an uncertain or fluctuating body for the indefinite time.

  • The revocable trust can be revoked or canceled at any point in time by the settlor himself.
  • The irrevocable trust can last till it needs to fulfill.
  • A discretionary trust is a kind of trust that has the legitimacy to choose the beneficiary from time to time.
  • Determinate trust is an arrangement where the settlor fixes the beneficiaries himself.
  • There may also be combining trust.

Family trust belongs to the private trust group and can be set up at during a person's lifetime, or in accordance with his will, or written documents. It can combine the processes of the trusts mentioned above.  As far as the immovable property is concerned, the trust needs to be registered in written documents.

What is a family trust in India and what are the necessary conditions to design a valid family trust.

  • In order to create a valid family trust,  the settlor should make an unquestionable declaration of his intention.
  • He must clearly define and specify the objects of trustees to accomplish the goal of the trust.
  • The settlers must specify their beneficiaries.
  • The settlor must transfer his property and remove himself from the ownership and beneficial enjoyment of the property.

Setting up a trust

To set up a trust, you have to create and enforce a trust agreement document. This document will make a list of beneficiaries, trustees, and follow the instructions in terms of asset- management. Then transfer the property and execute the necessary procedures to transfer the assets from the settlor to the trustees formally.

The Trustee

A trustee can hold the trust property for the benefit of beneficiaries to the trust. He has various powers to manage the affairs of the trust. So it is crucial to choose the most suitable trustee with an eye to the commercial requirement of the family. For example, a trustee either may be an individual, an old and trusted friend, or a member of the family.

The institutional trustee can be appointed when neutral decision making is a primary requirement. In some cases, the family may consider to set up a  private trust company where the members are nominated as directors.

Powers of The Trustees

A trustee is not only capable of organizing daily procedures of the trust, making proportions to beneficiaries but also able to assign himself to amend the trust deed, modifying the term of the faith, and adding or removing the beneficiaries.

He can be removed or discharged of his duties only by

  • The expiration of the trust.
  • The completion of his duties.
  • The instructions of the court to discharge him

 One should remember that all conflicts occurring from a trust contract and trust act are not arbitrable in India.

Some points to remember

  • An Indian resident settler may set up a trust outside of India under the foreign exchange act ( FEMA).
  • An Indian settlor can build trust in India for the benefit of both residents and NRI beneficiaries through  Indian Exchange control laws put some restrictions in terms of the direct distributions.
  • Indian Foreign Exchange laws don't permit NRI to hold immovable property on behalf of the trust and, therefore, not be confident to act as a trustee.

The Costs

Fabricating a family trust can be expensive, complicated, challenging to manage, and time-consuming. You must make sure it’s worth it!

Family trusts can be complicated and time spending and challenging to supervise as well. Huge money is needed to set them up and maintain the endless legal process and estimation fees.

So before settling it, one should think carefully about the appropriate person who must have the strength to authorize and eliminate the trustees, including initial trustees. It is essential because they will somehow be responsible for supervising the trust precisely.  

The Risks

If a trust is not established or managed reasonably, there can be substantial drawbacks in it, and the maintenance can be more expensive.

So while forming a trust, one must make sure that it is founded appropriately and for the just reasons, continuously operated well, keeping detailed documents of every element.  I hope the discussion gives you the answer to the question, “ what is a family trust?”

In case of help, get in touch with counseling experts at My Fit Brain.

Share on
  • Recommended

    Neha Mehta

    Consultant Psychologist, Mental Health Professional

    Avaliable: Online

    Location: Hisar, India

    Language: English, Hindi, Punjabi

    Area Of Expertise: Child Counseling, Couple Counseling, Marriage Counseling, Parenting, Self Improvement, Sleep, IQ Testing, ADHD, Career Counselling, Adolescent Counselling, Motivation, Family Counseling

    Talk to Me Today

    Rs. 1000.00/30min

Let’s talk

We cover all the phycological related therapies and have trained therapists for every one of them. Just search for your need below and start now!

Start Now!