NATIONAL LAW INSTITUTE UNIVERSITY

KERWA DAM ROAD

BHOPAL

TRIMESTER: VIII TRIMESTER

SESSION: 2010-2011

SUBJECT: Property Law II

CLASSIFICATION OF TRUSTS ON THE BASIS OF THEIR OBJECTS

SUBMITTED TO SUBMITTED BY

Ms. Sushma Sharma Abiha Zaidi

Assistant Professor of Law Roll no. - 2008 BA LLB 66

NLIU, Bhopal. Enrollment no. - A 0840

 TABLE OF CONTENTS

INTRODUCTION...........................................................................................................................2

TRUST AS DEFINED IN THE INDIAN TRUSTS ACT,1882-....................................................4

CREATION OF TRUSTS...............................................................................................................4

BASIC INGREDIENTS..................................................................................................................6

CERTAINITIES REQUIRED.........................................................................................................6

WHO CAN FORM A TRUST?.......................................................................................................6

PURPOSES......................................................................................................................................8

CLASSIFICATION OF TRUSTS.................................................................................................11

BIBLIOGRAPHY..........................................................................................................................18

1
 INTRODUCTION

In common law legal systems, a trust is a relationship whereby property (including real, tangible

and intangible) is managed by one person (or persons, or organizations) for the benefit of
another. A trust is created by a settlor (or feoffor to uses), who entrusts some or all of their
property to people of their choice (the trustees or feoffee to uses). The trustees hold legal title to
the trust property (or trust corpus), but they are obliged to hold the property for the benefit of
one or more individuals or organizations (the beneficiary, cestui que use, or cestui que trust),
usually specified by the settlor, who hold equitable title. The trustees owe a fiduciary duty to the
beneficiaries, who are the "beneficial" owners of the trust property. The trust is governed by the
terms of the trust document, which is usually written and occasionally set out in deed form. It is
also governed by local law. The trustee is obliged to administer the trust in accordance with both
the terms of the trust document and the governing law.

A gift may be made by an equitable machinery of a trust; and the interposition of the trustees
enables a gift to be made to a person not yet in existence and therefore incapable of being the
donee of a direct gift.

A trust is not complete until the trust property is vested in trustees for the benefit of the cestui
que trust. The settlor may do this by a declaration of trust, if he is himself the sole trustee, sing
language which if taken in connection with his acts, shows a clear intention on his part to divest
himself of all beneficial interest in it and to exercise dominion and control over it exclusively in
the character of a trustee.1 Otherwise, he must transfer the trust property to trustees by registered
conveyance or delivery of possession, as the case maybe.2

According to the Gujarat High Court, when a settler creates trust by settling of his properties and
appoints himself as the sole trustee, he makes a vesting declaration, and not a gift. It is not a
transfer. He bifurcates his real ownership, he retains for himself the legal ownership of the
property and transfers the beneficial or equitable ownership to those for whose benefit he has
created the trust. Looking to s 6, Trusts Act, when the settlor appoints himself as the sole trustee,

1
Richard’s v. Delbridgee (1874) LR 18 Eq 11; Heartley v. Nicholson (1875) LR 19 ES 233; Re Richards, Sherston
v. Brock (1887) 36 Ch D 541; Ashoka v. Haji Tyeb (1885) 9 Born 115, 122.
2
Trusts Act, Section 6; Gobardhandas v. Bai Ramcoover (1902) 24 Bom 449, 472.
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there is no ‘transfer’. A transaction in which there is no transfer is not a gift. The creation of a
gift by trust and the vesting in the trustee of the property is a mode independent of, and de hors, a
gift. Therefore the transaction in question did not amount to a gift.3

If the settler has not perfected the trust either by constituting himself a trustee or by transferring
the trust property to trustees, the court will not enforce the trust, 4 nor will the court perfect an
incomplete gift by holding that the property was transferred in equity or that an imperfect gift
amounted to a declaration of trust.5

3
Suleman Isubji Dadabhai v. Naranbhai Dayabhai Patel (1980) 21 Guj LR 232.
4
Ellison v. Ellison (1802) 6 Ves. 656; Dening v. Ware (1856) 22.
5
Antrobus v. Smith (1806) 12 Ves 39.
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 TRUST AS DEFINED IN THE INDIAN TRUSTS ACT,1882-

As defined in section 3 of the Trust Act, 1882 as " an obligation annexed to the ownership of
property and arising out of a confidence reposed in and accepted by the owner, or declared and
accepted by him, for the benefit of another or of another and the owner. In simple words it is a
transfer of property by the owner to another for the benefit of a third person along with or
without himself or a declaration by the owner, to hold the property not for him and another.

In India, the second most popular form of registration is as a Trust. However, the statutory
provisions, procedures and the laws relating to trusts are confusing. Under Indian Laws, various
kinds of public and private trusts can be formed. Here, we have dealt with the laws and
procedures related to Public Charitable Trusts.

The Indian Trust Act, 1882 is not applicable to Public Charitable Trust. There is no specific act
under which a Public Trust is to be registered, except in the State of Gujarat and Maharashtra.
Public Trusts are formed under general law, with guidance drawn from the Indian Trust Act,
1882. The other relevant acts are Religious Endowment Act, 1863, Charitable & Religious Trust
Act, 1920 and The Bombay Public Trust Act, 1950.

CREATION OF TRUSTS

According to section 3 of the Indian Trusts Act 1882, a trust is an obligation annexed to the
ownership of property, and arising out of a confidence reposed in and accepted by the owner or
declared and accepted by him for the benefit of another or of another and the owner. The person
who reposes or declares the confidence is called the ‘author of the trust’; the person who accepts
the confidence is called the ‘trustee’ and the person for whose benefit the confidence is accepted
is called the ‘beneficiary’. According to section 4 of the Indian Trusts Act 1882, a trust may be
created for any lawful purpose.

Two types of trusts can be created –

(i) Trust of immoveable property
(ii) Trust of moveable property
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TRUST OF IMMOVEABLE PROPERTY

A trust of immoveable property may be created upon satisfying following conditions:

Declared by a non-testamentary instrument in writing signed by the author of the trust indicating
with reasonable certainty by any words an intention on his part to create thereby a trust, the
purpose of the trust, the beneficiary and the trust property, and transfers the trust-property to the
trustee and the instrument should also signed by the trustee, and registered, or
- By the will of the author of the trust or of the trustee indicating with reasonable certainty by
any words an intention on his part to create thereby a trust, the purpose of the trust, the
beneficiary and the trust property. 

TRUST OF MOVEABLE PROPERTY

A trust of moveable property may be created upon satisfying following conditions:

 Declared by a non-testamentary instrument in writing signed by the author of the trust

indicating with reasonable certainty by any words an intention on his part to create thereby a
trust, the purpose of the trust, the beneficiary and the trust property and the instrument should
also be signed by the trustee,

 By transferring the ownership of the property to the trustee.

The important difference in creation of trust of immoveable property and trust of moveable
property is that the former requires the instrument to be registered unless it is created by the
will of the author and in the later there is no condition to be registered and however proper
proof for transferring the ownership of the property to the trustee is required.

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 BASIC INGREDIENTS

The following are the basic ingredients of a valid trust :

i. There must be an author or settler of the trust. The author or the settler refers to the person
who sets aside certain property for the benefit of the beneficiaries.
ii. There must be a trustee. The trustees are the persons who manage this property for the
benefit of the beneficiaries as per the Trust Deed. The author himself may or may not
become a trustee.

iii. There must be a beneficiary or beneficiaries.

iv. There must be clearly delineated trust property.

v. The objects of the trust must be specific.

CERTAINITIES REQUIRED

Three Certainties of a Trust are:

i. Certainty of intention to create trust.

ii. Certainty of the objects and the beneficiaries.

iii. Certainty of the subject matter of the Trust i.e. funds or properties must be specified and
settled in the deed.

WHO CAN FORM A TRUST?

Every person competent to make a contract and competent to deal with property can create a
Trust. Besides individuals, a body of individuals or an artificial person such as an association of
persons, an institution, a limited company, a Hindu Undivided Family through its Karta can also
form a Trust. For all practical purposes, two or more individuals are required to form a charitable
trust.

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 PURPOSE:
Common purposes for trusts include:

1. Privacy: Trusts may be created purely for privacy. The terms of a will are public and the
terms of a trust are not. In some families this alone makes use of trusts ideal.

2. Spendthrift Protection Trusts may be used to protect beneficiaries (for example, one's

children) against their own inability to handle money. It is not unusual for an individual to
create an inter vivos trust with a corporate trustee who may then disburse funds only for
causes articulated in the trust document. These are especially attractive for spendthrifts. In
many cases a family member or friend has prevailed upon the spendthrift/settlor to enter into
such a relationship. However, over time, courts were asked to determine the efficacy of
spendthrift clauses as against the trust beneficiaries seeking to engage in such assignments,
and the creditors of those beneficiaries seeking to reach trust assets. A case law doctrine
developed whereby courts may generally recognize the efficacy of spendthrift clauses as
against trust beneficiaries and their creditors, but not against creditors of a settlor.

3. Wills and Estate Planning Trusts frequently appear in wills (indeed, technically, the

administration of every deceased's estate is a form of trust). A fairly conventional will, even
for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and
then to the children equally. If the children are under 18, or under some other age mentioned
in the will (21 and 25 are common), a trust must come into existence until the contingency
age is reached. The executor of the will is (usually) the trustee, and the children are the
beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.

4. Charities In some common law jurisdictions all charities must take the form of trusts. In
others, corporations may be charities also, but even there a trust is the most usual form for a
charity to take. In most jurisdictions, charities are tightly regulated for the public benefit (in
England, for example, by the Charity Commission).

5. Unit Trusts The trust has proved to be such a flexible concept that it has proved capable of
working as an investment vehicle: the unit trust.

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6. Pension Plans Pension plans are typically set up as a trust, with the employer as settlor, and
the employees and their dependents as beneficiaries.

7. Remuneration Trusts Trusts for the benefit of directors and employees or companies or

their families or dependents. This form of trust was developed by Paul Baxendale-Walker
and has since gained widespread use.

8. Corporate Structures Complex business arrangements, most often in the finance and

insurance sectors, sometimes use trusts among various other entities (e.g. corporations) in
their structure.

9. Asset Protection The principle of "asset protection" is for a person to divorce himself or

herself personally from the assets he or she would otherwise own, with the intention that
future creditors will not be able to attack that money, even though they may be able to
bankrupt him or her personally. One method of asset protection is the creation of a
discretionary trust, of which the settlor may be the protector and a beneficiary, but not the
trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to
benefit from the trust assets, without owning them, and therefore without them being
available to his creditors. Such a trust will usually preserve anonymity with a completely
unconnected name (e.g. "The Teddy Bear Trust"). The above is a considerable simplification
of the scope of asset protection. It is a subject which straddles ethical boundaries. Some asset
protection is legal and (arguably) moral, while some asset protection is illegal and/or
(arguably) immoral.

10. Tax Planning The tax consequences of doing anything using a trust are usually different
from the tax consequences of achieving the same effect by another route (if, indeed, it would
be possible to do so). In many cases the tax consequences of using the trust are better than
the alternative, and trusts are therefore frequently used for legal tax avoidance.

11. Tax Evasion In contrast to tax avoidance, tax evasion is the illegal concealment of income
from the tax authorities. Trusts have proved a useful vehicle to the tax evader, as they tend to
preserve anonymity, and they divorce the settlor and individual beneficiaries from ownership
of the assets. This use is particularly common across borders—a trustee in one country is not
necessarily bound to report income to the tax authorities of another. This issue has been
addressed by various initiatives of the OECD.
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12. Money Laundering The same attributes of trusts which attract legitimate asset protector also
attract money launderers. Many of the techniques of asset protection, particularly layering are
techniques of money-laundering also, and innocent trustees such as bank trust companies can
become involved in money-laundering in the belief that they are furthering a legitimate asset
protection exercise, often without raising suspicion. 

13. Co-ownership Ownership of property by more than one person is facilitated by a trust. In

particular, ownership of a matrimonial home is commonly effected by a trust with both
partners as beneficiaries and one, or both, owning the legal title as trustee.

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 CLASSIFICATION OF TRUSTS

Trusts go by many different names, depending on the characteristics or the purpose of the trust.
Because trusts often have multiple characteristics or purposes, a single trust might accurately be
described in several ways. For example, a living trust is often an express trust, which is also a
revocable trust, and might include an incentive trust, and so forth.

1. Constructive trust. 
2. Dynasty Trust 
3. Express trust
4. Fixed trust
5. Hybrid trust
6. Implied trust
7. Incentive trust
8. Inter vivos trust 
9. Irrevocable trust
10. Offshore trust.
11. Private and public trusts
12. Protective trust
13. Purpose trust
14. Resulting trust
15. Revocable trust
16. Secret trust
17. Simple trust
18. Spendthrift trust
19. Standby Trust or Pour over Trust
20. Testamentary trust or Will Trust
21. Unit trust

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Constructive trust:

Unlike an express or implied trust, a constructive trust is not created by an agreement between a
settlor and the trustee. A constructive trust is imposed by the law as an "equitable remedy." This
generally occurs due to some wrongdoing, where the wrongdoer has acquired legal title to some
property and cannot in good conscience be allowed to benefit from it. A constructive trust is,
essentially, a legal fiction. For example, a court of equity recognizing a plaintiff's request for the
equitable remedy of a constructive trust may decide that a constructive trust has been "raised"
and simply order the person holding the assets to the person who rightfully should have them.
The constructive trustee is not necessarily the person who is guilty of the wrongdoing, and in
practice it is often a bank or similar organization.

Dynasty Trust

It is also known as a Generation-skipping trust. A type of trust in which assets are passed down
to the grantor's grandchildren, not the grantor's children. The children of the grantor never take
title to the assets. This allows the grantor to avoid the estate taxes that would apply if the assets
were transferred to his or her children first. Generation-skipping trusts can still be used to
provide financial benefits to a grantor's children, however, because any income generated by the
trust's assets can be made accessible to the grantor's children while still leaving the assets in trust
for the grandchildren.

Express trust:

An express trust arises where a settlor deliberately and consciously decides to create a trust, over
their assets, either now, or upon his or her later death. In these cases this will be achieved by
signing a trust instrument, which will either be a will or a trust deed. Almost all trusts dealt with
in the trust industry are of this type. They contrast with resulting and constructive trusts. The
intention of the parties to create the trust must be shown clearly by their language or conduct. For
an express trust to exist, there must be certainty to the objects of the trust and the trust property.

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In the USA Statute of Frauds provisions require express trusts to be evidenced in writing if the
trust property is above a certain value, or is real estate.

Fixed trust:
In a fixed trust, the entitlement of the beneficiaries is fixed by the settlor. The trustee has little or
no discretion. Common examples are:

 a trust for a minor ("to x if she attains 21");

 a life interest ("to pay the income to x for her lifetime"); and

 a remainder ("to pay the capital to y after the death of x")

Hybrid trust:

 A hybrid trust combines elements of both fixed and discretionary trusts. In a hybrid trust, the
trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor.
But the trustee has discretion as to how any remaining trust property, once these fixed amounts
have been paid out, is to be paid to the beneficiaries.

Implied trust:

An implied trust, as distinct from an express trust, is created where some of the legal
requirements for an express trust are not met, but an intention on behalf of the parties to create a
trust can be presumed to exist. A resulting trust may be deemed to be present where a trust
instrument is not properly drafted and a portion of the equitable title has not been provided for.
In such a case, the law may raise a resulting trust for the benefit of the grantor (the creator of the
trust). In other words, the grantor may be deemed to be a beneficiary of the portion of the
equitable title that was not properly provided for in the trust document.

Incentive trust:

 A trust that uses distributions from income or principal as an incentive to encourage or

discourage certain behaviors on the part of the beneficiary. The term "incentive trust" is

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sometimes used to distinguish trusts that provide fixed conditions for access to trust funds from
discretionary trusts that leave such decisions up to the trustee.

Inter vivos trust (or living trust):

A settlor who is living at the time the trust is established creates an inter vivos trust.

Irrevocable trust:

In contrast to a revocable trust, an irrevocable trust is one in which the terms of the trust cannot
be amended or revised until the terms or purposes of the trust have been completed. Although in
rare cases, a court may change the terms of the trust due to unexpected changes in circumstances
that make the trust uneconomical or unwieldy to administer, under normal circumstances an
irrevocable trust may not be changed by the trustee or the beneficiaries of the trust.

Offshore trust:

Strictly speaking, an offshore trust is a trust which is resident in any jurisdiction other than that
in which the settlor is resident. However, the term is more commonly used to describe a trust in
one of the jurisdictions known as offshore financial centers or, colloquially, as tax havens.
Offshore trusts are usually conceptually similar to onshore trusts in common law countries, but
usually with legislative modifications to make them more commercially attractive by abolishing
or modifying certain common law restrictions. By extension, "onshore trust" has come to mean
any trust resident in a high-tax jurisdiction.

Private and public trusts:

 A private trust has one or more particular individuals as its beneficiary. By contrast, a public
trust (also called a charitable trust) has some charitable end as its beneficiary. In order to qualify
as a charitable trust, the trust must have as its object certain purposes such as alleviating poverty,
providing education, carrying out some religious purpose, etc. The permissible objects are
generally set out in legislation, but objects not explicitly set out may also be an object of a
charitable trust, by analogy. Charitable trusts are entitled to special treatment under the law of
trusts and also the law of taxation.
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Protective trust:

Here the terminology is different between the UK and the USA:

In the UK, a protective trust is a life interest which terminates on the happening of a specified
event such as the bankruptcy of the beneficiary or any attempt by him to dispose of his interest.
They have become comparatively rare.

In the USA, a protective trust is a type of trust that was devised for use in estate planning. (In
another jurisdiction this might be thought of as one type of asset protection trust.) Often a
person,A, wishes to leave property to another person B. A however fears that the property might
be claimed by creditors before A dies, and that therefore B would receive none of it. A could
establish a trust with B as the beneficiary, but then A would not be entitled to use of the property
before they died. Protective trusts were developed as a solution to this situation. A would
establish a trust with both A and B as beneficiaries, with the trustee instructed to allow A use of
the property until they died, and thereafter to allow its use to B. The property is then safe from
being claimed byA's creditors, at least so long as the debt was entered into after the trust's
establishment. This use of trusts is similar to life estates and remainders, and are frequently used
as alternatives to them.

Purpose trust:

Or, more accurately, non-charitable purpose trust (all charitable trusts are purpose trusts).
Generally, the law does not permit non-charitable purpose trusts outside of certain anomalous
exceptions which arose under the eighteenth century common law (and,
arguable, Quistclose trusts).

Certain jurisdictions (principally, offshore jurisdictions) have enacted legislation validating non-

charitable purpose trusts generally.

Resulting trust:

A resulting trust is a form of implied trust which occurs where (1) a trust fails, wholly or in part,
as a result of which the settlor becomes entitled to the assets; or (2) a voluntary payment is made
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by A to B in circumstances which do not suggest gifting. B becomes the resulting trustee of A's
payment.

Revocable trust:

A trust of this kind may be amended, altered or revoked by its settlor at any time, provided the
settlor is not mentally incapacitated. Revocable trusts are becoming increasingly common in the
US as a substitute for a will to minimize administrative costs associated with probate and to
provide centralized administration of a person's final affairs after death.

Secret trust:

A post mortem trust constituted externally from a will but imposing obligations as a trustee on
one, or more, legatees of a will.

Simple trust:

 This term is only used in the US, but in that jurisdiction has two distinct meanings:

In a simple trust the trustee has no active duty beyond conveying the property to the beneficiary
at some future time determined by the trust. This is also called a bare trust. All other trusts
arespecial trusts where the trustee has active duties beyond this.

A simple trust in Federal income tax law is one in which, under the terms of the trust document,
all net income must be distributed on an annual basis.

Special trust:

In the US, a special trust contrasts with a simple trust (see above).

Spendthrift trust :

is a trust put into place for the benefit of a person who is unable to control their spending. It
gives the trustee the power to decide how the trust funds may be spent for the benefit of the
beneficiary.

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Standby Trust or Pour over Trust:

The trust is empty at creation during life and the will transfers the property into the trust at death.
This is a statutory trust.

Testamentary trust or Will Trust:

A trust created in an individual's will is called a testamentary trust. Because a will can become
effective only upon death, a testamentary trust is generally created at or following the date of the
settlor's death.

Unit trust:

A unit trust is a trust where the beneficiaries (called unitholders) each possess a certain share
(called units) and can direct the trustee to pay money to them out of the trust property according
to the number of units they possess. A unit trust is a vehicle for collective investment, rather than
disposition, as the person who gives the property to the trustee is also the beneficiary.

While the preceding list is a great starting point in trust education, this is an ever-expanding field
of law. New types of trusts continue to be created, as the IRS continues to expand tax law, and
individuals seek to find new ways to properly transfer their wealth to individuals, charities, etc.

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 BIBLIOGRAPHY

1. Mukherjee's commentary on Indian Trusts Act, 1882  with Benami Transactions

(Prohibition) Act, 1988, Charitable & Religious Trusts Act, 1920, and models of trust
deeds. 2nd ed. / by H.C. Johari.

2. Mulla Transfer of Property Act by Solil Paul. 9th ed. Lexis Nexis Butterworths.

3. www.legalservicesindia.com

4. www.google.com

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