Trusts are recognised internationally as favoured vehicles for estate and succession planning. Although most private asset-holding trusts are created during the lifetime of the creator (settlor), there is another category of trusts called testamentary trusts. As the term suggests, testamentary trusts (also known as ‘Will-trusts’ in certain jurisdictions) are formed through testamentary instruments such as a Will, and which take effect only upon the death of the creator. This post seeks to provide an overview of the Indian law on testamentary trusts, and offer insights into their creation, function and utility.
A testamentary trust is essentially a trust created by a Will. It must, therefore, comply with the laws relating to trusts, as well as those relating to Wills.
In order to settle a valid testamentary trust, the person making it (testator/settlor) must formulate a valid Will. Under the Indian Succession Act, 1925, a person of sound mind, who has attained majority, may make a valid Will in writing and in the presence of two attesting witnesses. It is also necessary that a Will is made in exercise of the testator’s free agency, and not under the influence of fraud or coercion.
To constitute a valid Will, neither is stamp duty payable nor is registration of the Will required.
Private trusts are governed by the Indian Trusts Act, 1882 (“Trusts Act”). Under the Trusts Act, to create a testamentary trust, the testator must bequeath all or some of his property under the Will to a person (trustee) to hold and utilise it for stated purposes, for the benefit of one or more persons (beneficiaries).
Therefore, in essence, a testamentary trust must satisfy the requirements of the ‘four certainties’ for creation of a valid trust, as explained below:
(i) Intention – The intention to settle a trust must be evident in the language of the Will, i.e. it must be ‘expressed’, and not ‘inferred’ circumstantially. Therefore, there must be no ambiguity in the language used to create a trust in the Will.
(ii) Purpose – The purpose/objective for creation of the trust should be clearly expressed in the Will – for example, for the maintenance of one’s family, or for meeting the education expenses of a child. While executing the terms of the trust, the trustee is bound to fulfil the purpose of the trust.
(iii) Beneficiaries – The Will must also identify with reasonable certainty the persons for whose benefit the trust is created (beneficiaries). In India, a private trust must exist for ascertainable beneficiaries; it cannot exist merely for an object or purpose.
Interestingly, it is not necessary that the beneficiaries are named individuals, so long as a class or criteria of beneficiaries is described to enable the trustees to identify with reasonable certainty whether a person satisfies the criteria to fit within the class of beneficiaries. A charitable trust may also be settled through a Will, and may, inter alia, appoint causes, charities or idols as beneficiaries.
(iv) Subject Matter – The property for which the trust has been created must be described and identifiable with reasonable certainty.
It is common for the above matters as well as the key terms and principles governing the trust to be set out in the body of the Will, or as an annexure or schedule to the Will.
Choice of trustees
The trustees appointed for a testamentary trust need not be the same persons who are appointed as executors under the Will, although it is not uncommon for the executors also to be appointed trustees.
It is advisable that the testator consults and informs the individuals he seeks to appoint as trustees, so that the individuals are not caught by surprise on being reposed with this critical role. If a professional trustee company is sought to be appointed, the terms of their engagement should ideally be agreed before they are named as trustees under the Will.
The terms of the testamentary trust may also, if desired, provide for fees to be paid to trustees and the same to be deducted from the trust fund.
As explained earlier, a testamentary trust takes effect in accordance with the terms of the Will only upon the demise of the testator. Till his demise, the testator may amend the terms of the trust as often as he prefers by amending his Will through a document called ‘codicil’, or by executing a new Will.
Upon demise of the testator, the executor named in the Will must – after probate (as required) is obtained – commence the formalities for constitution and operation of the testamentary trust.
2. Testamentary Trust v. Inter vivos (Living/ Lifetime) Trust – Key differences
A testamentary trust differs from an inter vivos trust (also known as a living trust or lifetime trust) in some key ways, some of which are explained below:
(i) Control over trust property
In a testamentary trust, the testator/settlor exercises continued ownership and control over his assets throughout his lifetime, as the property transfers and trust becomes effective only upon his death. In an inter vivos trust, however, the settlor’s property is typically transferred during the lifetime of the settlor and the settlor cedes control and ownership of the property when this happens. This distinction is one of the key reasons that persons opt for testamentary trusts over inter vivos trusts – so that control remains in their hands during their lifetime. That said, an alternative may be to create an inter vivos trust but transfer property to it only subsequently, under the Will.
(ii) Control over trust
The settlor of an inter vivos trust may exercise some degree of control / oversight over the trust by providing in the trust deed that the trustee must mandatorily take his consent or consult with him before undertaking certain actions. In a testamentary trust, however, the testator/settlor would, by its very nature, be unable to exercise any control over the functioning of the trust.
A Will may be subject to probate, which would bring the terms of the testamentary trust into the public domain. For individuals who might prefer the trust terms to remain private and confidential, an inter vivos trust may be preferable.
A testamentary trust may be revoked by the testator’s wish by simply amending or destroying the Will during his lifetime. However, an inter vivos trust, once created, may only be revoked if it is a revocable trust as per the terms of the trust.
(v) Stamp duty and registration
A testamentary trust does not require stamping or registration. However, a trust deed for an inter vivos trust would require to be duly stamped and also, if immovable property is held by it, registered.
(vi) Regulatory considerations
Testamentary trusts, it may be argued, ought to be treated as ‘inheritance’ or ‘succession’ for regulatory purposes, such as for exchange control laws and takeover regulations. Therefore, they may offer regulatory exemptions which inter vivos trusts would not. However, a lifetime settlement under which the settlor retains life interest in the property may be regarded as ‘inheritance’ under exchange control regulations.
(vii) Forced heirship
The personal law applicable to Muslims in India allows them to bequeath only a certain portion of their wealth under their Wills. The balance estate must go to heirs as per ‘forced heirship’ rules. A testamentary trust would have to comply with the said rules, whereas an inter vivos trust would not.
A testamentary trust is an attractive option for estate and succession planning on account of its ease of creation as well as the flexibility and cost benefits that it offers over an inter vivos trust. That said, it would have to be examined whether a testamentary trust should be preferred over an inter vivos trust or if a structure which is a hybrid of the two should be adopted. Such examination would have to be made on the basis of the facts surrounding the estate of each individual. As with estate and succession planning in general, there is no one-size-fits-all solution for trusts.