PROPERT LAW “CREATION OF TRUSTS”

“TOPIC-CREATION OF TRUSTS”

1. INTRODUCTION

“Of all the exploits of equity the largest and the most important is the invention and
development of the trust”- Maitland According to Underhill ‘A trust is an equitable
obligation binding a person (called a trustee) to deal with property over which he has
control (called the trust property) for the benefit of persons (called beneficiaries or cestui
que trust) of whom he himself may be one and any of whom may enforce the obligation’. 1
Thus the essential characteristic of a trust is that a person (the settlor) transfers property,
or declares to another, or others (the trustees), property which he already holds, and that
property is to be managed and controlled for the benefit of someone else (the
beneficiary).

1.1 AIMS AND OBJECTIVES

The aims and objectives of this research is to perform a comprehensive study and analysis
of the law relating to ‘Creation and Extinction of Trusts’.

1.2 HYPOTHESIS

Creation of trust could be testamentary.

1.3 RESEARCH QUESTIONS

1.3.1 What is creation of trust?
1.3.2 How trust is created?
1.3.3 How many types of trust are there?

1.4 RESEARCH METHODOLOGY

1
Mohamed Ramjohn, Sourcebook on Law of Trusts (London: Cavendish Publishing Limited, 1998) at 11.

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Researcher will do doctrinal method of research.

2. ORIGIN OF TRUSTS2

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 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 property 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
developed. This split in ownership is unique to the English legal system and is unknown
in civil law systems.

2
www.trusts-and-trustees.com/main.htm

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3. 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.

In this regard, trusts are generally classified as either living trusts (“inter vivos” trusts), or
testamentary trusts.3

3.1 LIVING TRUSTS

It is 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).

3.2 TESTAMENTARY TRUSTS

It is created as part of a will and must conform to the statutory requirements that govern
wills. This type of trust becomes effective upon the death of the 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.

4. REASONS FOR CREATION OF TRUSTS

The trust concept is a flexible institution which may be created for a variety of reasons: 4

4.1 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 settlor, 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

3
www.wsba.org/media/publications/pamphlets/trusts.htm
4
Mohamed Ramjohn, Sourcebook on Law of Trusts (London: Cavendish Publishing Limited, 1998) at 18-19.

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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 personal relief against the income liable to tax.

4.2 TO PROTECT SPENDTHRIFT BENEFICIARIES:

The settlor may believe that an outright transfer 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.

4.3 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
property on trust for the secret beneficiary. Thus, the existence of the trust and the
identity of the beneficiary will be concealed on the face of the will.

4.4 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
going into liquidation.

4.5 CLUBS AND UNINCORPORATED ASSOCIATIONS:

Unincorporated associations have no separate legal existence. Such bodies are not entitled
to own funds separately for their members. The funds are owned by the members and the

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trust is treated as the collective 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 purposes declared in the constitution of the association.

5. ESSENTIALS FOR THE CREATION OF A VALID TRUST.

The essentials of a valid trust are:

 It must be created for a lawful purpose.5

 If it relates to immoveable property, it must be declared by a non-testamentary

instrument 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 property it
must be declared as in the case of immoveable property; or, in the alternative, the
ownership of the property must be transferred to the trustee.6

 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 beneficiary and
the trust property.7

 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.

 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.8

 The author of the trust, the trustee and the beneficiary must all be competent persons
within the meaning of section 7 of the Indian Trusts Act, 1882.

5
Section 4 of the Indian Trusts Act, 1882.
6
Section 5 of the Indian Trusts Act, 1882.
7
Section 6 of the Indian Trusts Act, 1882.
8
Section 8 of the Indian Trusts Act, 1882.

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6. THE THREE CERTAINTIES OF TRUSTS.

In Knight v. Knight9 Lord Langdale stated that there were three conditions essential for
the creation of a valid trust. They are:

6.1 The words used must be so couched that, taken as a whole, they could be regarded
imperative.
6.2 The subject matter of the trust must be certain.
6.3 The objects or persons intended to be benefited must be certain.

6.1 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.10 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.11

Precatory words such as wish, hope, desire etc. should be avoided. In Adams and the
Kensington Vestry, Re12 where there was a gift by a person to his wife in full confidence
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.

6.2 CERTAINTY OF SUBJECT MATTER:

It is essential that the subject matter of the trust as also the beneficiaries must be pointed
out with certainty to constitute a valid trust. Courts have refused to establish a trust owing
to lack of certainty of subject matter where the direction provided to remember certain

9
(1840) 3 Beav. 148.
10
Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001) at
163.
11
S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University
Book Agency, 1998) at 65.
12
LR 27 Ch D 394.

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persons, to reward very old servants according to their desires, to give the bulk of the
property etc.13

Where in a partition deed between father and son there was a direction that the son should
make certain articles for divine service but no particular property was earmarked for the
purpose and there was only a prohibition that the son should not mortgage or alienate his
share, there was no trust because of absence of dedication.14

When no specific property is earmarked but only a direction to spend out of general
income is given there is no trust but only a charge.

In Ram Ran Vijay Prasad Singh v. Province of Bihar 15 where neither any land was set
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.

6.3 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. Certainty of
object implies that the beneficiaries must be identifiable with reasonable certainty.
Moreover there must also be certainty regarding the nature and quantity of interest which
the beneficiaries have and the manner in which the trust is to be performed.16

In Subhash Chandra Bose v. Gordhandas Patel17 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 enforced 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

13
S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University
Book Agency, 1998) at 67.
14
Dassa Ramachandra v. Narasimha Damodar, 13 Bom LR 101.
15
AIR 1942 Pat 435.
16
S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University
Book Agency, 1998) at 68.
17
AIR 1940 Bom 76.

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court has no means of judging whether any proposed political change will or will not be
for the public welfare or benefit.

7. WHO CAN CREATE A TRUST?

Section 7 of the Indian Trusts Act, 1882 says who is competent to create a trust. This
section provides that a trust can be created by every person who is competent to contract.
It further provides that a trust may be created by or on behalf of a minor with the
permission of a principal civil court of original jurisdiction. Competency to contract is the
test laid down for the capacity to create a trust. Any person who is not competent to
contract cannot create a trust.

Section 7 of the Transfer of Property Act, 1882 is analogous to this section. It follows
therefore that a person must be competent to contract and he must further be entitled or
authorised to transfer property in order to create a trust.

English Law provides that:18 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. 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 Indian
Trusts Act, 1882.

8. MERE DIRECTION DOES NOT CONSTITUTE A TRUST.

Case law clearly illustrates that mere direction does not constitute a trust. Where an
undivided member of a joint Hindu family purported to execute a will wherein he directed
his brothers to defray the expenses of the marriage of his daughter out of an investment of
the family assets with a third person and to pay the balance to her and the brothers had
agreed to act according to the directions, it was held that no separate property was

18
Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001) at
194.

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assigned in trust but only a direction to the brothers to pay out of the family assets was
given.19

9. CONCLUSION

Creation and Extinction of Trusts is an absolutely essential imperative part of the law of
trusts and has extreme importance and relevance. The various legal issues involved in the
creation of extinction of trusts form the basics which provide the foundations of the law
of trusts. This project has explored these issues in detail and has also performed a
comprehensive study and analysis of the relevant case law and statutory provisions.

The provisions relating to Creation and Extinction of Trusts in India are well developed
and clear. There is not much ambiguity and the law also does not prescribe too many
formalities. Thus the law with respect to creation and extinction of trusts is reflective of
the legislative intent of keeping the law simple and clear so as to be easily understood and
followed by the common man. Trusts are a very important part of life today and the
Indian Trusts Act, 1882 does not make a person apprehensive about creating a trust or
extinguishing owing to ambiguity and complexity. Thus these provisions are a step in the
right direction. Complexities will no doubt arise but the law is equipped to deal with
them.

In India the law of trusts is codified and well developed. The Indian Trusts Act, 1882 is
the major statute relating to trusts. Other statutes like the Indian Penal Code, 1860 deal
with offences relating to trusts and punishment for such offences. The Code of Civil
Procedure, 1908 prescribes the procedure for actions relating to trusts and the Limitation
Act, 1963 prescribes periods of limitation for recovery of property conveyed away by
trustees in breach of trust.

19
Re, Caplen’s Estate, Bulbeck v. Silvester, (1876)45 LJ Ch 2.

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10. BIBLIOGRAPHY
 Mohamed Ramjohn, Sourcebook on Law of Trusts (London: Cavendish
Publishing Limited, 1998).
 S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust
Laws (Allahabad: University Book Agency, 1998).

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