Many Purposes – One Solution: Private Family Trust (Part Two)

Types of Private Family Trusts

In India, the most prevalent categories of Private Family Trusts are:

• Revocable Trust
• Irrevocable Trust
• Discretionary Trust
• Non-Discretionary Trust (or Determinate Trust)

Revocable Trust

A Revocable Trust is a trust that can be altered, changed, modified, or entirely revoked by the Settlor during their lifetime. The owner of the trust retains control over it, allowing them to remove beneficiaries, add new ones, modify the provisions for managing the assets, and even remove property from the trust during their lifetime. This type of trust helps in avoiding probate, though the assets held in a revocable trust are not protected from creditors. While offering flexibility and control during the settlor’s lifetime, a revocable trust does not provide asset protection from creditors.

Irrevocable Trust

An Irrevocable Trust is a trust that cannot be altered, changed, modified, or revoked after its creation. It continues until the term and/or purpose specified in the Trust Deed has been fulfilled. This type of trust provides asset protection since the assets are no longer considered the settlor’s.

Discretionary Trust

A Discretionary Trust is one where the beneficial interest of the beneficiaries is not fixed by the settlor at the time of the trust’s formation. The trustees have the discretionary power to decide the beneficiaries’ share of the trust assets and the benefits they derive from them. This arrangement gives trustees flexibility to make decisions based on circumstances, though the beneficiaries have no say in how the property is used for their benefit. Trustees must still perform their duties according to the trust objectives, giving them maximum flexibility in managing the trust’s assets.

Non-Discretionary Trust / Determinate Trust

A Non-Discretionary Trust or Determinate Trust is one where the benefits to be derived from the trust assets by the beneficiaries are fixed by the settlor when drawing up the Trust Deed. Trustees have no discretion in distributing the benefits or the trust assets.

Other Types of Private Family Trusts in India

While less popular, other types of Private Family Trusts in India include:

Special Needs Trust

This trust provides for the needs of a special individual without affecting their eligibility for government benefits.

Testamentary Trust

Created under a will, this trust is subject to the Indian Succession Act, 1925.

HUF Trust

A Hindu Undivided Family Trust is set up by the head of a Hindu Undivided Family (HUF) for the benefit of the HUF members.

Spendthrift Trust

Designed to protect the beneficiary’s inheritance from creditors and the beneficiary’s poor spending habits.

Life Insurance Trust

This trust holds and manages a life insurance policy for the benefit of specified beneficiaries.

Generation-Skipping Trust

Used to skip a generation in distributing assets to beneficiaries.