Indian Trust Act, 1882 | Property Law - CLAT PG PDF Download

History of Trust

The modern concept of trust has its roots in ancient practices, with the term derived from the Latin word "Opus," meaning "on his behalf." This term was used because, in ancient times, one person often managed large land holdings on behalf of others. Over time, this practice became known as trust.

In essence, a trust represents a fiduciary relationship where one party is entrusted with property or power for the benefit of another. It signifies a relationship where one party is obligated to exercise their rights and powers in good faith for the benefit of another.

Indian Trust Act 1882

• The Indian Trust Act 1882 governs private trusts established for the benefit of a single person or a class of persons.
• However, this act does not apply to private or public religious or charitable endowments, Waqf under Mohammedan law, or the relations of members within a Hindu undivided family as per their customs.

Definition of Trust

• A trust is an obligation attached to the ownership of property, arising from the confidence placed in the owner by another party. This obligation can be accepted by the owner or declared and accepted by them for the benefit of another party or parties.
• The definition of a trust highlights three key elements:
• The person who creates the trust (Settlor)
• The person who accepts the trust (Trustee)
• The person for whose benefit the trust is created (Beneficiary)

Key Roles in a Trust

• Settlor/Maker of Trust: The person who establishes the trust is known as the creator or author of the trust. This individual declares the trust and designates specific property for it, which can be either immovable property or money.
• Trustee: The trustee is the individual in whom the settlor places trust and confidence. The settlor can name any person as the trustee in the trust deed, but the trustee must accept the trust. The trustee is the nominal owner of the property.
• Beneficiary: The beneficiary is the person for whom the trust is created and is also known as the "cestui que trust." This individual is the beneficial owner of the property.

Instrument of Trust

• The document that establishes the trust is referred to as the instrument of trust.

Prof Keeton's Definition of Trust

• A trust is a relationship in which a person, called the trustee, is compelled by equity to hold property, whether real or personal, for the benefit of some persons, termed beneficiaries, or for some object permitted by law.
• The real benefit of the property goes not to the trustee but to the beneficiaries and other objects of the trust.

Definition by Story

• Trust is an equitable right, title, or interest in property, real or personal, distinct from the legal ownership thereof.

Trust vs. Other Relationships

• Trust and Agency: In a trust, there is property called the trust property, and the trustee is the owner of this property. The trustee is personally liable for contracts made on behalf of the trust, is not under the control of the creator of the trust, and the trust does not terminate upon the death of the maker.
• In a contract of agency, there is an implied or express contract to act for another party; the agent is not the owner of the property, and personal liability does not arise if the agent fails to perform. The agent is under the control of the principal, and the contract ceases to exist upon the death of either party or at the will of the parties.
• Trust and Mortgage: In a mortgage, the mortgagee is not the owner of the property but has a legal interest in it. In contrast, the trustee is the owner of the property and has a beneficial interest in it.
• Trust and Contract: A contract is an agreement made by the free consent of competent parties, with lawful consideration and lawful object. The obligation under a contract is legal and creates a right in personam, enforceable by the parties to the contract. In contrast, a trust is equitable and voluntary, does not require consideration, and is possible. A trust is a unilateral act, creating a right in rem, and involves a fiduciary relationship between the trustee and the beneficiary.
• Trust and Bailment: Bailment involves the delivery of a thing by a party called the bailor to a person called the bailee, who has a legal right over the goods and must return them after use. In contrast, in a trust, the obligation is attached to the property and arises from the confidence reposed in the trustee. The trustee is the owner of the property and can pass on a better title to others. The rights of a trustee are equitable, and the duties under a trust can be enforced by any beneficiary.
• Trust and Ownership: Ownership gives the owner the exclusive right to deal with property in any way, subject to not causing harm to others. In a trust, the trustee is bound to use their rights for the benefit of another or for a specific purpose.

Types of Trusts

• Private Trust: A private trust benefits either one person or a class of definite persons.
• Public Trust: A public trust benefits the whole society at large or members of an uncertain and changing body, such as a trust for the advancement of education irrespective of caste or creed.

II. Classification according to mode of creation of trust:

• Express Trust: A trust created by the settlor using words, a will, or a deed of trust.
• Executed Trust: A trust is executed when no further instrument is necessary, and the trust is finally declared. This trust cannot be revoked.
• Executory Trust: A trust requiring a further instrument or additional instrument to carry out the general instructions of the first instrument of trust. This trust can be revoked.
• Constructive Trust: A constructive trust arises in cases involving relationships such as trustee and beneficiary or guardian and ward. It occurs when a person possesses property through an abuse of confidence, leading the court to determine that they must hold the property for the benefit of the injured party.
• Implied Trust: An implied or presumed trust arises from the presumed intention of the parties, inferred from the circumstances. It is presumed that one party intended to create a trust.

III. Classification based on the nature of the duties of the trustee;

• A simple trust: If the trustee has no active duties to perform under the trust and simply holds it for the beneficiary, it is called a simple trust.
• A special Trust: A special trust requires the trustee to exercise discretion in carrying out the trust.

IV. Classification based consideration for creation of the trust:

• Trust for value: A trust for consideration or value is created when consideration moves from the beneficiary, establishing a contractual relationship between the settlor and beneficiary.
• Voluntary trust: A voluntary trust is created when no consideration comes from the beneficiary.

V. Completely and Incompletely constituted trust:

• Illusory trust: This is not a real trust, as the form of the instrument suggests apparent beneficiaries, but the settlor's intention, as gathered from the instrument, shows a desire to create a trust.
• Trust of Imperfect Obligation: A trust that cannot be enforced by the trustee, yet the court allows trustees to carry out the trust if they choose to do so.
• Trust in favour of creditors: A trust created by a letter for the payment of creditors becomes irrevocable. It is not necessary for the settlor or debtor to communicate the creation of the trust to the creditors.
• Discretionary trust: A trust that does not grant a beneficiary the right to any part of the income of the trust property but gives trustees discretionary power to pay them a portion of the income as they see fit. The beneficiary only has hope that the discretion will be exercised in their favor.

Creation of Trust

1. Creating a Trust in India:
   • Express Trusts: These are created through a clear expression of intent by the settlor, without any specific wording requirement.
   • Trust by Law: Includes Implied Trusts, Resulting Trusts, Constructive Trusts, and Trustee de son tort.
2. Parties Involved:
   • Creator of Trust: Must be competent as per Section 11 of the Indian Contract Act.
   • Trustee: Any person capable of holding property can be a trustee.
   • Beneficiary: Every person capable of holding property may be a beneficiary.
3. Essentials of Trust (Section 6, Indian Trust Act):
   • Certainty of Intention: Clear expression of intent to create a trust.
   • Certainty of Object: The object of the trust must be clear to ensure its validity.
   • The Beneficiaries: Must be indicated with reasonable certainty.
   • Certainty about Trust Property: There must be reasonable certainty about the subject matter of the trust.
   • Transfer of Property: The trust property must be transferred to the trustee by the settlor.
   • Lawful Purpose: The trust must be created for a lawful purpose.
4. Trust of Immovable Property: Declared by a non-testamentary instrument in writing, signed by the author or trustee, and registered.
5. Trust of Movable Property: Can be created either like immovable property or by transferring ownership of the trust property to the trustee.

Appointment of Trustees

Section 73 & 74 of Indian Trust Act 1882
A Trust cannot fail for the want of a Trustee:

• According to Section 10 Indian trust act, a person may be appointed as a Trustee If is capable of holding property.

Trustee's Responsibilities

• The Trustee is responsible for managing the trust's property.
• They can be appointed by the settlor (the person who creates the trust) or by the court.
• The Trustee must accept the role voluntarily and cannot resign without the consent of all beneficiaries or the court.

Trust Validity Without a Trustee

• If the settlor does not appoint a trustee, the trust remains valid. The principle is that equity does not require a trustee.
• In such cases, the person holding the property is responsible for executing the trust.
• If a named trustee refuses to perform their duties, it does not affect the trust.

Trustee Inability or Absence

• If a trustee dies or becomes unfit to act, the trust is not affected. The property will revert to the settlor (if alive) or their legal representatives until new trustees are appointed (as per Section 73).
• If a trustee leaves India to reside abroad or is absent for six months, a new trustee may be appointed (as per Section 73).

Who Can Be a Trustee

• A trustee can be an individual (such as a married or unmarried woman), a corporation, or a bank.
• Minors can be appointed as trustees in the case of a passive trust, but insolvents cannot be trustees.

Power to Appoint New Trustee

• The power to appoint a new trustee lies with:
• i) The person nominated in the trust deed.
• ii) The author of the trust, if they are alive and competent to contract.
• iii) All surviving or continuing trustees or the legal representative of the last surviving trustee.
• iv) With the court's consent if all trustees are retiring simultaneously.

Appointment of Trustees by Court

• Section 74 of the Indian Trust Act allows the court to appoint a new trustee.
• When there is a vacancy due to death or disqualification of a trustee, beneficiaries can petition the Principal Civil Court for a new trustee.

Principles for Court Appointment

The court considers:

• The wishes of the trust author as stated in the trust instrument.
• The wishes of any person empowered to appoint new trustees.
• Whether the appointment will aid or hinder the execution of the trust.
• The interests of all beneficiaries if there are multiple beneficiaries.

This principle was established by Justice Turner in the case of Re Tempest.

Powers of Trustees

The powers of a trustee can be classified into two categories: General powers and Statutory powers.

General Power of a Trustee

• A trustee can perform all acts that are reasonable and proper for the realization, protection, or benefit of the trust property.
• The trustee has the authority to lease the trust property for a period not exceeding 21 years. If the lease period exceeds 21 years, the trustee must seek permission from the principal Civil Court of original jurisdiction.
• The trustee is also empowered to spend money for necessary repairs and improvements to the trust estate.

Statutory Power of a Trustee

Power to Sell

• A trustee has the power to sell any trust property, either together or in lots, by public auction or private contract, at one time or at intervals, unless the instrument of the trust specifies otherwise (Section 37).
• Power to Sell Under Special Conditions
• Power to Buy-In and Re-Sell
• Direction to Sell Within a Specified Time Section 38.
• Power to Convey the Trust Property Section 39.

Power to Vary Investment

• A trustee has the authority to recall any investment of the trust property in securities and reinvest the same in other securities that are secure and profitable (Section 40).

Power to Apply Property of Minors for Their Maintenance

• When the beneficiary is a minor, the trustee is responsible for using the funds to cover the minor's necessities, maintenance, education, and reasonable expenses related to religious worship, marriage, or funeral.
• The trustee must apply the property and invest the income in securities for the benefit of the minor. If the income from the trust property is insufficient for these expenses, the trustee may, with the permission of the Principal Court, apply the corpus of the trust property (Section 41).

Power to Give Receipt for Trust Property

• The trustee has the authority to provide a written receipt for any money, securities, or other movable property payable, transferable, or deliverable to him in the exercise of any trust or power, and in the absence of fraud (Section 42).

Power to Compound

• Trustees acting together have the power to accept any composition or security for any debt, allow time for the payment of any debt, compromise, compound, or submit any claim to arbitration, or settle any debt, account, or claim relating to the trust.
• The trustee can enter into agreements or execute instruments that he deems beneficial. If the trustee acts in good faith, he is absolved from liability for any loss (Section 43).

Vesting of Power

• If there are several trustees and the power to deal is granted to all, if any one of the trustees dies, the power may be exercised by the remaining trustees unless the terms of the trust deed specify otherwise (Section 44).

Suspension of Powers

• The powers of the trustee are suspended when a decree is obtained in a suit for the execution of the trust (Section 45).

Disabilities of a Trustee

• Trustee Cannot Renounce After Acceptance: A trustee cannot renounce the trust after acceptance except with the permission of the court, with the consent of the beneficiary (if competent to contract), or with a special power given under the instrument of trust.
• A Trustee Cannot Delegate: A trustee cannot delegate his duties to a stranger or co-trustee unless the instrument of trust allows it, or in the regular course of business, or with the consent of the beneficiary. A trustee may employ workmen, valuers, auctioneers, or agents if necessary.
• A Co-Trustee Cannot Act Singly: When there are multiple trustees, all must join in the execution of the trust unless the instrument provides otherwise. Joint execution is generally necessary to bind the trust estate. In Janakirama Iyer's case, the Supreme Court held that all actions intended by the trustees for executing the trust must be taken by all of them acting together as per Section 48.
• Trustees Cannot Act Arbitrarily: If a trustee has discretionary power under a special trust, he must exercise it in good faith and reasonably. The court can intervene if the trustee acts arbitrarily, mischievously, or in a way that endangers the beneficiaries' interests (Section 49).
• Trustee May Not Charge for Services: The office of a trustee is honorary unless the instrument of the trust provides otherwise. A trustee is not entitled to any charges for services rendered in executing the trust, including trouble, skill, and loss of time. This does not apply to official trustees, administrators-general, public curators, or those holding a certificate of administration. The courts have strong reasons to disallow anything beyond the trust to prevent the trustee from gaining an undue advantage and causing distress to the beneficiary. This principle was stated by Lord Herschell in Bray v. Ford, where it was emphasized that a person in a fiduciary position is not entitled to make a profit unless expressly provided otherwise, and should not put himself in a position where his interest and duty conflict.
• Trustee Mean of Trust Property for His Own Profit: The relationship between the trustee and beneficiary is fiduciary, and the trustee cannot make a personal gain from any matter arising out of the trust. The trustee must show the same care and caution towards the trust property as he would towards his own. The trustee holds the property in trust for the beneficiary and must use his skills for their benefit. However, the trustee is entitled to reimburse himself for all properly incurred expenses related to the execution of the trust, realization, preservation, or benefit of the trust property, or for the protection of the beneficiary (Section 51).
• Trustee for Sale May Not Buy:A trustee for sale or his agent may not buy the trust property or any interest in it. It was held in Peari Mohan Mukerji v. Manohar Mukerji that a trustee for sale cannot purchase because the same person cannot be both vendor and purchaser. However, a trustee can purchase trust property under certain circumstances:
  • When the parties are at arm's length.
  • If he has given a fancy price for it.
  • If the sale is by public auction and court permission has been obtained.
  • If he is a bare or nominal trustee without any duties, or if he has disclaimed the trust.
• Trustee May Not Buy Beneficiary's Interest Without Permission: If a trustee of a trust property has recently ceased to be a trustee, he may, with the permission of the Principal Civil Court of original jurisdiction, buy or become a mortgagee or lessee of the trust property. Such permission shall be granted by the court if the sale is for the benefit of the property.
• Co-Trustees Not to Lend to One of Them: A trustee or co-trustee is under a duty not to invest the trust money on mortgage by or on the personal security of himself or any one of the co-trustees (Section 54).

Rights and Liabilities of the Beneficiary

Under the Indian Trust Act, 1882, the beneficiary of a trust is entitled to certain rights and has specific liabilities.

1. Right to Rents and Profits

• The beneficiary has the right to receive the rents and profits generated from the trust property, subject to the terms outlined in the instrument of the trust (Sections 55 & 56).

2. Right to Specific Execution

• The beneficiary is entitled to have the intentions of the author of the trust executed specifically to the extent of his interest (Section 56).

3. Right to Transfer of Possession

• If there are one or more beneficiaries who are competent to contract and are in agreement, they may request the trustee to transfer the trust property to them. This right accrues to a beneficiary upon reaching the age of majority (Section 56).

4. Right to Inspect and Copy Trust Documents

• The beneficiary has the right to inspect and obtain copies of the instrument of trust or the documents of title relating to the trust property. This right is also applicable against individuals claiming under the trustee with notice of the trust (Section 57).

5. Right to Transfer Beneficial Interest

• If the beneficiary is competent to contract, he can transfer his interest to another person, subject to the applicable laws (Section 58).

6. Right to Sue for Execution of Trust

• The beneficiary has the right to sue for the execution of the trust in cases where no trustees are appointed, or if all appointed trustees have died, been discharged, or if the execution of the trust becomes impracticable. The court will execute the trust until a new trustee is appointed (Section 59).

7. Right to Proper Trustees

• The beneficiary has the right to ensure that the trust property is protected, held, and administered by proper persons. Improper persons include those domiciled abroad, alien enemies, insolvents, and, unless permitted by personal law, married women and minors. When the administration of the trust involves the receipt and custody of money, at least two trustees are required.

8. Right to Compel Trustee to Perform Duty

• The beneficiary has the right to compel the trustee to perform any specific act that is his duty. The beneficiary can also restrain the trustee from any action that may lead to a breach of trust (Section 61).

9. Wrongful Purchase by Trustee

• If the trustee has wrongfully purchased trust property, the beneficiary has the right to have the property declared subject to the trust and have it reconveyed by the trustee. Upon reconveyance, the beneficiary is obligated to repay the purchase money along with interest and other expenses incurred in the preservation of the property (Section 62).

10. Following Trust Property into the Hands of Third Person

• If the trust property comes into the possession of a third person in a manner inconsistent with the trust, the beneficiary may require the third person to admit formally or may file a suit for declaration that the property is subject to a trust. The trustee who received the money from the sale of the trust property is obligated to repay the money to the beneficiary.
• The beneficiary has the right to follow the trust property into the hands of third persons or into the hands of another beneficiary or into which it has been converted. If the trustee converts the trust property by breach of trust, the beneficiary has the right to recover the proceeds of the disposition of the trust property.
• If the trustee mingles the trust property with his own, the beneficiary is entitled to a charge on the entire fund for the amount due to him (Section 66).
• The beneficiary has the right to follow the trust estate into the hands of a person without notice of the trust and claim it. Similarly, he can follow the trust property in the hands of a purchaser for valuable consideration with notice of the trust (Section 63).
• Exceptions to the above rule of following trust property apply to a transferee in good faith for consideration without notice of the trust and also a transferee for consideration from such transferee with notice of the trust.
• In case of a breach of trust by the trustee, the beneficiary has two remedies:
  • Against the trustee personally. If there is more than one trustee, each is jointly and severally liable.
  • Against the trust property into which it has been converted.

11. Wrongful Employment by Partner-Trust of Property for Partnership Purposes

• If a trustee who is a partner in a partnership firm employs the trust property for the benefit of the partnership business, the trustee is liable for breach of trust. No other partners of the firm are personally liable for the breach. However, other partners can be held jointly and severally liable for the breach if they had notice that the property was trust property (Section 67).

When the Office of the Trustee Becomes Vacant

• The office of the trustee becomes vacant upon death or discharge from the office.
• Discharge of Trustee:A trustee may be discharged from duties in the following ways:
  • By the extinction of the trust
  • By the completion of his duties under the trust
  • By means prescribed in the instrument of the trust
  • By the appointment of a new trustee in his place