Trust - Characteristics and Regulations

A trust is a fiduciary relationship where a settlor transfers legal ownership of assets to a trustee, who manages those assets for the benefit of one or more beneficiaries. The three‑party structure—settlor, trustee, and beneficiary—is a hallmark that differentiates trusts from sole proprietorships or companies.

Key characteristics include: (i) the trustee holds title in trust, not for personal gain; (ii) the trust deed outlines the purpose, powers, and distribution rules; (iii) trusts can be revocable or irrevocable, affecting control and tax treatment; and (iv) the trust enjoys a separate legal identity for certain purposes, though it is not a separate juridical person like a corporation.

For the NISM exam, remember that the trustee’s fiduciary duty is the core concept. Questions often test whether you can identify breaches of duty (e.g., self‑dealing) or determine the appropriate party responsible for compliance. Misreading the role of the settlor versus the trustee is a common trap.

• Fiduciary duty – trustee must act in the best interest of beneficiaries.
• Separate asset pool – assets are insulated from the trustee’s personal liabilities.

Indian law recognises several trust categories, each created for specific objectives. The most common are Family Trusts, Charitable Trusts, and Business Trusts. A family trust is typically used for succession planning, holding family assets and ensuring smooth transfer across generations.

Charitable trusts are established for philanthropic purposes and must be registered under the Indian Trusts Act, 1882, or the Income Tax Act for tax exemption. Business trusts, often termed "unit trusts" or "mutual funds", pool investor money for professional management and are regulated by SEBI under the Mutual Funds Regulations.

Exam questions may ask you to match a scenario with the correct trust type or to identify the statutory registration requirement. Pay attention to the purpose clause in the trust deed – it is the decisive factor for classification.

All trusts in India must be created by a written deed and, where required, registered with the appropriate authority. For family and charitable trusts, registration under the Indian Trusts Act, 1882, provides legal enforceability. Charitable trusts seeking tax exemption must also obtain registration under Section 12A and 80G of the Income Tax Act.

SEBI’s role is limited to business trusts (mutual funds). These entities must obtain a Certificate of Registration from SEBI, comply with the Net Asset Value (NAV) reporting standards, and adhere to the KYC/AML norms prescribed for mutual fund distributors. Failure to comply can lead to penalties, suspension, or cancellation of the registration.

From an advisory perspective, the exam tests your knowledge of the documentation checklist: trust deed, registration certificate, PAN of the trust, and periodic compliance filings (e.g., Form 10A for charitable trusts). Missing any of these can be a red flag in client suitability analysis.

Tax treatment varies by trust type. A revocable family trust is taxed in the hands of the settlor, while an irrevocable trust is taxed as a separate entity under the Income Tax Act. Charitable trusts that obtain 12A registration are exempt from income tax on surplus income, provided the income is applied to charitable purposes.

Business trusts (mutual funds) are subject to dividend distribution tax (DDT) on dividends paid to unit holders, and capital gains tax on the sale of units. The tax rates are stipulated in the Finance Act and are unchanged from the previous fiscal year unless amended.

For the exam, remember the distinction: income of a family trust flows to the settlor (if revocable) versus the trust itself (if irrevocable). A typical trap is confusing the tax exemption eligibility of charitable trusts with that of private family trusts.

Trustees must maintain accurate books of accounts, segregating trust assets from personal assets. Annual financial statements, including a balance sheet and profit & loss account, must be prepared and, where applicable, audited by a Chartered Accountant.

For charitable trusts, the Income Tax Act mandates filing of Form 10A (annual return) and Form 10B (audit report). Business trusts must submit quarterly NAV statements to SEBI and publish them on their website. Non‑compliance can attract penalties ranging from ₹10,000 to ₹1 lakh, and in severe cases, the trust may be derecognised.

Exam‑level advisors should be able to list the key filings and their frequencies. A frequent mistake is overlooking the separate audit requirement for charitable trusts, assuming the general audit suffices for all trust types.