Non-Corporate Entities: formula sheet

Key formulas

Section 6: essentials of a trust

Trust = intention + purpose + beneficiary + trust-property (each with reasonable certainty) + transfer to trustee

Transfer is not needed if the trust is declared by will or the author is himself the trustee. All of this is subject to Section 5.

Section 5: immoveable property

Valid only if: written non-testamentary instrument + signed by author or trustee + registered; OR by will

Oral declaration of a trust of immoveable property is not valid. A will needs no registration under this section.

Section 5: moveable property

Valid if: declared as for immoveable property, OR ownership transferred to the trustee

Moveable property can therefore be held on trust by delivery or transfer, without writing.

Section 5: fraud exception

Formality rules do not apply where they would effectuate a fraud

Use it only when facts show fraud.

Section 7: who may create a trust

Any person competent to contract; or a minor, by or on his behalf, with permission of a principal Civil Court of original jurisdiction

Competence follows Section 11 of the Indian Contract Act, 1872.

Section 10: who may be trustee

Any person capable of holding property; if discretion is involved, must be competent to contract

No one is bound to accept a trust. A disclaimer must be within a reasonable period.

Rule on delegation (Section 47)

No delegation, unless: (a) the trust instrument allows it; (b) it is in the regular course of business; (c) it is necessary; or (d) a competent beneficiary consents

Appointing an attorney or proxy for an act that is merely ministerial and needs no independent discretion is not delegation.

Who can be a trustee

Any person capable of holding property and competent to contract can be a trustee

A minor or person of unsound mind cannot be a trustee. A person who is not competent to contract cannot accept the office. The author of the trust can also be a trustee.

Acceptance and disclaimer

A person named as trustee is not bound to accept; he may accept or disclaim the office

Disclaimer is made before accepting. Once he has accepted, he can retire only in the ways the Act permits.

Standard of care

Trustee must deal with trust property as a man of ordinary prudence would deal with his own property of the same kind

This is the basic duty, and the base for most liability questions.

Core duties

Know the terms of the trust; protect the property; keep accounts; avoid conflict of interest; act impartially; no personal profit

Use as a checklist for any duty question.

Removal or replacement

Appointment by the author, by the beneficiaries or by the court; removal or replacement by the court

Give the grounds in the question facts, such as breach, misconduct or incapacity, and conclude.

Liability for breach (Section 23)

Trustee must make good the loss to the trust property or beneficiary

Exceptions: beneficiary induced the breach by fraud, or a competent beneficiary concurred or later acquiesced with full knowledge of the facts and his rights, without coercion or undue influence.

Interest on breach (Section 23)

General rule: no interest. Cases (a) actual interest received: account for it. Cases (b), (c), (d): simple interest at 6% p.a. unless Court directs otherwise

(b) unreasonable delay in paying the beneficiary, (c) ought to have received interest but did not, (d) fairly presumed to have received interest.

Compound interest or profits (Section 23)

Failure to invest and accumulate: compound interest, half-yearly rests. Use in trade or business: compound interest (half-yearly rests) or net profits, at beneficiary's option

Compound interest is at the same rate, 6% p.a.

Predecessor's default (Section 25)

Successor trustee is not, as such, liable for the acts or defaults of his predecessor

He is liable for his own failure, for example not acting on a breach he knows of.

Co-trustee's default (Section 26)

One trustee is not, as such, liable for a co-trustee's breach, subject to Sections 13 and 15

Unless the instrument expressly says otherwise, he is liable in the three cases (a), (b) and (c) below.

Exceptions to Section 26

(a) delivered trust property to co-trustee without seeing to its proper application; (b) allowed co-trustee to receive trust property without due enquiry, or to retain it too long; (c) became aware of a breach committed or intended and either concealed it or did not within a reasonable time take proper steps to protect the beneficiary

Joining in signing a receipt does not by itself make a co-trustee liable if he proves he did not receive the property.

Payment without notice (Section 28)

Beneficiary's interest vested in another + trustee has no notice + trustee pays the person who would otherwise have been entitled = trustee not liable

All three conditions must be met.

Beneficiary at fault (Section 68)

Beneficiary's interest can be impounded until the loss is compensated

Applies where a beneficiary joins in the breach, knowingly takes an advantage without the others' consent, conceals a known breach or fails to act within a reasonable time, or deceives the trustee into the breach.

Rights of beneficiary (three groups)

Benefit + Information + Enforcement

Use this as a framework to organise the answer. Cite a section number only if you are certain of it.

Beneficiary's transferee (Section 69)

Transferee gets the rights and bears the liabilities of the beneficiary in respect of that interest at the date of transfer

The transferee takes the position as it stood at the transfer date.

Vacating of trustee's office (Section 70)

Office vacated by: death OR discharge from office

Vacating the office does not by itself end the trust.

Extinction of trust (Section 77)

(a) purpose fulfilled; (b) purpose unlawful; (c) purpose impossible by destruction of trust property or otherwise; (d) revocable trust expressly revoked

Only these four grounds. Revocation counts only if the trust is revocable and the revocation is express.

Power of sale (Section 37)

Trustee empowered to sell may sell subject to prior charges or not, together or in lots, by public auction or private contract, at one time or several times, unless the instrument directs otherwise

The trust instrument can override this default.

Savings (Section 1)

Act does not affect waqf under Muhammadan law, undivided family relations under customary or personal law, or apply to public or private religious or charitable endowments

Explains why the Act is about private trusts.

Quick revision

• A trustee may be discharged only in the ways listed in Section 71, including extinction of the trust, completion of duties, the trust instrument, a new trustee, consent, or the Court.
• Consent discharge needs the trustee and the beneficiary, or all beneficiaries if there are several, competent to contract.
• Section 73 allows a new trustee when a trustee disclaims, dies, is absent from India for six continuous months, is declared insolvent, wants discharge, or is unfit.
• The first person to appoint is the one nominated in the trust instrument; if none is able, the author, or the continuing trustees, and so on.
• An appointment of a new trustee must be in writing under the hand of the person making it.
• Under Section 75, trust property vests in the new trustee, who has the same powers as if originally nominated.
• A trustee must maintain and defend suits and take reasonable steps to protect title to trust property (Section 13).
• A new trustee is not, as such, liable for the acts or defaults of his predecessor (Section 25).
• One trustee is not, as such, liable for a co-trustee's breach, unless an exception applies, such as handing over property without seeing to its application or concealing a known breach (Section 26).
• A trustee who pays without notice of the beneficiary's transfer is not liable (Section 28).
• A person to whom a beneficiary transfers his interest has the beneficiary's rights and liabilities at the date of transfer (Section 69).
• The State Government appoints Registrars of Firms under the Partnership Act (Section 57).

Common mistakes

• Saying any written trust of land is valid. Fix: For immoveable property a non-testamentary instrument must be in writing, signed by the author or trustee, and registered. A will is the alternative.
• Requiring registration for a trust made by will. Fix: Section 5 allows a trust of immoveable property by the will of the author or the trustee. Registration applies to the non-testamentary instrument.
• Saying a trustee may freely delegate duties. Fix: State Section 47: no delegation unless the instrument allows it, it is in the regular course of business, it is necessary, or a competent beneficiary consents.
• Treating every appointment of an attorney as delegation. Fix: Mention that a proxy for an act merely ministerial, with no independent discretion, is not delegation.
• Saying a trustee is never liable for a co-trustee's breach. Fix: Always check the three cases: delivery without seeing to application, allowing receipt without enquiry or retention too long, and concealing or ignoring a known breach.
• Saying a successor trustee is liable for a predecessor's default because he took over the trust. Fix: Section 25 says he is not, as such, liable. Only his own failure, such as ignoring a known breach, can make him answerable.
• Saying the trust ends when the trustee dies. Fix: Section 70 only says the office is vacated by death or discharge. The trust continues and a new trustee is appointed.
• Saying any trust can be revoked by the settlor. Fix: Section 77(d) applies only when the trust is revocable and is expressly revoked. Write both conditions.

Exam tips

• Begin every validity answer with the property type. Section 5 turns on it.
• Quote the key words of Section 5 and Section 6 and apply them to the facts. Do not only recite.
• Use the Section 6 illustrations as models. 'Hoping' and 'bulk' are classic failure facts.
• Mention Section 1 savings, such as waqf and religious or charitable endowments, when facts hint at them.
• Write a one-line conclusion. ICSI answers follow provision, analysis, conclusion.
• Learn Section 47 word for word. It is the one provision in this topic that examiners can test directly.
• Use headings such as Duties, Rights and Powers, Disclaimer, Appointment, and Removal for long answers, so the answer is easy to mark.
• In case problems, always end with a clear conclusion on the trustee's liability or the beneficiary's remedy.