NISM-Series-X-B: Investment Adviser (Level 2) · Tools for Estate Planning

Trusts in Estate Planning: Types, Parties and Uses

Updated 11 October 2026 · Fact-checked

A trust is an arrangement where a settlor transfers assets to a trustee, who holds and manages them for beneficiaries under a trust deed. In estate planning, you use it to pass wealth smoothly and protect assets. In exams, identify the parties, then the type, then the purpose.

Understand Trusts in Estate Planning

A trust separates ownership on paper from benefit. The person who creates it gives assets to someone else to hold. That person must manage them for the benefit of others, as the trust deed says.

There are three core parties. The settlor (author of the trust) creates it and contributes the assets. The trustee holds legal title and manages the assets. The beneficiary receives the benefit. One person can play more than one role. For example, a settlor can also be a trustee, but a sole trustee should not be the sole beneficiary, because the legal and benefit interests would merge. The trust deed sets out the terms. In India, private trusts are governed by the Indian Trusts Act, 1882.

Trusts are classed in a few ways. A revocable trust can be cancelled or changed by the settlor, so the settlor keeps control. An irrevocable trust cannot be taken back once created, except as the deed or law allows. This gives stronger asset protection and certainty, but less flexibility. In a specific (determinate) trust, the deed fixes each beneficiary's share. In a discretionary trust, the trustee decides who gets what and when, within the class of beneficiaries named in the deed.

A private family trust is a trust set up by a family member for relatives. It is used to hold assets such as property, shares and investments, and to pass them on in a planned way. Typical uses are: avoiding disputes among heirs, providing for minors or dependents with special needs, staging distributions over time, and keeping family business holdings together. It can also help protect assets from claims of a beneficiary's creditors, depending on how it is structured and when it is created.

A trust is created by a trust deed and transfer of assets to the trustee. Unlike a will, a trust can operate during the settlor's lifetime and can continue after death. Tax treatment depends on the type of trust and the Income-tax Act, so link this topic with taxation of trusts.

Key formulas to remember

Three core parties: Settlor (creates) → Trustee (holds and manages) → Beneficiary (benefits); The trust deed sets the terms. One person may hold more than one role, but a sole trustee cannot be the sole beneficiary.
Revocable vs irrevocable: Revocable = settlor can cancel or change; Irrevocable = settlor cannot take it back; Irrevocable gives stronger asset protection. Revocable gives flexibility and control.
Specific vs discretionary: Specific = shares fixed in deed; Discretionary = trustee decides shares; Discretionary suits uncertain future needs, such as minors or spendthrift beneficiaries.
Governing law: Private trusts in India: Indian Trusts Act, 1882; Used for private trusts, including family trusts. Do not confuse with charitable trust laws.

How to solve Trusts in Estate Planning questions

Use this order for any trust question, whether a definition, a scenario or a type-matching question.

1Identify who created the trust and who is named to hold the assets. That gives you settlor and trustee.
2Identify who benefits. That gives you the beneficiaries.
3Check whether the settlor can cancel or change the trust. If yes, it is revocable. If no, it is irrevocable.
4Check who decides the shares. Fixed in the deed means specific. Left to the trustee means discretionary.
5Match the client's goal (control, protection, minors, dispute avoidance) to the trust type.
6Eliminate options that overstate, such as claiming a trust always avoids tax or can never be challenged.
7Pick the option that fits the facts and the Indian Trusts Act framework.

Quickest way: Three-word test for trust questions

When to use it: Use when you have under a minute per question and the options look similar.

Ask: Who gives? (settlor)
Ask: Who holds? (trustee)
Ask: Who gets? (beneficiary)
Then ask two switches: Can it be taken back? (revocable or irrevocable) and Who fixes the shares? (specific or discretionary).
Choose the option that matches both switches.

Common mistakes in Trusts in Estate Planning

Mixing up settlor and trustee
Both deal with the assets, so the roles sound alike.
Fix: Settlor creates and gives. Trustee holds and manages. Beneficiary receives.
Saying a revocable trust gives full asset protection
Students remember that trusts protect assets and apply it to every type.
Fix: Because the settlor can take back a revocable trust, it offers weaker protection. Stronger protection comes with irrevocability.
Confusing discretionary with revocable
Both words suggest flexibility.
Fix: Revocable is about the settlor taking the trust back. Discretionary is about the trustee choosing the beneficiaries' shares.
Assuming a trust is the same as a will
Both are estate planning tools.
Fix: A will takes effect only on death. A trust can operate during life and continue after death, as the deed provides.
Treating a sole trustee who is also sole beneficiary as valid
Students know a settlor can be a trustee or beneficiary and over-generalise.
Fix: Roles can overlap, but the sole trustee cannot be the sole beneficiary, since the legal and benefit interests would merge.

Worked examples

Example 1

Mr Rao transfers shares to a trust through a deed. His brother manages the shares and pays income to Mr Rao's two minor children as the brother thinks fit. Mr Rao cannot cancel the trust. Identify the parties and the type of trust.

Show the solution

Mr Rao creates the trust and transfers the shares, so he is the settlor.
The brother manages the shares, so he is the trustee.
The two minor children receive the benefit, so they are the beneficiaries.
Mr Rao cannot cancel the trust, so it is irrevocable.
The trustee decides how much each child gets, so it is discretionary.

Answer: Settlor: Mr Rao. Trustee: his brother. Beneficiaries: the two children. It is an irrevocable discretionary trust.

Example 2

A client wants to give each of his two children exactly 50% of the income from a family trust, fixed now, and does not want the trustee to vary the shares. Which type of trust fits, and what is the main limitation?

Show the solution

The shares are fixed in the deed, so the trust is specific (determinate), not discretionary.
The trustee has no power to vary shares.
The limitation follows from this: the trust cannot adapt if a child's needs change, for example if one child has a special need or becomes unable to manage money.
A discretionary trust would give that flexibility, at the cost of certainty of shares.

Answer: A specific trust fits. Its main limitation is lack of flexibility, since shares are fixed and the trustee cannot adjust them.

Exam tips

Expect scenario questions that ask you to name the settlor, trustee or beneficiary. Read who does what.
Watch for revocable vs irrevocable. The key test is whether the settlor can take the trust back.
Reject options that say a trust guarantees tax savings or can never be challenged.
Remember the Indian Trusts Act, 1882 governs private trusts. Do not invent section numbers.
Negative marking applies in X-B, so skip only if you cannot narrow to two options.

Practice questions from Tools for Estate Planning

Trusts in Estate Planning in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Trusts in Estate Planning: frequently asked questions

What is a private family trust?

It is a trust created by a family member, the settlor, to hold assets for relatives as beneficiaries. A trustee manages the assets under a trust deed. It is used to plan wealth transfer and reduce family disputes.

What is the difference between a revocable and an irrevocable trust?

In a revocable trust, the settlor can cancel or change the trust and take the assets back. In an irrevocable trust, the settlor cannot do so once it is created, except as the deed or law allows. Irrevocable trusts give stronger asset protection.

What is the difference between a discretionary and a specific trust?

In a specific trust, the deed fixes each beneficiary's share. In a discretionary trust, the trustee decides who receives what and when, within the class named in the deed. Discretionary trusts give more flexibility.

How is a family trust created in India?

The settlor executes a trust deed naming the trustees, beneficiaries and terms, and transfers assets to the trustees. The deed should be drafted with legal advice. Stamp duty and registration depend on the assets and state rules, so check them for the case.

Can the settlor also be a trustee?

Yes, the same person can hold more than one role. However, a sole trustee cannot be the sole beneficiary, because the legal and benefit interests would merge.