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

Mr. Raman Iyer settles a revocable trust for his family and keeps the power to cancel it and take back the assets. Which statement best describes the position of the trust property?

Because Mr. Iyer can cancel the trust and reclaim the assets, he effectively retains control. Income from such revocable transfers is clubbed with the settlor's income for tax. The trust is not an irrevocable gift, and no rule forces equal distribution among beneficiaries.

  1. AIt is irrevocably removed from his control and can never be taxed in his hands
  2. BIt is treated as a gift to the beneficiaries, attracting no further consideration
  3. CIt must always be distributed equally among all beneficiaries
  4. DThe settlor retains control, and income from the property can be clubbed with his income under the income tax lawCorrect

Explanation

In a revocable trust the settlor keeps the power to take back the assets. Under the income tax clubbing provisions, income from assets transferred under arrangements that are revocable is taxed in the transferor's hands. The assets are not truly removed from his control, and equal distribution is not required by law.

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