Trusts are internationally recognised as favoured vehicles for estate and succession planning. Although most private asset-holding trusts are lifetime trusts created under inter vivos documents such as a trust deed, testamentary trusts (also known as 'will trusts' in certain jurisdictions) are formed through testamentary instruments such as a will and take effect only on demise.

Formation

Legal validity

A testamentary trust is essentially a trust created by a will. Therefore, it must comply with the laws relating to trusts and wills.

Wills

To settle a valid testamentary trust, the testator must formulate a valid will. Under the Succession Act 1925, a person of sound mind, who is not a minor, may make a valid will in writing and in the presence of two attesting witnesses. The will must be made according to the testator's free choice and without the influence of fraud or coercion.

Stamp duty is not payable on a will and wills need not be registered.

Trusts

Private trusts are governed by the Trusts Act 1882. Under the act, in order to create a testamentary trust, the testator must bequeath all or some of their property under the will to a trustee to hold and use for the stated purposes for the benefit of the beneficiaries.

Therefore, a testamentary trust must satisfy the 'four certainties' required for the creation of a valid trust:

  • Intention – the intention to settle a trust must be evident in the will's language (ie, it must be expressed and not just inferred circumstantially). Therefore, there must be no ambiguity in the language used to create the trust in the will.
  • Purpose – the purpose or objective for the trust's creation should be clearly expressed in the will (eg, the maintenance of family or meeting a child's education expenses). While executing the terms of the trust, the trustee must fulfil the trust's purpose.
  • Beneficiaries – the will must identify the beneficiaries with reasonable certainty. In India a private trust must exist for ascertainable beneficiaries; it cannot exist merely for an object or a purpose. Beneficiaries need not be named individuals as long as a class of beneficiaries or criteria are described to enable the trustees to identify with reasonable certainty whether a person satisfies the criteria or fits within the class. A charitable trust may also be settled through a will and may, among other things, appoint causes, charities or idols as beneficiaries.
  • Subject matter – the property for which the trust has been created must be described and identifiable with reasonable certainty.

These four certainties and the key terms and principles governing the trust are often set out in the body of the will or as an annex or schedule thereto.

Choice of trustees

The trustees appointed for a testamentary trust need not be the same persons who are appointed as the will's executors – although this is not uncommon.

It is advisable that the testator consult with and inform the individuals that they seek to appoint as trustees so that the individuals are not caught by surprise. If an individual wants to appoint a professional trustee company, the terms of their engagement should be agreed before they are named as trustees under the will.

The terms of a testamentary trust can provide for fees to be paid to trustees and deducted from the trust fund.

Taking effect

Testamentary trusts take effect in accordance with the terms of the will only on the testator's death. Before their death, the testator may amend the terms of the trust as often as they want by amending their will through a codicil or by executing a new will.

On a testator's death, the executor named in their will must, after probate (as required) is obtained, commence the formalities for constitution and operation of the testamentary trust.

Differences between testamentary trusts and living trusts

Control over trust property

In a testamentary trust, the testator exercises continued ownership and control over their assets throughout their lifetime as the property transfers and the trust becomes effective only on their death. However, in a living trust (also known as an 'inter vivos' or a 'lifetime' trust), the testator's property is typically transferred during their lifetime and they cede control and ownership of the property when that happens. This distinction is one of the key reasons that people choose testamentary trusts over living trusts, as control remains in their hands during their lifetime. An alternative method may be to create a living trust but transfer property to it later under a will.

Control over trust

A living trust's settlor may exercise some degree of control and oversight over the trust by providing in the trust deed that the trustee must have their consent or consult with them before undertaking certain actions. However, in a testamentary trust the testator would, by its very nature, be unable to exercise any control over the trust's functioning.

Privacy

A will may be subject to probate, which would bring the testamentary trust's terms into the public domain. For individuals who would prefer the trust terms to remain private and confidential, a living trust may be preferable.

Revocation

A testator can revoke their testamentary trust simply by amending or destroying their will during their lifetime. However, once created, a living trust may be revoked only if it is a revocable trust as per the trust's terms.

Stamp duty and registration

A testamentary trust does not require stamping or registration. However, a deed for a living trust must be duly stamped and, if immovable property is held by it, registered.

Regulatory considerations

Testamentary trusts may arguably be treated as 'inheritance' or 'succession' for regulatory purposes, such as for exchange control laws and takeover regulations. Therefore, they may offer regulatory exemptions which living trusts do not. However, a lifetime settlement under which the settlor retains life interest in the property may be regarded as 'inheritance' under exchange control regulations.

Forced heirship

The personal law applicable to Muslims in India allows them to bequeath only a certain portion of their wealth under their wills. The balance estate must go to heirs as per the forced heirship rules. These rules apply to testamentary trusts, but not to living trusts.

Comment

Testamentary trusts are an attractive option for estate and succession planning as they are easily created and flexible and offer cost benefits over living trusts. However, it should be considered whether a testamentary trust would be beneficial over a living trust or if a hybrid structure should be adopted. Such a decision must be made based on the facts surrounding each individual's estate. As with estate and succession planning in general, there is no one-size-fits-all solution for trusts.

For further information on this topic please contact Radhika Gaggar, Shaishavi Kadakia or Hita Agarwal at Cyril Amarchand Mangaldas by telephone (+91 22 2496 4455) or email ([email protected], [email protected] or [email protected]). The Cyril Amarchand Mangaldas website can be accessed at www.cyrilshroff.com.