SANCTIONING LOAN TO TRUST ACCOUNTS

Brief Introduction on Trusts.

A) Essentials in its Making

1. A written Trust Deed signed by the Settlor,

2. Trustees (minimum) and 2 witnesses.

3. Property of the Trust (Money or Other Property).

3. Purpose/Object of trust.

4. Stamp Paper depending on value of property under trust.

5. Registration of deed in Sub-Registrar’s office on payment of apt

registration charges. The trust may or may not be registered; registration
is required only if an immovable property is transferred to the trust.

6. Name of Trust.

7. Address of Trust.

8. Apply for a permanent account number for the trust and open a
bank account for it.

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B) Who can form a Trust?

Any competent individual i.e person over 18 years of age and mentally
sound can create a trust for any legal purpose(s). But in case of a minor, for
whom a guardian is appointed by the court or of whose property the
superintendence has been assumed by the court of wards the age of
majority is twenty one years. A trust can be created by or on behalf of a
minor with the permission of a principal civil court of original jurisdiction.
Apart from a human being, a company, firm, society or association of
persons is also capable of creating a trust.

C) For the sake of clarity, the parties involved in a trust are stated below

1) Settlor: – Person who makes a settlement in a trust (forms a trust) by

entrusting assets in a trust. (It refers to the person who wants to
transfer assets into a trust. At times Settlor can be someone else like
a professional who forms a trust with nominal funds. Donors are
persons who transfer the assets to the trust. For the purpose of this
article, “Donor” is a person who gifts funds to a trust. He may or may
not be a settlor / trustee / beneficiary.)

( Hence the words “settlor”, “owner”, and “donor” have been used inter-
changeably.)

2) Trustee :– Person whom the settlor trusts; and to whom the settlor
transfers some funds or property to look after for the benefit of the
beneficiaries. He is person who is the “legal owner” of assets and is
responsible for managing the trust assets and for legal compliance.
(A trustee is like a custodian. He has a fiduciary relation with the
beneficiary.)

3) Beneficiary: – Person who is entitled to the income and assets of the

trust as laid down in the trust deed. The beneficiary may be
identified or not. Beneficiary may exist on the date of trust formation
or may come into existence in future. (These are usually spouse and
children of the settlor. At times the settlor is also the beneficiary.)

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(Hence the words “beneficiary” and “heir” are used interchangeably.)

4) Protector:- Without the above three persons, a trust cannot be

formed.

Outside India, there is a concept of “Protector”. A “Protector” is a person

who is expected to protect the beneficiaries. He can ensure whether the
trustee is performing as per the trust deed or not.

The settlor, trustee and beneficiary can be individuals or non-individuals.

The respective trust law can have a bearing on the rights of beneficiaries.
For example, under the Indian law, the beneficiary has a right to demand
his shares from the trustees in case of specific trusts.

Hence one will have to consider the trust law as well as the trust deed.

D) Types of Trusts in India

There are two types of trusts in India: private trusts and public trusts.
While private trusts are governed by the Indian trusts Act, 1882, public
trusts are divided into charitable and religious trusts. The Charitable and
Religious Trust Act, 1920, the Religious Endowments Act, 1863, the
Charitable Endowments Act, 1890, the Bombay Public Trust Act, 1950 are
some of the statutes for the enforcement of public trusts in India. Recently,
trusts can also be used as a vehicle for investments, such as mutual funds
and venture capital funds. These trusts are governed by Securities and
Exchange Board of India (SEBI). Classification in terms of motive of
formation is as follows:

1. Simple Trust :– Trustee is just a passive depository of the Trust

property. There are no active duties expected from Trustee and no
directions are given to him.

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2. Special Trust :– Trustee is active and acts as an agent to execute the

Grantor’s wishes. This Trust is operative.

3. Private Trust: – Settlor creates a Trust primarily for benefit of one or

more particular individuals as its Beneficiary.

4. Public Trust :– Beneficiaries are the general public or a class as a whole.

It has some charitable end as its Beneficiary.

5. Express Trust: – Here, the Settlor creates a Trust over his assets either in
present or upon his death. It can be either by way of a will or Trust deed.

6. Implied Trust :– It is created where some legal requirements for an

Express Trust are not met, but intention on behalf of the parties is to
create a Trust that is presumed to exist.

7. Others depending on the type of object(s).

E)Recoverable Trusts:-

Recoverable Trusts are created during the life time of the trust maker and
can be altered, changed, modified or revoked entirely. Often called a living
trust, these are trusts in which the trust maker transfers the title of a
property to a trust, serves as the initial trustee, and has the ability to
remove property from the trust during his or her life time. Revocable
trusts are entirely helpful in avoiding probate. If ownership of assets is
transferred to a revocable trust during the lifetime the trust maker so that
it is owned by the trust at the time of the trust maker’s death, assets will
not be subject to probate. Although useful to avoid probate, a revocable
trust is not an asset protection technique as assets transferred to the trust
during the trust maker’s life time will remain available to the trust maker’s
creditors. It does make it more somewhat more difficult for creditors to
access these assets since the creditors must petition to a court for an order
to enable the creditor to get the assets held in the trust. A recoverable trust
evolves into an irrevocable trust upon the death of the trust maker.

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F) Irrevocable Trusts:-

An irrevocable trust is one which cannot be altered, changed, modified or

revoked after its creation. Once a property is transferred to an
irrevocable trust, no one, including the trust maker, can take the property
out of the trust. It is possible to purchase survivorship life insurance, the
benefits of which can be held by an irrevocable trust. This type of
survivorship life insurance cam be used for estate tax [planning purposes
in large estates, however, survivorship life insurance held in an
irrevocable trust can have serious negative consequences.

G) Purpose of Trusts

A Trust can be created for any lawful purpose. It can be effectively used as
a tax planning tool, also for protection and management of assets /
resources. It can also be formed for Charitable, Corporate Structuring,
Privacy, Spendthrift Protection and Succession Planning.

H)) Who can be Trustee?

Any person who is capable of holding property can be appointed a trustee.

Depending upon the nature of the trust, if trustee is required to play a
passive and role without any scope of discretion

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I) Who can be beneficiary?

A Corporation, a company or association of persons may as well be

appointed as trustee. Every person capable of holding property such as
a human being, corporation, Company and even a state can be made
beneficiary of a trust. An unborn person can also be made beneficiary. A
proposed beneficiary is not bound by the desires of the person creating
the trust. Such a proposed beneficiary can renounce his interest under
the trust by either making a disclaimer addressed to the trustee or by
setting up a claim inconsistent with the trust.
A trust in relation to movable property can be either declared as in the
case of immovable property or by transferring ownership of the
property to the trustee

J) Rights of a Beneficiary of Trust

Unless the trust instrument expresses a different intention, a beneficiary

has a right to the rents and profits of the trust property.

The beneficiary has the right to ensure that the intention of the author of
the trust is specifically executed to the extent of the beneficiary’s interest
therein.

A beneficiary can compel the trustee to perform any particular act of his
duty or can as well restrain the trustee from committing any contemplated
or probable breach of trust.

If no trustees are appointed or all the trustees die, disclaim or are

discharged or where for any other reason the execution of a trust by the
trustee becomes impracticable, the beneficiary can file a suit for the
execution of the trust. In such a circumstance, the court executes the trust
until a trustee is appointed for the same.
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K) CHECK LIST FOR TRUST ACCOUNTS:

The Indian Trusts Act 1882 which deals with private trusts.

The Public Trust Act of various states which deal with public trusts. These
Acts are based on the general framework of the Indian Trusts Act 1882.

Sl Points to be taken care of Yes/ No

No

1 Whether Private Trust or Public Trust or revocable or Yes/ No

irrevocable

(law will apply as the nature of trust as mentioned

above)

2 Whether the Trust is Registered and if so, whether copy Yes/ No

of registration certificate enclosed (Generally bankers
will prefer or insist registered trust)

3 Act under which the Trust is Registered

4 Whether copy of Trust Deed is submitted/ scrutinized Yes/ No

(If No the trust deed to be submitted and scrutinised)

5 Rules/ Latest Bye Law of Trust – whether obtained Yes/ No

(If No Rules and latest Bye law to be obtained).

6 Affidavit from Trustees that all amendments to Bye Yes/ No

Laws/ Trust Deed have duly been registered

7 A special note giving details as to the following points To be

should be prepared and kept along with the opening furnished
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form. covering
all the 4
points.
i. Whether there are any onerous provisions in the Trust
Deed, which may place the bank in a difficult position in
case of its breach by the trustees.

ii. Whether there are any restrictive clauses in the Trust

Deed regarding the amount which can annually be drawn
by the trustees.

iii. Whether there are any directions/restrictions

contained in the Trust Deed regarding the opening or
mode of operations of bank accounts.

iv. Whether any local enactment imposes any condition

regarding opening of accounts with banks and
operations on the Trust account.

8 Name, address of all Trustees and relationship among Yes/ No

trustees

9 KYC Documents like Aadhar Card, PAN Card, TAN, Voters Yes/ No
Id, Photos, Passport etc for Trustees and Trust obtained

10 Whether copy of resolution passed by the Board of Yes/ No

Trustees and Authorisation for availing the limits and
execution loan documents enclosed, are valid and as per
Trust Deed.

11 Whether Trust Deed Provides borrowing powers to the Yes/ No

Trustees and whether the purposes specified therein are
complied with (In some cases benefit of beneficiary
only may be mentioned in trust deed)

12 Whether the property owned by the Trust can be Yes/ No

mortgaged / charged as per the provision of the Trust
Deed and if so, whether procedure laid down in the Trust
Deed have been complied with i.e. purpose for Security
Creation and favouring which banks/
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13 Whether the Trust has permission from appropriate Yes/ No

Government Authority to hold Lands beyond the Ceiling
Limit prescribed ( for e.g. Trusts in Tamil Nadu have to
obtain permission from State Government for holding
land under Tamil Nadu Land Reforms (Ceiling and Land
Holding) Act 19621)

`14 Whether the trust properties can be mortgaged to raise Yes/ No

loan from Bank under relevant State Laws ( as per
Provisions of Tamil Nadu Private Schools (Regulations)
Act 1973, Tamil Nadu Aided Institutions ( Prohibition of
Transfer of Property) Act 1948 and Tamil Nadu
Recognised Private Colleges ( Regulations) Act 1976,
Trusts running Schools, Colleges and Educational
Institutions shall obtain permission from competent
authority prescribed under the Act to mortgage the
lands)

15 Whether the Trust can guarantee repayment of loan of Yes/ No

another trust or organisation or individual

16 Whether the Trust can sue and be sued for contract/ Yes/No
agreements/ guarantee executed by it through one or
more trustees.

17 Who should execute documents on behalf of the trust To be

furnished

18 Whether accounting rules / Tax rules like Depreciation To be

is applicable for the Trusts furnished

19 Provision relating to continuation of Trust on the death To be

of one or more Trustee and Trust’s liability furnished

20 Other Regulatory compliances as applicable under State Yes/ No

/ Central Enactment – whether complied.
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Legal

Accounting

Taxations

Other issues

21 Audited Financial statements of the Trust and copies of 3 To be

CB/3 CD as the case may obtained. furnished

22 Other Details: To be
furnished
Legal opinion on Trust deed and loan is taken for benefit
or purpose of the trust created.

Whether the creator of trust changed conditions

subsequently and if so opinion on the changed
conditions.

23 Whether Loan Proposed is in line with purpose/ clause Yes/No

in the Trust Deed

24 Whether ABS is submitted with audit report Yes/No

25 Details of Foreign Contribution received by the Trust or Yes/No

RBI permission obtained for the same

26 Accounting for foreign/ local donations is as per relevant Yes/No

provisions/rules received

27 Whether Statutory dues are paid regularly Yes/No

28 Details of Fixed Deposits to be enclosed Yes/No

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29 Details of Guarantees if any issued ( enclose) Yes/No

30 Whether the Trust is Tax exempt. If so, furnish copy of Yes/No

exemption certificate issued by the IT authorities

31 Statement of Funds Raised and Employed by the Trust Yes/No

32 Details of Leases Given and Taken by the Trust Yes/No

33 Whether auditors appointment/ rotation of auditors is Yes/No

as per relevant guidelines

34 Details of Law suits pending against the Trust Yes/No

35 Details of Personal Guarantee/ Liability of the Trust/ Yes/No

Trustees.

L) Important on sanction of loan TO TURSTS in addition to the above to be

considered.

1)Before creation of MOD on of mortgage of properties of trust usual pre-

cautions and legal opinion to be taken.

2) Valuation of properties from the approved valuer to be obtained.

3)Loan documents as specified by the bank to be taken.

4)Viability of the proposal as per norms to be vetted out. In the proposal.

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M) FEMA IMPLICATIONS ON TRUST

a) If Indian residents settlers

1 Indian residents FEMA does No problem Decision to

settler = >Indian not apply in taken by the
Assets=>Resident sanctioning sanctioning
loan to trust authority
Beneficiary=> as there are
no problems
on account of
FEMA

2 Indian residents FEMA Yes Whether to

settler = >Indian issues are Problems are obtain
Assets=> Non- there there under permission
FEMA issues from RBI or
Resident and has to not a
Beneficiary=> carefully decision to
dealt with. be taken.

3 Indian residents FEMA Yes Problems Whether to

settler = >Foreign issues are are there obtain
Assets=>Resident th ere under FEMA permission
issues and from RBI or
Beneficiary=> has to not a
carefully decision to
dealt with. be taken.

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4 Indian residents No major No problem Decision to

settler = >Foreign FEMA in taken by the
Assets=> Non- issues sanctioning sanctioning
loan to trust authority
Resident as there are
Beneficiary=> no problems
on account
of FEMA

b) If Non Residents settlers

Non- residents No major No problem Decision to

settler = >Indian issues in taken by the
Assets=>Resident under sanctioning sanctioning
loan to trust authority
Beneficiary=> FEMA as there are
no problems
on account of
FEMA

Non- residents settler FEMA Yes Whether to

= Indian Assets=> issues are Problems are obtain
Non-Resident there there under permission
FEMA issues from RBI or
Beneficiary=> and has to not a
carefully decision to
dealt with. be taken.

Non- residents settler FEMA Yes Whether to

= Indian Assets=> issues are Problems are obtain
Non-Resident there there under permission
FEMA issues from RBI or
Beneficiary=> and has to not - a
carefully decision to
dealt with. be taken.

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Non- residents settler FEMA does No problem Decision to

= Indian Assets=> not apply. in taken by the
Non-Resident sanctioning sanctioning
loan to trust authority
Beneficiary=> as there are
no problems
on account of
FEMA

N) Implication of Transactions:

FEMA issues can arise for the following transactions:

1) Settlement of trust.

2) Earning of income in the trust.

3) Distribution of the trust property – during lifetime of the trust, or on

dissolution.

4) In case of income of a trust, if the settlement of assets is permitted, the

consequent income is also permitted. It should be noted that under FEMA,
capital gain is not considered.

5) If settlement is permitted, a sale normally is permitted. However there

could be some restrictions such as on transfer of immovable property from
NRI to non-resident.

6)If settlement and income are permitted, distribution also is permitted.

There could be issues in case of distribution to NRIs. He may not be able to
remit the funds outside India beyond US$ 1 mn. per year.

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7) In the past, RBI has permitted distribution of income of the trust to NRIs
in the NRO account, if the trust was formed through a Will

O)CONCLUSION:

1)If all persons and assets of a trust – settlor, trustee, beneficiaries, assets
and location are in India / resident in India - there is no difficulty under
FEMA.

2)Conversely if all persons and assets are outside India / non-residents,

FEMA does not apply.

3)If any of the persons or assets in India and the rest outside India, it may
be advisable to obtain an approval from RBI.

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