A matter of trust: Private trusts are not a tax-saving hack. When should you set one up?

A private trust sounds like a billionaire’s trick to stash wealth in offshore havens. But it’s actually a clean, underrated structure for Indian families juggling succession, asset protection, or care for vulnerable loved ones. Think of it as a rulebook for your wealth, not a secret vault.

Trusts often beat joint ownership or HUFs (Hindu undivided families) for clarity. But they’re not for everyone and definitely not a tax-planning tool. So, when should you set one up?

What is a private trust?

A private trust is a legal arrangement governed by the Indian Trusts Act, 1882. In simple terms, you (the settlor) hand over assets to someone you trust (the trustee) to manage for someone else (the beneficiary).

You can wear all three hats – settlor, trustee and beneficiary.

The trust deed is the operating manual, spelling out who gets what, when and how.

There are two main types of trusts:

• Specific trust: Beneficiaries and their shares are fixed, like a family recipe.
• Discretionary trust: The trustee decides how and when to dish out the assets, like a chef improvising in the kitchen.

When should you actually create a trust?

Not every family needs a trust, but it can solve problems that aren’t just about money. These pertain to:

1. Minor children or dependent parents
   If you’re gone tomorrow, who manages your assets for them? A trust lets you decide who handles the money, how it’s used, and when the beneficiaries get it, avoiding probate or succession fights.
2. Family member with special needs
   Trusts secure long-term funds for those who can’t manage finances, preserving dignity and rights. They can also be structured for slab-rate taxation.
3. Business or marital disputes
   Discretionary trusts shield assets from creditors, family feuds, or ex-spouses. Not bulletproof, but stronger than joint holding or nominees.
4. HUF feels too rigid
   HUFs have rigid succession rules and legal baggage. Trusts offer flexibility as you control who manages and benefits, without unintended rights.
5. Smooth succession for real estate or NRO/foreign assets
   Trusts bypass probate (for wills) or succession certificates (no will), which can take months. For NRIs, they ease cross-border transfers.

Example: Imagine a business owner with two minor kids and a family home in Pune. By setting up a specific trust, they appoint their sister as trustee to manage the property and business income, ensuring the kids get funds for education until age 25, while shielding assets from business creditors.

What about taxation?

Trusts are not a tax hack.

In aspecific trust, income from the corpus or assets in the trust is taxed in the beneficiaries’ hands, as if they earned it directly (e.g., ₹3 lakh split among three beneficiaries). In adiscretionary trust, where the trustee decides distributions, income is taxed at the maximum marginal rate (42.744% including surcharge and cess) if beneficiaries or shares are indeterminate, per Section 164 (1). Consult a tax expert to structure it right.

Trusts with taxable income must file returns, maintain books, and comply with PAN, TDS and investment rules.

Transferring real estate may attract stamp duty, varying by state. The trust deed may also need registration under the Registration Act, 1908, in case of immovable property.

So, should you set one up?

A trust is a structure for control, continuity and avoiding chaos—not a tax loophole. A poorly drafted trust can cause more headaches than it solves.

1. You wantcontrol and clarity after you’re gone
2. You havefamily-specific needs like special care, blended heirs or conflict-prone succession
3. You’re holdingsubstantial assets across entities and want a single long-term vehicle to manage them

Don’t use one if:

1. You’re just trying to save tax
2. Your family setup is simple and straightforward
3. You won’t invest in good legal drafting and compliance

Bottom line

Most families keep assets in their own name because, well, that’s just how dad did it, and grandpa before him. But inheritance today isn’t a matter of trust, it’s a matter ofTrust (with a capital T).

A private trust is not some billionaire’s loophole. It’s a well-documented, regulator-approved way to make sure your wealth reaches the right (intended) people at the right time, without the wrong surprises. Work with a professional advisor to draft a robust trust deed and stay compliant, avoiding costly fumbles.

If you don’t want your family to fight over your money, give them a rulebook, not just a balance sheet.

CA Vijaykumar Puri, partner at VPRP & Co LLP, Chartered Accountants