1. What is a Family Trust?
A Family Trust is a legal arrangement where:
- Settlor (usually a family head) transfers assets
- Trustee holds and manages those assets
- Beneficiaries (family members) receive benefits (income / assets)
The trust is governed by the Indian Trusts Act, 1882 and taxed under the Income-tax Act, 1961.
2. Why is a Family Trust Useful?
(A) Asset Protection
- Assets held in a trust do not belong personally to family members
- Safer from: Creditors, Divorce disputes, Business risks and Sudden claims
(B) Estate & Succession Planning
- Avoids disputes among heirs
- Smooth transfer without court probate (important for large families)
- Beneficiaries can be minors or dependents
(C) Control Over Wealth
- Settlor decides:
- Who gets income, When they get it and For what purpose (education, health, marriage, etc.)
- Prevents misuse by heirs
(D) Tax Planning (Not Tax Evasion)
- Trusts help distribute income efficiently across family members
- Especially useful where beneficiaries are in lower tax slabs
3. Types of Family Trusts (Important for Tax)
a. Private Specific Trust
- Beneficiaries and their shares are clearly defined
- Most commonly used for families
b. Private Discretionary Trust
- Beneficiaries are known
- Shares are not fixed; trustee decides distribution
- Higher tax implications
Tax treatment depends heavily on this distinction