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Myself and my wife are tax assessees. Both of us have demat accounts and bank deposits in our respective names with the other as joint holder. We are considering creating family trust with both of us as initial trustees and both of us, our children and grandchildren as beneficiaries. We wish to transfer our shareholdings to a demat account to be opened in the name of the family trust. We also intend transferring some of our bank deposits to the family trust. It is not proposed to hold any immovable property in the name of the trust. Is the trust deed required to be registered? What would be the requirements of the banks and depositories to recognise the trust and open account in the name of the trust? Please advise on the tax implications of such a transfer. Also how would the trust income (interest and dividend) be treated by the tax authorities? Will the trusts be eligible for any tax exemption or will every rupee of income be taxed and at what rate? Is any tax planning possible to reduce the tax liability of the trust?. What would be the tax implication on distribution of income to and meeting of the expenditure by the trust from time to time for the beneficiaries?. What would be the tax implication on distribution of financial assets/proceeds on dissolution of the trust.
B S Iyer
Understand that you and your spouse are considering to create a family trust and transfer your demat account and bank deposits to the trust. Considering that demat account/bank deposits to be transferred are in the nature of movable assets, registration of the trust deed is not mandatory as per the provisions of the Indian Trust Act, 1882. Generally, the following documents are required to be furnished to open a bank account in the name of the trust –
a. Trust Deed / Bye-laws / Constitutional Document (notarised copy)
b. Copy of PAN card
c. Income tax registration obtained under section 12A of Income-tax Act, 1961
d. Certified copy of resolution for opening and operating of the account
e. Duly authenticated list of current Trustees / Office bearers on the letter head of the entity
f. Address proof of the Trust
g. Beneficial ownership declaration
h. KYC documents of the authorised signatories
On a related note, there are essentially no tax implications at the time of transfer of the movable assets to the private trust (if the trust is only for the benefit of specified relatives of the settlor or transferor).
Nevertheless, the income earned by the Trust in the nature of interest and dividend income would be taxable as per the slab rates that are applicable to beneficiaries (not being a senior citizen or super senior citizen). Further, the deductions/exemptions are also available to a private trust similar to that of an individual beneficiary.
Additionally, the distribution of financial assets/proceeds received from the private trust on dissolution would be taxable in the hands of the beneficiaries.
The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in
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