Creation and Extinction of Trusts

Creation and Extinction of Trusts

10/21/11 2:23 PM

Creation and Extinction of Trusts Print this Table of Cases

1. Adams and the Kensington Vestry, Re , LR 27 Ch D 394. 2. Chhogmal Bhandari v. Deputy Commissioner Tax Officer , AIR 1976 SC 656. 3. Dassa Ramachandra v. Narasimha Damodar , 13 Bom LR 101. 4. Dinshaw and Co. v. Krishna Piarey , AIR 1941 Oudh 126. 5. Dutton v. Thompson , (1883)23 Ch D 278. 6. Gangi Reddi v. Tami Reddi , , AIR 1927 PC 80. 7. Garrard v. Lauderdale , (1830)3 Sim 1. 8. Gelaram v. District Board of Muzzafargarh , AIR 1923 Lah 93. 9. Govindlalji v. State of Rajasthan , AIR 1963 SC 1638. 10. Harbans Singh v. Rajendra Kaur , AIR 1925 All 277. Prasad Singh , AIR 1925 Pat 68. 11. Harihar Prasad Singh v. Maharaja Kesho Prasad 12. Harland v. Trigg , 1 Bro CC 141. 13. Isaac Nissim v. Official Trustee, Bengal , , AIR 1957 Cal 118. 14. Jadunath Singh v. Bisheswara Singh , AIR 1939 Oudh 17. 15. Jugalkishore Rupchand v. Ambala Commercial Bank , AIR 1953 Punj 98. 16. Knight v. Knight , , (1840) 3 Beav. 148. 17. Morice v. Bishop of London , 10 Ves 527. 18. Princess Usha Trust v. CIT , 1983 Tax LR 838. 19. Rajkumar Mohan Singh v. Rajkumar Pasupatinath Saran Singh , AIR 1969 SC 135. 20. Ram Ran Vijay Prasad Singh v. Province of Bihar , AIR 1942 Pat 435. 21. Ramchandra Sukla v. Mahadeoji , , AIR 1970 SC 458. 22. Re, Caplen’s Estate, Bulbeck v. Silvester , (1876)45 LJ Ch 2. 23. Saunder’s Case , (1841) 4 Beav. 115. 24. Subhash Chandra Bose v. Gordhandas Patel , , AIR 1940 Bom 76. 25. Suraj Bhan v. Bodh Nand , AIR 1987 All 183. 26. Syed Zakir Ali v. Umatul Habib Begum , 1 IC 347. 27. Sykes v. Beadon , 11 Ch D 170. 28. Thayammal v. Perumal Chetty , AIR 1926 Mad 284. http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 1 of 27


10/21/11 2:23 PM

29. Vadivelu Mudaliar v. C.N Kuppuswami Mudaliar , [1972]1 Mad LJ 265. 30. Vadivelu Mudaliar v. N.S Rajabada , AIR 1967 Mad 175. 31. Venkataratnam v. Bola Buravayya , AIR 1930 Mad 84. Table of Statutes

1. 2. 3. 4. 5. 6. 7.

Code of Civil Civil Procedure, Procedure, 1908. Indian Penal Code, 1860. Indian Registration Act, 1908. Indian Trusts Act, 1882. Limitation Act, 1963. Transfer of Property Property Act, Act, 1882. Trustee Act, 1925.

Introduction

“Of all the exploits of equity the largest and the most important is the invention and development of the trust” - Maitland

According to Underhill ‘A trust is an equitable obligation binding a person(called a trustee) to deal with property over which he has control(called the trust property) for the benefit of persons(called beneficiaries beneficiaries or cestui cestui que trust) of whom he himself may be one and any of whom may enforce the obligation’[1]. Thus the essential characteristic of a trust is that a person (the settlor) transfers property, or declares to another, or others (the trustees), property which he already holds, and that property is to be managed and controlled for the benefit of someone else (the beneficiary).

Origin of Trusts[2] Trusts originate when assets are transferred to another person with instructions that the assets are used to benefit a third party. The question that arises is how can the use of the assets and the benefit of another be guaranteed? Originally it couldn’t; the transfer was the end of the matter and, despite http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 2 of 27


10/21/11 2:23 PM

the undertaking by the recipient to use the property to benefit others, advantage was taken of that position. The recipient had been endowed with the legal ownership of that property and those who anticipated receiving the benefit from that property could be in difficulty. How this was overcome marks the development of English law over all other systems. A disappointed beneficiary could not hope to succeed by appealing to the law courts. He wouldn’t get very far. The legal ownership had been transferred and he had no legal title at all to the assets. Instead he appealed to the Lord Chancellor. In the early days the Lord Chancellor was a cleric and was known as “Keeper of the Kings Conscience”. The Lord Chancellor was a powerful person. He had jurisdiction over spiritual matters and matters affecting peoples’ conscience. He could not deny the authority of the law in the common law courts, and the rights that they conferred on others in respect of the property transfer. However, by an ingenious step, although whilst not denying the legal ownership, the Lord Chancellor could exercise his jurisdiction by saying to that person that if he did not honour his obligation this would damage his conscience. The Lord Chancellor would therefore feel he should take action to prevent this. He would enforce the beneficial rights of the person who the transfer was intended to benefit. These beneficial rights become part of the title to the property; English law, therefore, adopted a split concept of ownership. There was the legal ownership by the person holding the assets, who became known as the trustee, and there was the equitable, or beneficial ownership held for the person, who became known as the beneficiary. This is a simple explanation of a complex historical process but, nevertheless, upon this distinction between the legal and equitable ownership, the modern law of trusts has developed. This split in ownership is unique to the English legal system and is unknown in civil law systems.

Types of Trusts Many kinds of trusts are available. Trusts may be classified by their purposes, by the ways in which they are created, by the nature of the property they contain, and by their duration. One common way to describe trusts is by their relationship to the trustor’s life. http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 3 of 27


10/21/11 2:23 PM

In this regard, trusts are generally classified as either living trusts (“inter vivos” trusts), or testamentary trusts.[3] Living trusts are created during the lifetime of the trustor. Property held in a living trust

is not normally subject to probate (the court-supervised process to validate a will and transfer property on the death of the trustor)[4]. Testamentary trusts are created as part of a will and must conform to the statutory re-

quirements that govern wills. This type of trust becomes effective upon the death of the person making the will (the “decedent”) and is commonly used to conserve or transfer wealth. The will provides that part or all of the decedent’s estate will go to a trustee who is charged with administering the trust property and making distributions to designated beneficiaries according to the provisions of the trust[5]. Most trusts involve a number of technical legal concepts relating to ownership, taxes and control. In creating a trust, one should consider several factors and obligations, including[6]: Personal situation, including age, health and financial status; Family relationships family’s financial circumstances; Personal financial data: personal property, real estate holdings, securities, and other property — as well as one’s tax situation and any debts or obligations; The purpose of the trust: one’s goals, or what one hopes to accomplish by the arrangement; The type of trust, and how versatile or flexible one’s plans are. The amount and type of property it will contain; The duration, or how long the trust will last; The beneficiaries and their specific needs; Any conditions that must be met by a beneficiary to receive benefits (such as attaining a certain age); Alternatives for disposing of assets in case the trust conditions are not met or circumstances change; and The trustee, and the conditions or guidelines under which he or she will function. This project focuses on and performs a comprehensive study of the various legal issues http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 4 of 27


10/21/11 2:23 PM

and aspects involved in ‘The Creation and Extinction of Trusts’. The law of trusts has proved to be versatile and adaptable and in today’s world the law of trusts is only gaining in importance and stature. Trusts are making their presence felt in almost every walk of life including international finance. Thus emphasis on the basics of the law of trusts viz. ‘Creation and Extinction of Trusts’ assumes an even greater importance as it will enable a fuller and more comprehensive understanding of the legal niceties involved in trust law and will equip one to face the challenges posed by the ever developing law of trusts in today’s dynamic world. Research Methodology

Aims and Objectives The aim of this project is to perform a comprehensive study and analysis of the law relating to ‘Creation and Extinction of Trusts’. The project aims at analysing the various statutory provisions relating to creation and extinction of trusts in the light of case law. Another objective of this project is to study ancillary issues and questions which are inextricably related to the creation and extinction of trusts such as revocation of trusts, essentials of a valid trust, reasons for creating trusts and persons competent to create and extinguish trusts. The project also throws light on the definition of trusts, origin of trusts and modern day developments in trust law.

Nature of Project The project is analytical as well as descriptive in nature. However majority of the project is analytical in nature.

Sources of Data The sources of data used are primary as well as secondary in nature. A host of leading textbooks relating to the law of trusts have been referred to. Legal encyclopaedias have also been referred to. Case reporters like All England Reports and All India Reporter have also been used. Electronic information sources like Westlaw and Manupatra have been accessed. Information has also been accessed from the information superhighway.

http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 5 of 27


10/21/11 2:23 PM

Scope and Limitation The scope of this project is limited to performing a comprehensive study and analysis of the Indian law relating to creation and extinction of trusts. Relevant English case law and principles have been incorporated and analysed but American law relating to the creation and extinction of trusts has been ignored. Moreover with respect to religious trusts only Hindu religious trusts have been dealt with. Trusts relating to other religions and wakfs have not been dealt with.

Research Questions The research questions are: What is a trust? What is the origin of the law of trusts? What are the different kinds of trusts? What are the various factors and obligations that must be kept in mind while creating a trust? Why are trusts created and extinguished? Which are the relevant statutory provisions in India which deal with creation and extinction of trusts? Who are competent to create trusts? What are the essential requirements for a valid trust? How can a trust be extinguished? Why are trusts extinguished? How can a trust be revoked? How do the provisions relating to creation and extinction of trusts apply to religious and charitable trusts? How is the law of trusts developing today?

Mode of Citation A uniform mode of citation has been adopted throughout the course of the project. Creation Of Trusts- An Exploration Of Issues And Controversies http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 6 of 27


10/21/11 2:23 PM

Reasons For Creation of Trusts The trust concept is a flexible institution which may be created for a variety of reasons[7]: Tax Avoidance: One of the most important reasons for the creation of a trust is to

avoid or mitigate the settlor’s liability to tax. There are many ways in which this objective may be achieved. Subject to statutory provisions to the contrary, the settlor, having exhausted his personal relief from income tax may alienate his income by way of a trust in favour of another who may use his relief to reduce the amount of tax payable, for example, a settlor may transfer 50000 shares in a company to trustees for the benefit of his nephew N. Trustees pay income tax at the basic rate of tax. On distributing the income, the beneficiary, N is entitled to set off his personal relief against the income liable to tax. To Protect Spendthrift Beneficiaries: The settlor may believe that an outright transfer of property to a donee may result in the dissipation of the fund by the donee. To avoid this the settlor may create a trust under section 33 of the Trustee Act, 1925 in favour of the child. The protective trust is a determinable life interest in favour of the beneficiary which terminates on the happening of any course of events which is capable of prejudicing the interest of the beneficiary. To Avoid Adverse Publicity from a Published Will : On death, a testator’s will is published and transfers as well as the identity of the beneficiaries may become public. In order to avoid adverse publicity a testator may create a fully secret trust by transferring property under his will to a person whose identity is not a source of embarrassment. Before his death the testator will make a bargain with the person to the effect that following the receipt of the he will be required to hold the property on trust for the secret beneficiary. Thus, the existence of the trust and the identity of the beneficiary will be concealed on the face of the will. To Protect Purchasers Entering Into Commercial Transactions: A customer who makes an advance payment for goods may be entitled to utilise the trust concept in order to secure the return of the purchase money in the event of the company going into liquidation. Clubs and Unincorporated Associations: Unincorporated associations have no separate legal existence. Such bodies are not entitled to own funds separately for their http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 7 of 27


10/21/11 2:23 PM

members. The funds are owned by the members and the trust is treated as the collective alter ego of the members. The members may appoint or elect officers of the club. The officers may hold the club’s assets and income as trustees for the purposes declared in the constitution of the association.

Essentials For The Creation Of A Valid Trust The essentials of a valid trust are[8]: It must be created for a lawful purpose[9] If it relates to immoveable property, it must be declared by a non-testamentary instrument in writing signed by the author of the trust or trustee and registered, or by the will of the author of the trust or of the trustee. If it relates to movable property it must be declared as in the case of immoveable property; or, in the alternative, the ownership of the property must be transferred to the trustee[10]. The author of the trust must indicate with reasonable certainty by any words or acts an intention on his part to create a trust, the purpose of the trust, the beneficiary and the trust property[11]. Unless the trust is declared by will or the author of the trust is himself to be the trustee, the trust property must be transferred to the trustee[12]. The subject matter of a trust must be property transferable to the beneficiary; but it cannot be a mere beneficial interest under a subsisting trust[13]. The author of the trust, the trustee and the beneficiary must all be competent persons within the meaning of section 7 of the Indian Trusts Act, 1882.

The Three Certainties of Trusts In Knight v. Knight[14] Lord Langdale stated that there were three conditions essential for the creation of a valid trust. They are: The words used must be so couched that, taken as a whole, they could be regarded imperative. The subject matter of the trust must be certain. The objects or persons intended to be benefited must be certain.


Page 8 of 27


10/21/11 2:23 PM

Certainty of Words No formal language is necessary to create a trust. But what is required is an unequivocal or unambiguous expression of intention on the part of the author of the trust to create a trust[15]. The language used must make it certain that the settlor intended to constitute a trust binding on in law on himself, or the person to whom the property was given; that he intended to bind definite property by the trust and that he intended to benefit a definite person or persons in a definite way[16]. The language used must be such as to disclose with certainty the purpose to create the trust. And a Court will not raise a trust from where the words used and all the circumstances it is of the opinion that a trust was not intended. In determining whether or not a trust has been created, courts will take into consideration the situation and relations of the parties, the character of property and the purpose which the settlor had in view in making the declaration. It is sufficient if the language used shows that the settlor intended to create a trust, and clearly points out the property, the beneficiary and the disposition to be made of the property. The use of the words ‘trust’ or ‘trustee’ is not essential to the creation of a trust[17]. No positive rule can be laid down which shall determine in all cases what terms or expressions will carry a beneficial interest or what will create a trust[18]. Precatory words such as wish, hope, desire etc. should be avoided[19]. In Adams and the Kensington Vestry, Re[20] , where there was a gift by a person to his wife in full confidence that she would do what was right as to the disposal between the children. It was held that there was no trust in favour of the children.

Certainty of Subject Matter It is essential that the subject matter of the trust as also the beneficiaries must be pointed out with certainty to constitute a valid trust[21]. Courts have refused to establish a trust owing to lack of certainty of subject matter where the direction provided to remember certain persons, to reward very old servants according to their desires, to give the bulk of the property etc[22].


Page 9 of 27


10/21/11 2:23 PM

Where in a partition deed between father and son there was a direction that the son should make certain articles for divine service but no particular property was earmarked for the purpose and there was only a prohibition that the son should not mortgage or alienate his share, there was no trust because of absence of dedication[23]. When no specific property is earmarked but only a direction to spend out of general income is given there is no trust but only a charge[24]. In Ram Ran Vijay Prasad Singh v. Province of Bihar[25] where neither any land was set apart for the maintenance and support of the institution mentioned in the instrument of trust and nor was the income from any particular property earmarked for the objects of the trust, it was held that there was no valid trust.

Certainty of Object Certainty of Object is an essential requirement for a valid trust. This rule is founded on the principle that the trust must be one which a court can control and enforce[26]. Certainty of object implies that the beneficiaries must be identifiable with reasonable certainty. Moreover there must also be certainty regarding the nature and quantity of interest which the beneficiaries have and the manner in which the trust is to be performed[27]. Applying the rule of certainty of object- where a testator gave leaseholds to his brother hoping ‘he will continue them in the family’, it was held that the object of the trust was uncertain and that no trust was created[28]. In Subhash Chandra Bose v. Gordhandas Patel[29] where the will provided that after applying certain legacies the residue of the testator’s assets should be handed over to a certain person to be spent by him or by his nominee for the political upliftment of India and preferably for publicity work on behalf of India’s cause in other countries it was held that trust was vague and could not be enforced by the court. It was further held that a trust for the attainment of political objects is invalid not because it is illegal but because the court has no means of judging whether any proposed political change will or will not be for the public welfare or benefit.

Who Can Create a Trust?


Page 10 of 27


10/21/11 2:23 PM

Section 7 of the Indian Trusts Act, 1882 says who is competent to create a trust. This section provides that a trust can be created by every person who is competent to contract. It further provides that a trust may be created by or on behalf of a minor with the permission of a principal civil court of original jurisdiction. Competency to contract is the test laid down for the capacity to create a trust. Any person who is not competent to contract cannot create a trust. Section 7 of the Transfer of Property Act, 1882 is analogous to this section[30]. It follows therefore that a person must be competent to contract and he must further be entitled or authorised to transfer property in order to create a trust. English Law provides that[31]: Every person who can hold and dispose of any legal or equitable estate or interest in property can create a trust in respect thereof. It is to be noted that the capacity of a minor to create a trust is different under English Law and different under Indian Law[32]. This is because under Indian Law a contract entered into by a minor is void whereas under English Law a contract by a minor is void able. Thus in India a minor is not competent to enter into any contract whatsoever, and, therefore, no trust can be created by him except as provided in section 7 of the Indian Trusts Act, 1882.

Mere Direction Does Not Constitute a Trust Case law clearly illustrates that mere direction does not constitute a trust. Where an undivided member of a joint Hindu family purported to execute a will wherein he directed his brothers to defray the expenses of the marriage of his daughter out of an investment of the family assets with a third person and to pay the balance to her and the brothers had agreed to act according to the directions, it was held that no separate property was assigned in trust but only a direction to the brothers to pay out of the family assets was given[33]. Where the holder of a promissory note directed the promisor to pay the interest after her death to her sister and on her death to divide the principal among her children in equal shares but did not transfer the promissory note itself either to the beneficiaries or to the trustees there was no trust as she had not parted with her legal title to her property and the mere direction to the promisor did not create a trust[34].


Page 11 of 27


10/21/11 2:23 PM

Allocation of Specific Property or Funds- Does It Constitute a Trust? Where an employer made credit entries in his accounts of amounts as bonus and dearness allowance to the employees and acted upon those entries by representing to the Income Tax authorities that the amounts had been set apart for the employees it was held that there was a trust but mere credit entries in the book of accounts by the employer as bonus to his employees would not amount to a trust[35]. The scheme of a provident fund under which monies are credited to an account of a subscriber in the books of the fund and payable to him only on retirement and non-transferable till then would amount to a trust[36]. Thus it is quite clear that allocation of specific property or funds will usually constitute a trust provided the essentials of a valid trust are also present.

Creation of A Public Charitable or Religious Trust A public charitable or religious institution can be formed either as a trust or as a society or as a non-profit company registered under Section 25 of the Companies Act, 1956. It generally takes the form of a trust when it is instituted or formed primarily by one or few persons only[37]. Hindus have been dedicating property for religious and charitable purposes since times immemorial. These can be broadly classified under two heads- Istha and Purtta. Istha works like vedic sacrifices, gifts to priests, preserving the vedas and hospitality are exhausted as soon as the sacrifice is completed or the gift made and no trust arises since there is no obligation imposed on any person to do or continue to do something for the accomplishment of a particular purpose. The Purtta signifies works of public utility such as tanks, wells, groves, gifts of food, schools and temples etc. The purtta works can be duly carried out only when an institution is founded or when somebody is trusted with the duty of performing the acts. It is thus, the purtta works wherein a trust, properly speaking, comes into being[38]. A religious endowment is one which has for its object the establishment, maintenance or worship of an idol or deity or any object or purpose subservient to religion. A charitable endowment is one which has for its object the benefit of the public or of mankind. There http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 12 of 27


10/21/11 2:23 PM

might be a private trust for religious purposes but there can be no private charitable trust[39]. A Hindu charitable or religious trust may be created by a Hindu who is of sound mind and not a minor, under a will or inter vivos by gift for any religious or charitable purpose[40]. Even a karta of a Hindu joint family can make effective dedication of a portion of the joint family property for religious and charitable purposes[41]. The essentials of a religious or charitable trust are:[42]

The object or purpose of the trust must be a valid religious or charitable purpose according to Hindu Law. The founder or settlor should be capable of creating a trust and dedicating his property to that trust. The settlor should indicate precisely the object of the trust and the property in respect of which it is made. The property should be dedicated to the trust and the owner must divest himself from the ownership of that property. The trust or its objects must not be opposed to the provisions of any law for the time being in force. A Hindu charitable or religious endowment may be created under a will or inter vivos. No writing is necessary to create an endowment except where the endowment is created by will in which case the will creating the trust must be in writing and attested by at least two witnesses[43]. No written trust deed is necessary for creating a valid trust[44] since the provisions of Section 5 of the Indian Trusts Act, 1882 do not apply to charitable or religious trusts[45]. However even though it is competent for a Hindu to dedicate any immovable or movable property for a religious or charitable endowment without any document in writing[46] it is always desirable to have a written trust deed to avoid future complications. Dedication may be inferred from long use for a charitable purpose; however, an instrument in writing declaring a trust is sound supporting evidence. It is always desirable to have a written trust deed, with an intention to create a trust manifest therein in unequivocal terms, followed by vesting of the trust property in the trustees for the benefit of the public or for a religious purpose[47]. http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 13 of 27


10/21/11 2:23 PM

No religious ceremony is necessary to establish a religious endowment[48] but ceremony/rituals may be performed if so desired by the settlor or if decided by the trustees. A dedication of immoveable property for a public endowment is a transfer of property within the meaning of Section 5 read with Section 18 of the Transfer of Property Act, 1882 and as per the provisions of Section 18(d) of the Indian Registration Act, 1908 any instrument (other than a will) declaring a trust in relation to an immovable property may be registered optionally. Extinction Of Trusts- An Analytical Overview

Section 77 of the Indian Trusts Act, 1882 describes how a trust is extinguished. The extinction of a trust may be brought about in any one of the following ways: By the fulfilment of the object of the trust By the purpose of the trust becoming unlawful By the purpose becoming impossible by either the destruction of the trust property or otherwise By the trust being revoked It was held in Harbans Singh v. Rajendra Kaur[49] that a trust is not extinguished merely because one of the trustees is dissatisfied with the trust or is dissatisfied with the management of other co-trustees.

Fulfilment of Object of the Trust A trust comes into existence for the fulfilment of some object which the author of the trust has in view. Thus logically speaking, once the specific purpose for which the trust was created has been accomplished the trust fulfils itself and terminates[50]. In Jugalkishore Rupchand v. Ambala Commercial Bank[51] a person deposited money in a bank to the credit of a company as earnest money for a tender for supplying materials and the deposit was released on final orders on the tender, though the bank held the money as a trustee till acceptance or rejection of the tender, the trust got extinguished thereafter and the court held that the claim against the bank would only be as an ordinary debt with no preference on the basis of the trust. http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 14 of 27


10/21/11 2:23 PM

Where under a contract of sale a suit fore specific performance by the vendee was dismissed it was held that the relationship of vendor and vendee came to an end on such dismissal and it was not competent to hold the vendor as a constructive trustee[52]. .Another case which illustrates fulfilment of purpose as a reason for extinction of a trust is Jadunath Singh v. Bisheswara Singh[53] where land was obtained by a resettlement from the Government and the head of the family would hold it in trust for the co-sharers but if a co-sharer took a guzari or maintenance grant in lieu of his share the trust would come to an end. In Dinshaw and Co. v. Krishna Piarey[54] it was held that a security deposit by employees would be held in trust by the employer but the trust would not be extinguished by a mere demand for its return. On the fulfilment of the purpose the trustee becomes a bare trustee for the person entitled[55].

Purpose Becoming Unlawful According to Section 4 of the Indian Trusts Act, 1882 a trust may be created for any lawful purpose only and every trust of which the purpose is unlawful is void. As per Section 4 the purpose of a trust is unlawful if it is: Forbidden by law Is of such a nature that, if permitted, it would defeat the provisions of any law Is fraudulent Involves or implies injury to the person or property of another The court regards it as immoral or opposed to public policy[56] Thus if the purpose of a trust becomes unlawful according to the provisions of Section 4 the trust gets extinguished. According to the principle laid down in Sykes v. Beadon[57] where the illegality supervenes the trust becomes extinguished thereafter. In Rajkumar Mohan Singh v. Rajkumar Pasupatinath Saran Singh[58] the trust deed provided for liquidation of the debts of the author of the trust and entailment of property but entailment was legally not possible. It was held that owing to the entailment being legalhttp://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 15 of 27


10/21/11 2:23 PM

ly impossible the purpose of the trust did not become unlawful and thus the trust was not extinguished.

Purpose Becoming Impossible Section 77(c) states that a trust is extinguished “when the fulfilment of its purpose becomes impossible by the destruction of the property or otherwise”. The word ‘destruction’ means that the property has gone out of existence and is not available for distribution. It is to be noted that a property cannot be said to be destroyed merely for the reason that the value of the existing trust property has become less than the outstanding liabilities. Loss or destruction of the subject matter of the trust puts an end to the trust because there is no property on which the trust can operate. The word ‘otherwise’ in Section 77(c) covers a case where the trust property is not available for the fulfilment of its purpose, where for example, all the beneficiaries under the trust have validly transferred their interests resulting in the extinction of the trust[59]. In Gelaram v. District Board of Muzzafargarh[60] land was given to a District Board by the owner for laying a road to a public park but later the park was closed down for the public and the Court held that the trust of the roadway for the public had come to an end as the purpose of the trust was impossible to fulfil as the park had ceased to be a public park. In Vadivelu Mudaliar v. C.N Kuppuswami Mudaliar[61] the trust was extinguished as its purpose could not be fulfilled owing to failure of the trustees to administer the trust.

Trust Being Revoked According to Section 77(d) of the Indian Trusts Act, 1882 a trust is extinguished when being revocable, it is expressly revoked. Section 78 of the Indian Trusts Act, 1882 deals with revocation of trusts[62].

Extinction of a Charitable or Religious Trust The dedication of property to a charitable or religious trust is permanent. Where the dedication of property is to the service and worship of a family idol or a particular deity or to a public temple the dedication cannot be revoked. Thus once a religious trust is http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 16 of 27


10/21/11 2:23 PM

created, it is irreversible, irrevocable and it cannot be terminated[63]. Where the trust has been effectually created even the fact that the trustees have failed to carry out the objects of the trust will not invalidate it. Thus it is clear that the provisions of Section 77 of the Indian Trust Act, 1882 do not apply to religious or charitable trusts[64].

Cypress Doctrine- Avoiding Extinction of Trusts Where it is impossible to fulfil the intention of the testator either for the reason that the purpose of the trust is illegal or otherwise, the income of the trust may be utilised for the nearest similar lawful purpose. This is called the Doctrine of Cypress[65]. The doctrine will not apply when contrary intentions are expressed by the testator[66]. Revocation Of Trusts

A trust created by the will of the testator may be revoked by him at his pleasure. This maybe done[67]: By express words By acts which lead to inference that he intended to revoke it By subsequent will By destruction of the will All trusts created otherwise than by a will can be revoked only in the modes prescribed in clauses (a) to (c) of Section 78[68]. Apart from the provisions of Section 78 it is always open to the author of a trust to revoke it if it was obtained from him by fraud or undue influence or if he executed it under a fundamental mistake or misapprehension as to its effect. But a trust may not be revoked on the ground that the settlement contains unusual provisions, provided it is clear that the terms of the settlement were brought to the settlor’s attention and fully understood by him[69].

Revocation with the consent of beneficiaries A beneficiary who is not under any incapacity may put an end to a trust which is exclusively for his own benefit[70]. Applying this rule if money is given to a trustee for the http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 17 of 27


10/21/11 2:23 PM

purchase of an annuity for a beneficiary, the latter can refuse the annuity and claim the money. The Rule in Saunder’s Case is applicable not only to trusts for a single beneficiary but also where there are joint or successive beneficiaries, provided that all the possi ble beneficiaries, under the trust are in existence, are sui juris and concur in putting an end to the trust[71]. It was held in Isaac Nissim v. Official Trustee, Bengal[72] that the settlor can revoke the trust with the with the consent of all beneficiaries.

Power of revocation expressly reserved Clause (b) of Section 78 declares that a trust created by a non-testamentary instrument or orally, may be revoked, if there was a power of revocation expressly reserved to the author of the trust. Thus where a person asks another to acquire a certain property for his benefit i.e. for the benefit of the settlor and allots a sum of money for the purpose but reserves to himself the power of revoking the trust, the trust is a valid one and his refusal after the amount is spent to further finance the work is a valid revocation of the trust[73].

Trust in Favour of Creditors According to clause (c) of Section 78 if a debtor conveys property in trust for the benefit of his creditors, who are not parties to the conveyance and to whom the fact of its execution is not communicated, the conveyance merely operates as a power to the trustees to apply the property in satisfying their claims and inasmuch as the debtor himself is in fact the only cestui que trust it is revocable by him before the property is so applied, and cannot be enforced by the creditors. A trust in favour of creditors is not, however, revocable if the creditors are parties to, or assent to the conveyance or if the fact of its execution is communicated to them[74]. In Syed Zakir Ali v. Umatul Habib Begum[75] a debtor, by an arrangement in writing, made one of his creditors a trustee in respect of some of his property for the payment of his debts. No communication of the arrangement was made to the creditor. The debtor subsequently hypothecated a portion of the trust property to secure an advance made by a creditor who had been made a trustee under the arrangement. The creditor afterwards appropriated the property. The court held that the hypothecation bond, subsequent to the trust arrangement, under the circumstances, http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 18 of 27


10/21/11 2:23 PM

amounted to revocation. This clause applies only to a trust solely for the payment of debts and not to a trust deed created for payment of debts and other purposes[76]. It is a well-known rule of equity that no revocation can have retrospective effect. Therefore, acts already performed in the due execution of the trust cannot be affected by any subsequent revocation of it. This principle is reflected in section 79 of the Indian Trusts Act, 1882 which states that ‘ No trust can be revoked by the author of the trust so as to defeat or prejudice what the trustees may have duly done in execution of the trust’. Conclusion

Creation and Extinction of Trusts is an absolutely essential imperative part of the law of trusts and has extreme importance and relevance. The various legal issues involved in the creation of extinction of trusts form the basics which provide the foundations of the law of trusts. This project has explored these issues in detail and has also performed a comprehensive study and analysis of the relevant case law and statutory provisions. The provisions relating to Creation and Extinction of Trusts in India are well developed and clear. There is not much ambiguity and the law also does not prescribe too many formalities. Thus the law with respect to creation and extinction of trusts is reflective of the legislative intent of keeping the law simple and clear so as to be easily understood and followed by the common man. Trusts are a very important part of life today and the Indian Trusts Act, 1882 does not make a person apprehensive about creating a trust or extinguishing owing to ambiguity and complexity. Thus these provisions are a step in the right direction. Complexities will no doubt arise but the law is equipped to deal with them In the United States the ever-growing importance of the Law of Trusts has been realised and the National Conference of Commissioners on Uniform State Laws has drafted a Uniform Trust Code in order to provide the states with a comprehensive model for codifying their law of trusts. In India the law of trusts is codified and well developed. The Indian Trusts Act, 1882 is the major statute relating to trusts. Other statutes like the Indian Penal Code, 1860 deal with offences relating to trusts and punishment for such offences. The Code of Civil Procedure, 1908 prescribes the procedure for actions relating to trusts and the Limitation Act, 1963 prescribes periods of limitation for recovery of http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 19 of 27


10/21/11 2:23 PM

property conveyed away by trustees in breach of trust. The law of trusts today is assuming a greater significance and importance. Some of the common benefits that trust arrangements offer include[77]: Providing personal and financial safeguards for family and other beneficiaries; Postponing or avoiding unnecessary taxes; Establishing a means of controlling or administering property; and Meeting other social or commercial goals. Apart from providing these benefits trusts have weaved their way into new territory and are being applied in various new fields. Trusts are extremely versatile and adaptable. Innovation with respect to trusts has come in two ways[78]. First, the growth of trusts in international financial centres is now developing into a branch of trust law and practice of its own. The second source is the growth of the use of trusts for other commercial operations. Of these, securitisation is becoming a major example. Securitisation by the use of trusts is being taken up by several countries. Bibliography

Articles 1. David M. English, “The Uniform Trust Code (2000): Significant Provisions and Policy Issues” Missouri Law Review (Spring, 2002).

Books 1. A.J Oakley, Parker and Mellows: The Modern Law of Trusts (8th ed.) (London: Sweet and Maxwell, 2003). 2. L.C Goyle, The Law of Trusts (Calcutta: Eastern Law House, 1989). 3. Mohamed Ramjohn, Sourcebook on Law of Trusts (London: Cavendish Publishing Limited, 1998). 4. Nabhi Kumar Jain, Nabhi’s Formation and Management of A Trust alongwith Tax Planhttp://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 20 of 27


10/21/11 2:23 PM

ning, 1998-99 (New Delhi: Nabhi Publications, 1998). 5. P.S Narayana, Law of Trusts, Endowments and Wakfs (Hyderabad: Gogia Law Agency, 2000). 6. Philip H. Pettit, Equity and The Law of Trusts (Kent: ELBS with Butterworths, 1990).

7. Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001). 8. S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University Book Agency, 1998).

Encyclopaedias 1. Halsbury’s Laws of England (4th ed. Reissue), Volume 48 (London: Butterworths, 1995).

Websites 1. ourworld.compuserve.com/homepages/pntodd/trusts/intro/cre_trus.htm#intro (Visited on 5th April, 2004). 2. www.trusts-and-trustees.com/main.htm (Visited on 7th April, 2004). 3. www.wsba.org/media/publications/pamphlets/trusts.htm (Visited on 7th April, 2004). [1] Mohamed Ramjohn, Sourcebook on Law of Trusts (London: Cavendish Publishing Limited, 1998)at 11. [2] www.trusts-and-trustees.com/main.htm (Visited on 7th April, 2004). [3] www.wsba.org/media/publications/pamphlets/trusts.htm (Visited on 7th April, 2004). [4] Id. [5] Id. [6] Supra note 3. http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 21 of 27


10/21/11 2:23 PM

[7] Mohamed Ramjohn, Sourcebook on Law of Trusts (London: Cavendish Publishing Limited, 1998)at 18-19. [8] L.C Goyle, The Law of Trusts (Calcutta: Eastern Law House, 1989)at 16. [9] Section 4 of the Indian Trusts Act, 1882. [10] Section 5 of the Indian Trusts Act, 1882. [11] Section 6 of the Indian Trusts Act, 1882. [12] Id. [13] Section 8 of the Indian Trusts Act, 1882. [14] (1840) 3 Beav. 148. [15] Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001)at 163. [16] S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University Book Agency, 1998)at 65. [17] Ibid at 65-66. [18] Supra note 16 at 66. [19] Id. [20] LR 27 Ch D 394. [21] Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001)at 174. [22] S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University Book Agency, 1998)at 67. [23] Dassa Ramachandra v. Narasimha Damodar , 13 Bom LR 101. http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 22 of 27


10/21/11 2:23 PM

[24] Supra note 21 at 175. [25] AIR 1942 Pat 435. [26] Morice v. Bishop of London , 10 Ves 527. [27] S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University Book Agency, 1998)at 68. [28] Harland v. Trigg , 1 Bro CC 141. [29] AIR 1940 Bom 76. [30] Section 7 of the Transfer of Property Act, 1882 states: Every person competent to contract and entitled to transferable property, or authorised to dispose of transferable property not his own, is competent to transfer such property either wholly or in part, and either absolutely or conditionally, in the circumstances, to the extent and in the manner, allowed and prescribed by any law for the time being in force. [31] Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001)at 194. [32] Ibid at 196. [33] Thayammal v. Perumal Chetty , AIR 1926 Mad 284. [34] Re, Caplen’s Estate, Bulbeck v. Silvester , (1876)45 LJ Ch 2. [35] Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001)at 183. [36] Id. [37] Nabhi Kumar Jain, Nabhi’s Formation and Management of A Trust alongwith Tax Planning, 1998-99 (New Delhi: Nabhi Publications, 1998)at 34. [38] Id. http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 23 of 27


10/21/11 2:23 PM

[39] Id. [40] Nabhi Kumar Jain, Nabhi’s Formation and Management of A Trust alongwith Tax Planning, 1998-99 (New Delhi: Nabhi Publications, 1998)at 38. [41] Gangi Reddi v. Tami Reddi , AIR 1927 PC 80. [42] Supra note 40 at 39. [43] Supra note 40 at 46. [44] Ramchandra Sukla v. Mahadeoji , AIR 1970 SC 458. [45] Suraj Bhan v. Bodh Nand , AIR 1987 All 183. [46] Govindlalji v. State of Rajasthan , AIR 1963 SC 1638. [47] Supra note 40 at 47. [48] Supra note 44. [49] AIR 1925 All 277. [50] For example where the author of a trust makes a provision by way of trust in respect of property which he is settling for the benefit of minors and provides for the estate being handed over to them on the attainment of majority; the duration of the trust is only for the minority of the beneficiaries and can be terminated by the beneficiaries calling for a conveyance of the trust estate to them on attaining majority. [51] AIR 1953 Punj 98. [52] Venkataratnam v. Bola Buravayya , AIR 1930 Mad 84. [53] AIR 1939 Oudh 17. [54] AIR 1941 Oudh 126. [55] Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 24 of 27


10/21/11 2:23 PM

Butterworths, 2001)at 648. [56] Chhogmal Bhandari v. Deputy Commissioner Tax Officer , AIR 1976 SC 656. [57] 11 Ch D 170. [58] AIR 1969 SC 135. [59] Princess Usha Trust v. CIT , 1983 Tax LR 838. [60] AIR 1923 Lah 93. [61] [1972]1 Mad LJ 265. [62] Revocation of Trusts as a way of extinguishing a trust is dealt with in detail in the next section of this project. [63] Nabhi Kumar Jain, Nabhi’s Formation and Management of A Trust alongwith Tax Planning, 1998-99 (New Delhi: Nabhi Publications, 1998)at 101. [64] By virtue of the proviso to Section 1 the Indian Trusts Act, 1882 does not apply to religious or charitable trusts. [65] Prafulla C. Pant, N. Suryanarayana Iyer’s The Indian Trusts Act (5th ed.) (New Delhi: Butterworths, 2001)at 797. [66] Vadivelu Mudaliar v. N.S Rajabada , AIR 1967 Mad 175. [67] S. Krishnamurthi Aiyar and Harbans Lal Sarin, Principles and Digest of Trust Laws (Allahabad: University Book Agency, 1998)at 336. [68] The clauses state that a trust created otherwise than by a will can be revoked only: Where all the beneficiaries are competent to contract- by their consent Where the trust has been declared by a non-testamentary instrument or by word of mouth-in exercise of a power of revocation expressly reserved to the author of the trust; or Where the trust is for the payment of the debts of the author of the trust, and has http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 25 of 27


10/21/11 2:23 PM

not been communicated to the creditors- at the pleasure of the author of the trust [69] Jessel, M.R in Dutton v. Thompson , (1883)23 Ch D 278 stated that: “It is not the province of a court of justice to decide on what terms or conditions a man of competent understanding may choose to dispose of his property. If he thoroughly understands what he is about, it is not the duty of a court of justice to set aside a settlement which he chooses to execute, on the ground that it contains clauses which are not proper.” [70] Rule in Saunder’s Case , (1841) 4 Beav. 115. [71] Supra note 67 at 342. [72] AIR 1957 Cal 118. [73] Harihar Prasad Singh v. Maharaja Kesho Prasad Singh , AIR 1925 Pat 68. [74] Supra note 67 at 343. [75] 1 IC 347. [76] The rationale behind the rule regarding a trust in favour of creditors was clearly stated in Garrard v. Lauderdale , (1830)3 Sim 1 wherein the Court said that: ‘I take the real nature of the deed to be, not so much a conveyance vesting a trust in A for the benefit of the creditors of the grantor, but rather an arrangement made by the debtor for his own personal convenience and accommodation-for the payment of his own debts in an order prescribed by himself, over which he retains power and control, and with respect to which the creditors can have no right to complain, inasmuch as they are not injured by it- they waive no right of action and are not executing parties to it.’ [77] www.wsba.org/media/publications/pamphlets/trusts.htm (Visited on 7th April, 2004). [78] Id. share share http://legalsutra.org/1239/creation-and-extinction-of-trusts/

Page 26 of 27


10/21/11 2:23 PM

Print this No related posts.


Page 27 of 27

Creation and Extinction of Trusts

Recommend Documents