The following article was first published in the Mint newspaper on 17th January, 2023. The same was written by our Private Client team at Cyril Amarchand Mangaldas, who frequently publish their comments and opinions in the Mint. The online version of the article can be found here.
‘Should I write a will or form a trust to distribute my assets?’, mentioned setting up a trust with a daughter as trustee and adding one more person as trustee and beneficiary. As far as I know, a trustee cannot be the beneficiary. Please confirm if this is correct.
When using a private trust in India, it is not unusual for the trustee to also be a beneficiary of such trust. There is no embargo under the Indian Trusts Act, 1882, which prohibits an individual to be a trustee as well as beneficiary. In practical terms, for most families which set up trusts for their family business and personal property, this is a common approach.
That said, from a tax perspective, if the same individual acts in all three capacities – settlor, beneficiary as well as the trustee of a private trust, such trust may be treated as a “revocable trust” and thereby does not achieve any tax or asset protection. This should definitely be avoided.
Who can donate to an Hindu Undivided Family (HUF), and what is the tax implication on various donations paid or received in an HUF account?
—Dr. Ajay Garg
A HUF comprises all persons forming part of one lineal family branch and having a common ancestor. All members of the family including a spouse / wife are regarded as ‘members’ of the HUF and have different legal rights in the HUF
Any person including an individual (being father, mother, sons, daughters-in-law, daughters, etc.) can contribute / gift monies to an HUF.
Under the Income Tax Act, 1961, any funds received by a taxpayer (including an HUF) as a gift without consideration is chargeable to tax in the hands of such taxpayer, if the aggregate value of such gift received in one FY exceeds ₹50,000.
However, gift received by an HUF from its members is specifically exempt from such taxation. Thus, there should not be any tax liability in the event a member of an HUF gifts money to the HUF.
Note, if a member of an HUF, gifts money to the HUF, any income arising from it will have to be clubbed with the income of such member.