How To Tax Plan Through Private Trust?

The central point of tax planning is to have more tax entities. Each entity gets basic exemption from tax which in aggregate exempts quite a substantial amount of income from tax. When you create a private trust,what you are doing is creating a separate tax entities. Following points should be kept in mind to minimise the tax on trust , thereby , resulting in tax savings.

1. Trust should be in writing , because oral trust can be charged to tax on maximum marginal rate,

2. A private trust should refrain from carrying out any business or profession , otherwise the income of such trust shall be taxed at Maximum Marginal rate.Therefore, the  trust to should plan to earn income from

                            1. Rent of house property.

                           2. Capital gains.

                           3. Income from interest or dividend.

This will make the trust taxable at normal rate of tax.

3.Create a trust for  unborn son or daughter or would be wife by allocating fund to the trust or transferring the property , rent of which shall be income of the trust.

The beneficiaries like unborn son or daughter or would be husband should not be beneficiary in any other trust. This is important to save the trust from being taxed at Maximum Marginal Rate .

[Refer exception to section 164(1) of the I T Act given in first proviso ].

4. Since trust created through WILL can even carry out business income and still can be taxed at normal rate of tax, care should be taken that

1. the beneficiaries mentioned in the WILL are not beneficiaries in any other trust.
2. the beneficiaries are relatives of the person writing the WILL.
3. the beneficiaries are dependent on the writer of the WILL

This will put the trust under exception (ii) to section 164(1) , thus even though the trust is earning

5. If the private trust is for minor son or minor daughter or daughter in law or wife , the capital of the trust should not be through father or husband or father-in-law , because in that event the income is ultimately clubbed with father or husband or father-in-law as per section 64 of the the I T Act.  

Care should be taken to get the gift from persons who are relatives. In this way , the clubbing provision shall not be invoked.

6. Private trust should be 100 % specific beneficiary trust for major son or major daughter .This will save the money from misuse by son in future and even in case daughter when she is married, the money is saved from misuse by relatives of her husband.

7. A private trust can become partner in a partnership firm , so that share of profit in firm shall be tax free in hand of trust.

Relevant Readings

How A Private Trust Taxed?

How A Private Trust Can Help Your Daughter,Handicapped Dependent or Wife ?