IRREVOCABLE CLAUSE IN THE TRUST DEED

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IRREVOCABLE CLAUSE IN THE TRUST DEED

Every trust applying for registration of trust u/s 12AA of the Income Tax Act – 1961 are getting the notice that the trust don’t have irrevocability clause. Even in some cases, the registration is denied for the reason that the irrevocability clause is missing in the trust deed.

Let us know what this irrevocability clause is.

Trust could either be revocable trust or irrevocable trust.

Revocable trust is a trust which can be altered, modified or cancelled at any time during the lifetime of the author or settler of the trust. It serves 2 purposes

  1. Author or settler will remain the owner of the asset transferred and exercise control over it.
  2. Property will be handed over to the intended and mentioned beneficiary, after the death of the author/grantor/settlor. On the event of the demise of the grantor, the revocable trust becomes an irrevocable trust.

Primary objective of the revocable trust is to avoid the legal procedure of obtaining the probate  as it ensures easy transfer of the asset to the intended beneficiaries and at the same time ensuring dominance over the assets during the lifetime of the author.

On the other side, irrevocable trust is a trust which cannot be extensively amended/ modified/ altered/terminated by the grantor after the trust deed is signed and implemented. More importantly, once the asset & property is transferred to the trust, it can never revert back. In short, once the asset is vested with the trust, the author or settlor loses all control over the assets. No control whatsoever is there with the grantor after it is transferred to the trust.

It is believed that irrevocable trust offers ultimate protection to the property transferred from the creditors as transferred property ceased to be the property of the author.

Further, after trust, the property is not includible in to the assets list of the trustee/ donor./settlor.

Revocable vs Irrevocable Trust

  1. A revocable trust can be canceled at any time till the survival of the author whereas an irrevocable trust cannot be cancelled.
  2. In revocable trust, author can exercise his rights & control over the property transferred whereas in an irrevocable trust, the settlor cannot exercise his rights & control over the property.
  3. Major existence of revocable trust is for private trust whereas irrevocable trust is for public / general trust.
  4. One of the key logic for revocable trust to avoid the legal process of obtaining probate whereas it is to protect the assets against creditors and estate duty in case of irrevocable trust.
  5. Revocable trust offers full flexibility for amendment of trust deed whereas is is restrictive in case of irrevocable trust.
  6. Irrevocable trusts do offer some tax benefits whereas it is not available in case of revocable trusts. In case of revocable trust, income is normally taxed in the hands of the trustee/author/transferor only.

To conclude, if the trust is to offer the benefit to the public at large and the settlor /author/ grantor don’t intend to retain the control over the property then irrevocable trust is preferred. However, if the settlor intends to have all control over the assets over his lifetime then revocable trust will be better.

Now, let us come to the basic question of notices being received for incorporating the irrevocable clause from the income tax department, Commissioner of Income Tax.

Some of the draft clauses that can be incorporated in the trust deed to satisfy the conditions of irrevocable clauses are as under:

  1. It is expressly provided & agreed that the trusts created by this Deed of Trust by author is irrevocable.
  2. The trust is irrevocable. No part of the assets or property shall be transferred to the settlor, author, owner or trustee of the trust.
  3. IRREVOCABILITY CLAUSE:
    The Trust is irrevocable
  4.  IRREVOCABILITY & DURATION:
     Author hereby expressly declares that Trust is irrevocable and shall continue to exist. No part of the trust fund will be transferred to the trustee.
  5. The Trust hall be irrevocable and no part of the Trust Fund in any circumstances whatsoever shall be paid or applied for the benefit of the Settlor. If the Trust fails or is held to be invalid for any reasons whatsoever, it shall not result in any trust or benefit in favour of the Settlor and no part of the assets or property shall be transferred to the settlor or trustee.

Any one clause can be incorporated to fulfill the stipulation of CIT – Exemption for incorporating the irrevocability clause in the trust deed.

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