Creating a Trust: The Three Certainties and the Formalities (Sections 5 and 6)

Two sections decide whether an express trust has come into existence. Section 6 states the substance: the author must indicate with reasonable certainty an intention to create a trust, its purpose, its beneficiary and its property, and (in most cases) transfer the property to the trustee. Section 5 states the form: writing and registration for immovable property, and writing or transfer of ownership for movable property, subject to an exception that prevents the rules being used as an instrument of fraud. This note examines both.

1. Section 6: How a Trust Is Created

The section has three features worth noting at the outset. The required indication may be by words or acts, so no technical language is needed. The standard is reasonable certainty, not absolute precision. And there are effectively four certainties in the Indian formulation (intention, purpose, beneficiary, property), which correspond to the three English certainties of intention, subject matter and objects, with purpose and beneficiary together forming the certainty of objects. These were famously stated in Knight v Knight (1840) and are the foundation of the law of express trusts.

2. Certainty of Intention

The author must intend to create a trust, that is, to impose a binding obligation on the holder of the property, as opposed to making an outright gift, expressing a hope, or creating a contract, an agency or a condition. The court reads the whole instrument and the surrounding circumstances; the word "trust" is neither necessary nor conclusive.

Precatory words

Words of wish, hope, request or confidence ("precatory" words) raise the most difficult questions. The illustrations to Section 6 show that the answer depends on whether the words, read in context, are imperative and whether the other certainties are present.

Illustration (a) is notable. Nineteenth century English law moved away from treating expressions of "confidence" as creating trusts, but the Indian Act, drafted in 1882, records that such words can create a trust where the beneficiary and property are clear. Courts nevertheless construe each instrument as a whole, and the modern approach in India, as in England, is to look for a genuine intention to impose an obligation rather than to rely on particular words.

Sham trusts

Intention must be real. A document that calls itself a trust deed but was never intended to bind the "trustee", for example because the author continues to deal with the property as his own, may be disregarded as a sham. This question arises frequently in tax and creditor disputes.

3. Certainty of Purpose and Beneficiary

The author must indicate what the trust is for and for whom. In a private trust, the beneficiaries must be ascertained or ascertainable: named individuals, or a class described clearly enough that it can be determined whether any given person falls within it ("my grandchildren living at my death"). Where the trustee is given a discretion to choose among a class, the class must still be defined with reasonable certainty; Illustration (c) fails because "such members of C's family as B should think most deserving" gave no workable standard. Public charitable trusts are treated more generously, because the court can supply a scheme (Topic 40).

4. Certainty of Trust Property

The property must be identified with reasonable certainty: "my house at 12 Mall Road", "500 shares of X Ltd", "the residue of my estate". Expressions such as "the bulk of my property" (Illustration (d)) fail. Where the beneficial shares are uncertain but the property is certain, the trust may fail as to the shares and the property may result to the author (Topic 33). The requirement that the property be transferable to the beneficiary is examined in Topic 10.

5. Transfer of the Property

Section 6 requires the author to transfer the property to the trustee, except in two cases: where the trust is declared by will (the property then passes on death through the testator's estate), and where the author declares himself trustee. Until the property is vested in the trustee, the trust is not completely constituted (Topic 10). The transfer must comply with the law governing the type of property: a registered conveyance for land, share transfer formalities for shares, delivery for goods.

6. Section 5: Formalities

Points of detail

• Signature by author or trustee: the instrument may be signed by either, so a trustee's signed and registered acknowledgment that he holds land in trust satisfies the section.
• Registration regardless of value: Section 5 requires registration of every non-testamentary declaration of trust of immovable property, whatever its value. The Registration Act, 1908 and stamp law apply in addition (Topic 12).
• Oral trusts of movables: a person who hands over money, jewellery or shares to another, with an oral declaration of trust, creates a valid trust if ownership actually passes.
• Wills: a trust declared by will must satisfy the formalities of a valid will under the Indian Succession Act, 1925 or the applicable personal law (Topic 11).

The fraud exception

The last sentence of Section 5 prevents the formality rules being used as an instrument of fraud. If a person obtains property on the faith of an oral promise to hold it on trust, and then relies on the absence of a registered instrument to keep it for himself, the court may enforce the trust despite the lack of formality. The exception is narrow: it requires a fraudulent use of the statute, not merely a failure to comply with it. Where it does not apply, Chapter IX may still impose a resulting or constructive obligation (Part H).

7. Obligations Arising by Law Are Not Affected

Sections 5 and 6 govern express trusts. The obligations in the nature of trusts in Chapter IX, such as those arising on failure of a trust, on advantages gained by fiduciaries, or on transfers for illegal purposes, arise by operation of law and need neither writing nor registration, even when they relate to land.

8. Related Topics and Provisions

• Lawful purpose (Topic 7): Section 4
• Parties to a trust (Topic 9): Sections 7, 9 and 10
• Trust property and constitution (Topic 10): Section 8
• Trust deed in practice (Topic 12): registration and stamp duty
• Resulting trusts (Topic 33): when an attempted trust fails