Parties to a Trust: Capacity, Acceptance and Disclaimer (Sections 7, 9 and 10)

Every express trust involves three roles: the author who creates it, the trustee who holds the property, and the beneficiary who benefits. Sections 7, 9 and 10 decide who may fill each role. They also deal with two moments that decide whether a trust actually takes effect in a given person: the trustee's acceptance or disclaimer of the trust, and the beneficiary's disclaimer of his interest. This note examines each party in turn.

1. The Author: Who May Create a Trust (Section 7)

Section 7, Indian Trusts Act, 1882 (who may create trusts)

A trust may be created (a) by every person competent to contract, and (b) with the permission of a principal Civil Court of original jurisdiction, by or on behalf of a minor; but subject in each case to the law for the time being in force as to the circumstances and extent in and to which the author of the trust may dispose of the trust property.

Competence to contract

Section 3 imports the Contract Act's meaning: a person is competent to contract if he has attained majority, is of sound mind and is not disqualified from contracting by any law (Section 11, Indian Contract Act). Companies, LLPs and other bodies corporate may create trusts within the powers conferred by their constitution and the law governing them.

Trusts by or on behalf of a minor

A minor cannot contract, so ordinarily cannot create a trust. Section 7(b) allows a trust to be created by or on behalf of a minor with the permission of a principal Civil Court of original jurisdiction, usually the District Court. The safeguard of judicial permission protects the minor's property while allowing, for example, a settlement of a minor's inheritance on trust for his own education and maintenance.

Limits on the power to dispose

The final words of Section 7 make the author's power subject to any law restricting the circumstances and extent to which he may dispose of the property. Capacity to contract is necessary but not sufficient. Examples include:

Personal law limits: a Muslim may not, without the heirs' consent, dispose of more than one third of his estate by will, so a testamentary trust beyond that limit is ineffective to that extent.
Joint family property: a coparcener's power to deal with his undivided interest is governed by Hindu law; he cannot settle specific joint family property on trust as if it were his own.
Restrictions on transfer: property that the law makes inalienable, or alienable only with permission (for example certain tribal or assigned lands), cannot be settled in breach of those restrictions.
Insolvency and creditors: a settlement in fraud of creditors is caught by Section 4 and by the general law (Topic 7).

2. The Beneficiary (Section 9)

Section 9 (who may be beneficiary; disclaimer by beneficiary)

Every person capable of holding property may be a beneficiary.

A proposed beneficiary may renounce his interest under the trust by disclaimer addressed to the trustee, or by setting up, with notice of the trust, a claim inconsistent therewith.

Capacity to be a beneficiary

The test is the widest possible: capacity to hold property, not capacity to contract. Minors, persons of unsound mind, companies, societies and other legal persons may all be beneficiaries. A Hindu deity, recognised as a juristic person, can hold property and so can benefit under a trust. Gifts on trust for unborn persons are possible, but subject to the rules in the Transfer of Property Act and the Indian Succession Act on transfers for the benefit of unborn persons and against perpetuity.

Disclaimer by the beneficiary

No one can be forced to accept a benefit. A proposed beneficiary may renounce in two ways:

Express disclaimer addressed to the trustee; or
Implied disclaimer by setting up, with notice of the trust, a claim inconsistent with it, for example claiming the property as owner in his own right under a different title.

A beneficiary might disclaim to avoid onerous conditions, tax consequences or family conflict. Once he has disclaimed, his interest falls away and the property is dealt with as the instrument provides or, failing that, results to the author or his estate (Section 83).

3. The Trustee (Section 10)

Section 10 (who may be trustee; acceptance; disclaimer)

Every person capable of holding property may be a trustee; but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract.

No one is bound to accept a trust. A trust is accepted by any words or acts of the trustee indicating with reasonable certainty such acceptance.

Instead of accepting a trust, the intended trustee may, within a reasonable period, disclaim it, and such disclaimer shall prevent the trust property from vesting in him. A disclaimer by one of two or more co-trustees vests the trust property in the other or others, and makes him or them sole trustee or trustees from the date of the creation of the trust.

Capacity

Any person capable of holding property may be a trustee. Where the trust is purely ministerial (a bare trust to hold and convey), even a minor could in principle hold the title. Where the trust involves discretion, the trustee must be competent to contract, because exercising judgment over another's affairs requires full legal capacity. In practice trustees are adults, professional individuals, trust companies, or (for public trusts) official bodies such as the Official Trustee or Treasurer of Charitable Endowments.

Acceptance

Acceptance is part of the definition of a trust (Section 3), but no formality is needed. Any words or acts indicating acceptance with reasonable certainty will do: signing the trust deed, taking possession of the property, collecting rent, opening a trust bank account, or, as an illustration to Section 10 shows, a person named executor and trustee in a will proving the will. Once accepted, the trust cannot be renounced except as Section 46 allows (Topic 23).

Disclaimer

Within a reasonable period: the intended trustee must disclaim before accepting and within a reasonable time; a person who has acted as trustee cannot later disclaim.
Effect: a valid disclaimer prevents the property vesting in him. The trust itself does not fail for want of a trustee; a new trustee may be appointed (Section 73).
Co-trustees: if one of several intended trustees disclaims, the property vests in the others, who become sole trustees from the date of creation of the trust, so there is no gap in title.

4. One Person, Several Roles

Author and trustee (permitted): the author declares himself trustee, and no transfer is needed (Section 6).
Author and beneficiary (permitted): a trust may be for the benefit "of another and the owner" (Section 3).
Trustee and one of several beneficiaries (permitted): common in family trusts; the trustee's fiduciary duties still apply, including impartiality (Section 17).
Sole trustee and sole beneficiary (not permitted): legal and beneficial interest merge, no obligation is owed to another, and so no trust exists.

⚠ Key point

The author must be competent to contract, or be a minor acting through a court sanctioned trust, and is subject to any law limiting his power to dispose (Section 7). Any person capable of holding property may be a beneficiary, and may disclaim expressly or by setting up an inconsistent claim with notice of the trust (Section 9). Any person capable of holding property may be a trustee, but a discretionary trust needs a trustee competent to contract; no one is bound to accept, acceptance may be by words or acts, and a timely disclaimer prevents vesting, with the property passing to the remaining co-trustees from the date of creation (Section 10).

5. Related Topics and Provisions

Creating a trust (Topic 8): Sections 5 and 6
No renunciation and no delegation (Topic 23): Sections 46 and 47
Appointment of new trustees (Topic 30): Section 73
Hindu religious endowments (Topic 44): the deity as a juristic person