As parents, one of our greatest concerns is ensuring our children are taken care of—financially, emotionally, and legally.

When it comes to long-term protection of wealth, especially inheritance, relying solely on a Will might not be enough.

This is where Trusts step in as a powerful tool in Indian estate planning.

Trusts offer structure, control, and clarity—particularly if your child is still a minor, financially inexperienced, or vulnerable due to health, dependency, or other circumstances.

In this blog, we’ll explore how setting up a Trust in India can protect your child’s inheritance, ensure efficient asset protection, and help minimise long-term tax liabilities.

What Is A Trust?

A Trust is a legal arrangement where one person (the Settlor or Grantor) transfers assets to another (the Trustee), to be managed for the benefit of one or more people (the Beneficiaries).

When it comes to inheritance, Trusts ensure your assets are distributed in a structured and safeguarded manner, as per your intentions.

Trusts are governed in India under the Indian Trusts Act, 1882. They may be private Trusts (for specific individuals or families) or charitable Trusts (for a public cause).

Why Consider A Trust For Your Child?

Here’s why many Indian families are choosing Trusts over standalone Wills to secure their children's financial future:

• Minor or underage children cannot inherit property directly under Indian law.
• Trusts allow you to control the timing and conditions under which a child can access their inheritance.
• They shield the inheritance from being misused by the child or others.
• Trusts help bypass probate, ensuring quicker and more private distribution of wealth.
• They offer potential tax advantages, particularly through irrevocable Trusts and discretionary Trusts.

Types of Trusts You Can Use

1. Irrevocable Trust

An irrevocable Trust cannot be modified or revoked once it is created. This provides strong asset protection, especially when you're trying to remove assets from your personal ownership and reduce your taxable estate.

It is particularly helpful in:

• Protecting inherited assets from creditors or legal claims.
• Shielding your child’s inheritance from being considered in divorce proceedings.
• Potentially reducing estate taxes and capital gains tax liabilities.

2. Revocable Trust

A revocableTtrust allows the settlor to change or revoke the terms during their lifetime. While it does not offer the same level of tax protection as an irrevocable Trust, it:

• Enables you to manage assets while you're alive.
• Makes it easier to update Beneficiaries as circumstances change.
• Avoids probate and ensures seamless management of Trust assets after your death.

3. Discretionary Trust

A discretionary Trust gives trustees the authority to decide when and how much the Beneficiary (in this case, your child) should receive.

This is ideal when:

• Your child has not yet developed the maturity to manage large assets.
• You want to prevent misuse of funds.
• You want to avoid fixed disbursements and keep flexibility.

4. Testamentary Trust

This is a Trust created through your Will, and it comes into effect after your death.

It is particularly useful when:

• You want your child to receive assets only at a certain age.
• You want to manage how different parts of your estate are distributed over time.

What Can Be Held In A Trust?

You can place a wide variety of assets into a Trust, such as:

• Bank accounts
• Mutual funds and investment portfolios
• Life insurance proceeds
• Immovable property (like land, flats, or commercial buildings)
• Business interests
• Jewellery, artwork, or other valuable personal property

This allows for consolidated, well-documented wealth management on behalf of your child.

Tax Advantages Of Using Trusts In India

While India does not impose an inheritance tax, proper tax planning with Trusts can help minimise other liabilities:

• Income generated by Trust assets can be distributed in a tax-efficient way.
• Irrevocable Trusts may reduce your taxable estate, shielding your family from large capital gains tax on inherited property.
• Certain Trusts, especially charitable Trusts, may qualify for tax exemptions under the Income Tax Act.
• Trusts can help manage gift taxes and ensure tax efficiency across generations, especially when large sums or life insurance proceeds are involved.

Capital Gains & Trusts: What You Should Know

If you plan to transfer property or investments into a Trust:

• Be mindful of capital gains tax that may apply if the assets appreciate in value.
• Assets in a revocable Trust may still be treated as part of your personal estate for tax purposes.
• In an irrevocable Trust, capital gains may be taxed at the Trust level, but with strategic planning, the burden can be minimised.

Proper timing, valuation, and tax advisor consultation are crucial here.

Establishing A Trust In India: The Process

Step 1: Choose the type of Trust
Your goals—whether asset protection, delayed inheritance, tax saving, or philanthropic purpose—will decide the Trust structure.

Step 2: Draft a Trust Deed
A legally binding Trust Deed defines:

• The Settlor (you)
• The Trustee(s)
• The Beneficiary (your child)
• The Trust’s objective
• Rules around management and distribution of Trust assets

Step 3: Register the Trust
Private Trusts with immovable property need to be registered with the relevant authority, usually the sub-registrar's office.

Step 4: Fund the Trust
You transfer movable or immovable property to the Trust through proper legal documents like Gift Deeds or sale deeds.

Step 5: Appoint a Trustee
Choose someone responsible—either a trusted family member or a professional Trustee—to manage the Trust on your child’s behalf.

Role Of Trustees & Fiduciary Responsibility

The Trustee is legally bound by a fiduciary duty to act in the best interest of the Beneficiary. They manage, invest, and disburse the Trust assets as per the Trust Deed.

You can also appoint a protector—a person who supervises the Trustee and ensures the terms of the Trust are properly implemented.

Special Use: Trusts For Children With Special Needs

If you have a child who may not be able to manage finances due to mental or physical disability, a discretionary Trust or special needs Trust is essential.

It:

• Provides for medical care, education, and daily living
• Ensures they still qualify for government benefits
• Appoints long-term Trustees or caregivers

Trusts vs Wills: What’s Better?

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Ideally, a combination of both—a Will and a Trust—offers the most secure and flexible strategy.

Common Mistakes To Avoid

• Failing to register the Trust properly
• Naming unqualified Trustees
• Ignoring tax implications
• Not updating the Trust Deed as family circumstances change
• Using a one-size-fits-all approach for children with unique needs

The Bottom Line: How Yellow Can Help

Setting up a Trust for your child’s inheritance is not just about wealth transfer—it’s about peace of mind.

At Yellow, we help you:

• Choose the right Trust for your goals (irrevocable, discretionary, testamentary)
• Draft and register a legally sound Trust Deed
• Identify reliable Trustees and ensure compliance with the Indian Trusts Act
• Maximise tax benefits while ensuring asset protection
• Integrate your Trust with a broader estate plan that includes Wills, POAs, and advance directives

Whether you're looking to protect your child’s inheritance from life’s uncertainties or simply want to make your wealth last across generations, Yellow is here to simplify the process—legally, ethically, and affordably.

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