📚 PASS Investment Adviser (Level 2) Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 15.6 — Trust - Characteristics and Regulations

Imagine you are conducting due diligence on a family-owned conglomerate for a potential IPO mandate. During the review of ownership structures, the client mentions that certain substantial land assets are held in a ‘family arrangement’ based on verbal promises between the patriarch and the current management. As a financial analyst, this should immediately trigger a red flag, as the absence of a registered trust deed renders the arrangement legally precarious and essentially invisible to tax authorities and creditors alike.

In the Indian context, the Trust Deed is the primary charter that breathes life into the trust. It is a formal, written instrument that crystallizes the intentions of the author, defines the scope of the trustee’s fiduciary duties, and establishes the specific rights of the beneficiaries. Without this documentation, the trust remains a vague intent rather than an enforceable entity, leading to severe litigation risks and potential nullification of the asset transfer under the Indian Trust Act, 1882.

From a valuation perspective, the clarity of a trust deed directly impacts the risk premium assigned to the assets held therein. A well-drafted deed provides a clear roadmap for governance, succession, and tax treatment, which stabilizes the expected cash flows for beneficiaries. Conversely, reliance on oral or implied arrangements often results in ‘asset lock-in’ scenarios where beneficiaries cannot prove their beneficial interest, thereby depressing the value and marketability of the underlying holdings.

Consider a case where an author transfers shares to a trust without a formal deed to avoid personal liability. Should a dispute arise between family members regarding dividend distribution, the court will likely treat the assets as personal property of the author rather than trust assets. This defeats the primary objective of the trust—estate planning—and exposes the assets to the author’s personal creditors, effectively destroying the asset protection layer you were counting on in your model.1

Professional judgment in estate planning requires that you look beyond the financial statements and insist on the existence of a robust, registered deed. If the paperwork does not exist, the structure does not exist. As an advisor, your recommendation must be conditioned upon the execution of a written deed that aligns with statutory requirements to ensure the continuity and privacy that clients seek when establishing these vehicles.

Nuance

⚠️ Nuance
Many candidates incorrectly assume that trust law in India operates like common law informal understandings, where ‘intent’ is sufficient. They often fall into the trap of believing that equitable ownership can be proven solely through the physical possession of assets by a third party. In reality, Indian courts place a heavy burden of proof on the written document; without a validly executed trust deed, the ’trust’ is often disregarded by tax authorities, potentially resulting in the assets being taxed in the hands of the author at the maximum marginal rate.

Check Your Understanding

Practice Question 1

An HNI client informs you that they have transferred their dividend-yielding stock portfolio to a group of trustees for the benefit of their grandchildren, but they have not drafted a formal document, relying on a ‘moral understanding’ among the trustees. Which of the following is the most accurate assessment of this situation under the Indian Trust Act?

Practice Question 2

Which clause is essential in a trust deed to ensure that the trustee has the authority to diversify the portfolio effectively while protecting the interests of the beneficiaries?

This is a companion read for Section 15.6 — Trust - Characteristics and Regulations from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. An asset protection layer is the strategic segregation of wealth to insulate it from potential future creditors or legal claims against the settlor. ↩︎