ACCMULATIVE TRUST FOR MINOR CHILD  

                                       Paras Kochar, Advocate

INTRODUCTION: - A trust can be created for the benefit of minor child. Such trust is called private trust which is created for welfare of minor child, tax planning purpose and also to avoid fragmentation/transfer of properties.  Private trusts are also created for giving benefit to future successors such as would be son, grand son or would be daughter or grand daughter etc. Normally such trusts are created for the purpose of benefit of minor son who receives the accumulated fund when he becomes major or for the purpose of benefit of minor daughter who gets the accumulated fund of the trust at the time of her marriage.

TYPES OF TRUSTS: -   For the benefit of minor child, three types of following trusts can be created:-

a)                 Specific Trust.

b)                 Discretionary Trust.  

c)                  Accumulative Trust.

a)     Specific Trust:-A specific trust is a trust where either the beneficiary is a single or when beneficiaries are more than one, their share is determined and known under section 161(1) of Income Tax Act.

b)       Discretionary Trust:-  A Private trust which is not a specific trust will be considered as a discretionary trust where the number of beneficiaries are not determined, the specific shares of the beneficiary are not fixed and is left at the discretion of the trustees, the trust will be treated as discretionary under section 164(1) of the Income Tax Act.

c)      Accumulative Trust: - The Accumulative trust can be either specific or discretionary; the basic feature is that the benefits out of the trust property are distributed among the beneficiaries on happening of certain future events.

TAXATION OF PRIVATE ACCUMULATIVE TURST FOR MINOR CHILD: - By the finance Act, 1992 with effect from the A.Y. 1993-94, section 64(1A) has been introduced where by all income which arises or accrues to the minor child shall be included with the income of the parents having higher income.

The question that arises where the benefit through the medium of trust is deferred beyond the minority of the child is to be clubbed or not with the income of the parents u/s 64(1A) of the Act.

Before the amendments, u/s 64(1)(v) all income of a minor child which arose from assets transferred directly or indirectly to the minor child of such individual, otherwise than for adequate consideration, used to be clubbed in the hands of the parents having higher income. While interpreting section 64(1) (v) it has been held that the clause should be applicable to the transfer of asset to the minor child only and not to an association of person for the benefit of a minor child.

A Private accumulative trust for a minor child is a trust which is so settled that the entire income/accrual is accumulated till the minor child attains majority. The fund of the trust is distributed only after the beneficiary attains majority.

To make it more clear, say, a discretionary trust is created for two minors. The minors are aged 6 as on the date of settling of the trust. The entire fund is accumulated to be distributed say after 15 years from the date of creation. The trustees are given the discretion to distribute it only after 15 years. This is a case of accumulative trust.

In such a situation since the entire income is deferred beyond the minority, no part of it accrues or arises to the minor .In C.I.T. VS PONNATH 172 I.T.R. 269 (A.P), it was held that: deferred benefit must be construed as being a benefit deferred to a year subsequent to the accounting year in which the income is taxable, so long as it is not deferred beyond the minority of the child. The income actually spent upon the minors in a given accounting year should be included in the total income of the parents having higher income for the assessment year relevant to that accounting year, and that portion of the income, if any, which has been accumulated for being paid over to the minors on their attaining majority, cannot be so included. Reference can also be made in the case of YOGENDRA PRASAD N, MAFATLAL VS, C.I.T. 109 I.T.R. 602 (BOM).

In case where the trust is a specific trust for the immediate benefit of the minor child where share in the benefits of the trust is determinate or known and the assessing officer choose to assess such income directly in the hands of the minor child, the income shall be clubbed in the hands of the parent having higher income.

However, as seen in the case of C.I.T. VS T.PONNAIAH 172 I.T.R. 269, where the benefit through the medium of trust is deferred beyond the minority of the beneficiary, it is not includable in the hands of the parents of the minor.

The income of the minor child is clubbed in the hands of either parent with higher income. Since the minor herself does not have a right during minority, such clubbing is not possible even as held by the apex court as decided in CIT VS M.R. DOSHI (1995) 211 ITR ( SC). The Supreme Court further held in this case that were the income from the trust was to be accumulated until the child attained majority, the clubbing provisions u/s 64(1A) would not get attracted, since no benefit accrues to the minor child during the period when such child is a minor.

But such trust can not avoid liability to tax on year to year basis , though the income may not be assessable in the hands of the minor or clubbed in the hands of the parent was addressed in Ganesh Chhababhat Vallubhat Patel VS CIT (2002) 258 ITR 193 (GUJ). The High Court found that the decision of the Supreme Court in M.R. Doshi’s case was distinguishable, because it related to the assessment in the hands of the beneficiary and the consequent application of provision for clubbing of income of beneficiaries in the hands of the parents. Though the income was merely accumulated for the benefit of the beneficiary, it had also accrued and the representative assessee had become liable to tax on the same under section 161(1), so that there is liability in the year of accrual. In such a case, the accrual of income is not deferred. However, it will be taxed ‘in like manner ‘and to the same extent “as done in the hands of the individuals.

MODES OF INVESTMENTS: - The accumulative trust can also hold any shares, securities, immovable property and can advance loans to others. Like charitable trusts, there is no restriction on such trust in regard to mode of investment of fund.

CONCLUSION: - Life is uncertain. Nobody knows as to when the last breath will come out. Hence, if an assessee creates such trust for his minor son or minor daughter, he may feel relaxed as regards future of his children is concerned. However, trustees of such trust should be most reliable persons to take proper care of such trusts. Hope, The Hon’ble Finance Minister will not make any retrospective amendment in this regard so that social security of minor children is not hampered.