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Wealth Structuring · Private Trust

How to Create a Private Family Trust
The Ten-Step Process

A private family trust is the structure families use to hold assets for a child. The first decision - which type of trust - sets the tax treatment for everything that follows, so it is worth understanding before the deed is drafted.

📄 10 steps, start to finish · ✅ Our own family's structure · ⬇ PDF version available
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Before You Start

The first decision drives everything else

A private family trust separates who owns an asset from who benefits from it. Where an HUF is a family entity you are already part of, a trust is one you deliberately construct - and you choose its shape.


That choice is not cosmetic. Whether the trust is revocable or irrevocable, and whether the beneficiaries' shares are fixed or left to the trustees, decides who pays tax on the income and at what rate. Step 1 below is the one to read carefully; the remaining nine are process.

The Process

From choosing the type to opening a demat account

1

Decide the type of trust

This sets the tax treatment for everything after it

  • By operation - a revocable trust can be revoked by the settlor, and its income is taxed in the settlor's own hands. An irrevocable trust cannot be revoked, and its income is taxed either in the trust's hands or the beneficiaries'
  • By how beneficiaries are determined - a specific (fixed) trust names the beneficiaries and their shares. A discretionary trust leaves the allocation of income or assets to the trustees
  • In our own case we created an irrevocable specific trust, because the beneficiary's share was known in advance
  • For tax, irrevocable specific trusts are treated as an Association of Persons (AOP)
  • If any beneficiary's individual income exceeds the basic exemption limit, the entire accumulated income of the trust may be taxed at the Maximum Marginal Rate. The purpose of accumulating income must be stated clearly in the deed to keep the benefit
  • Where the beneficiary is a minor with no income attributed to them - our case - the trust is taxed at individual slab rates and the MMR does not apply
This is the step that decides whether the structure saves anything. Everything below is administration; this is the decision.
2

Identify the key parties

Settlor, trustees, beneficiaries - and optionally a protector

  • Settlor - the person creating the trust. Preferably the father or mother of the beneficiary, as defined under the Income Tax Act
  • The settlor can also be a relative as the Act defines one: spouse, siblings, siblings of either parent, siblings of the spouse, and any lineal ascendant or descendant - parents, grandparents, children, grandchildren
  • Trustees - the people who manage the trust. In our case, the parents. The settlor can also be a trustee
  • Beneficiaries - the family members it is for. Our child, in our case
  • Protector - optional
3

Draft the trust deed

On stamp paper, before two witnesses

  • The name of the trust and its address
  • The objectives of the trust
  • Details of all parties - settlor, trustees and beneficiaries
  • The powers of the trustees
  • Distribution and operation rules
  • The initial corpus provided by the settlor to establish the trust fund
  • Executed on stamp paper - stamp duty varies by state
  • Signed in the presence of two witnesses
4

Register the trust deed

Optional, but recommended

  • Registration is not legally compulsory
  • It is recommended - a registered deed is far easier to enforce
5

Apply for the trust PAN

Under the Trust category

  • Apply via Protean (NSDL) or the Income Tax Department
  • Category: Trust. Apply online and pay the nominal fee
  • After verification, submit copies of the trust deed, KYC of the trustees, KYC of the beneficiary, and address proof of the trust
  • The PAN is issued in the name of the trust - its fourth character will be "T"
6

Create the trust seal

Not legally required, but banks ask for it

  • Not legally mandatory, but required by most banks to open the account
  • Format: Beneficiary Name Trust, with For Trustee beneath
7

Open the trust bank account

Usually a current account

  • Banks normally open a current account for a trust
  • Take the trust deed and trust PAN
  • KYC of the trustees
  • A board resolution authorising the trustees to operate the account
  • Address proof - a recent electricity bill or equivalent
  • Beneficiary KYC. For a minor, a birth certificate and Aadhaar are enough
Pro tip: keep proof that the trust operates at its declared address - a nameplate, or designated office premises. Banks carry out physical verification, and the checks are thorough enough to take time.
8

Start trust operations

Fund it, then keep books from day one

  • As settlor or trustee, securities, assets or funds can be gifted to the trust, to be managed in line with the powers set out in the deed
  • Maintain proper books of accounts and compliances from the start
  • The trust's income tax return is filed on ITR-5
9

Meet the annual compliance

Every year, without exception

  • File the trust's income tax return annually
  • Audit the accounts where applicable
  • Maintain resolutions, minutes and statutory records
10

Open a demat account

Offline; mutual funds direct through the fund house

  • Generally an offline process. Depending on the provider, sign the forms and submit KYC of the trustees, the trust PAN and the trust deed
  • For mutual funds, go to the fund house websites directly and invest direct
Pro tip: use the same email ID as your personal investments. It simplifies tracking through CAMS and KFintech, and lets you invest through those platforms once the linkage is live.

Want us to set the trust up?

Choosing the right trust type, drafting the deed, the PAN, the bank account or the first year of compliance - done once, correctly, so the tax treatment holds.

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This guide is for educational purposes only. It is not legal or tax advice. Every family's situation is different. Please consult a qualified expert before making any decisions.