‘In trust’ and ‘trust in’: a comment on trust acts—I

Purpose of these notes

These notes have been prepared for the following reasons:

• The Trust Act 1882 which was applicable to the whole country has been repealed and replaced with five separate Trust Acts for each of the provinces and Islamabad Capital Territory;

• These new Acts require registration of existing trusts formed under the repealed Act with the authority designated by the respective Acts;

• To disseminate to the general public the concept of public and private trusts and foreign trusts, being a reasonable vehicle for the management/ administration of assets in and outside Pakistan; and

• Distinction between Musalman Waqf and the trust formed under the respective trust acts.

General

These notes have been prepared on the basis of the review of the Trust Act, 1882, Punjab Trust Act, 2020, the Sindh Trust Act 2020, the Punjab Trust Rules 2020, and the Sindh Trust Rules 2020. Other Acts carry almost similar provisions.

Trust is an efficient vehicle for the management and administration of assets for public and private purposes.

This is a vehicle where legal ownership is transferred to an entity called a ‘trust’ administered by some trusted persons called ‘trustees’ with the objective that the said property and earnings therefrom are to be used in the interest of a person, or persons or general public, as the case may, be in accordance with the desires of the settlor or author of the trust. The objectives are recorded in a document ‘trust deed’.

This vehicle has been recognised by the law since 1882 by way of the Trust Act 1882, much earlier than the Companies Act, 1913.

In the recent past (post-1947), there has been a decline in using the vehicle of trusts for public and private purposes. Generally, the option of ‘Not for Profit Company’ under Section 42 of the Companies Act, 2017 is used. Section 42 has a limited scope as the same can only be formed for ‘Not for Profit Activities’. There is no provision in the Companies Act 2017 for formation of such vehicle for private purposes.

One of the reasons for decrease in the use of this vehicle was limited availability of documented funds in the personal wealth statements. Now the ground realities are gradually changing and after attaining stability in personal wealth status there is a need to rethink about trust as a vehicle for wealth management and administration.

No civilized society can exist without a provision for a vehicle like a ‘trust’ for the administration of properties. These vehicles exist in every society and civilizations such as Waqf in Muslim civilization since 1913.

Trusts provide a legal and acceptable vehicle where a person can attribute his assets for the benefit of children and family not necessarily in accordance with the inheritance law. It also provides safeguards against abuse of assets by his descendants especially the protection of rights of unmarried daughters and disabled child. Trust laws are however different from Muslim Waqfs. This matter has been dealt with separately in these notes.

Recent revelations by the Panama Leaks, Paradise Leaks and Pandora Leaks transpired that Pakistanis are successfully and legally using the ‘trust’ structure for their wealth held outside Pakistan. The purpose of this note is to demonstrate that the trust vehicle contains many attributes better than other forms of ownership.

Status of a Trust

Trust means confidence. Trust is a structure where a person or a community reposes confidences on certain persons for effective management of his or their asset. Trust is a legally recognised vehicle under which a property (moveable or immovable) is placed in the name of certain persons, called trustees, for the benefit of a person or a group of persons called beneficiaries. The person placing the initial property is called the settlor or the author.

Trust is a structure where legal ownership is separated from beneficial ownership.

In every trust structure there are three parties. Which are (i) Settlor or author, (ii) Trustees, and (iii) Beneficiary or Beneficiaries.

Illustration:

Mr A being the owner of properties can author a trust deed whereby his immovable property is placed in a trust for the benefit of his children or the lineage of children, even those who are not born.

In that deed Mr A can decide any manner of distribution of benefit from the trust for his children and their lineage from the trust property.

Mr A can allocate all or a part of property for public interest.

Mr A can also decide the persons on whom he may trust for the management of that property. Those are called trustees.

Recent Developments

As a result of the 18th Amendment to the Constitution of Pakistan all the provincial legislatures and the capital territory have enacted Provincial Trust Acts in the respective provinces and the capital territory. It is suggested that there should be maximum cohesion within five trust acts now in force.

These Acts carry all the concepts of trust laws; however, certain procedural changes have been introduced requiring consideration.

Major additions relate to anti-money laundering provisions which have apparently been made to comply with the FATF guidelines.

General Observations on new laws

• There appears to be no specific manner to deal with the trusts which are operated on national level having properties in more than one province. This subject is to be settled.

• Private trusts which are a part of these Acts are completely different from public trusts. The primary amendment required in the present laws is to reduce the level of dissemination of information for private trust as against public trust.

• Trust is to be treated as a pass-through entity for tax purposes. Under the present law, there is effectively double taxation in the trust structure. Distribution of income from the trust to the beneficiaries is to be treated as a non-taxable dividend.

• Trusts, especially those being public trusts, are specifically exempted from taxes, levies, duties on the transfer of immovable and movable properties.

Important Changes in the New Trust Laws

The following important changes have been made in the new trust laws in comparison to earlier trust act:

• All trusts formed in the province of the Punjab and Sindh are required to be registered with Assistant Director, Industries & Commerce Directorate, Government of Sindh and Assistant Commissioner appointed under Punjab Civil Administration Act, 2017 respectively;

• All existing trusts in Sindh have been asked to seek registration with the authorities after the promulgation of the act. There is no such requirement in the Punjab Act. In Punjab all the information relating to existing trusts is to be obtained from the Registrar appointed under the Registration Act, 1908;

• The authorities as above have been allowed to extinguish a trust where any member of the trust including author, trustee or beneficiary is declared proscribed under the Anti-Terrorism Act 1997 or under United Nations Security Council Act, 1948;

• In Sindh all trusts are required to renew their approval on yearly basis. There is no such yearly approval required under the Punjab Act;

• Authorities as mentioned above have been given powers to seek information about the trust and trust properties;

Public & Private Trusts

Since inception of the trust legislation there has been a distinction between public and private trusts. A public trust means the trust where assets are to be used for the benefit of the general public at large. The term general public has repeatedly been defined by the courts. As against that, a private trust is the one where the beneficiaries are persons other than the general public.

For the first time the Sindh Trust Rules 2020 has defined the meanings of a private and public trusts. Unlike the common usage and understanding there has never been any concept of a charitable trust in the law. A public trust effectively encompasses the concept of charitable trust. The concept of charity is ingrained in a public trust, however, that charity may be in a form different as generally and commonly understood. For example, promotion of arts and music may not be treated as charity in a general sense; however, for the purpose of a trust, it is treated as a public trust.

The definition of Non-Profit Organization under Section 2(36) of the Income Tax Ordinance, 2001 states as under:

“Established for religious, educational, charitable, welfare purposes for general public, or for the promotion of an amateur sport”

Formed and registered by or under any law as a non-profit organization.

There should be consonance between the trust laws, Section 42 of the Companies Act, 2017 relating to non-profit organization and the Income Tax Act, 2001. There is a need to define charity as has been done under the Charities Act, 2011 in the UK.

Concept of Specialized Trust

The Sindh Trusts Act, 2020 by way of an amendment in 2021 has introduced a concept of Specialized Trusts. This is a right concept introduced in the trust laws.

Under the corporate and commercial regulations certain activities can only be operated through a trust mechanism. These inter alia include administration of retirement benefit funds, management of collective investment schemes like mutual funds and others. The trusts formed for these purposes are fundamentally and intrinsically different from the trusts as referred above. In most of the cases such trusts are regulated by the respective regulator such as Securities & Exchange Commission of Pakistan (SECP).

Accordingly, the Sindh Trust Act, 2020 by way of Section 12A provides that such trusts will be administered through a different procedure which effectively restricts the administration of such trust by the respective regulator. However initial registration will be made with the provincial authorities. Specialized trusts include:

• Collective investment schemes;

• Collective investment vehicles;

• Private funds;

• Real Estate Investment trust;

• Exchange Traded Funds;

• Private Equity & Venture Capital funds;

• Debt Securities Trust;

• Trust in relation to any security issued by the Federal or any Provincial Government through capital markets;

• Provident Funds;

• Gratuity Funds;

• Pension Funds;

• Employee Benefit Trust or

• Any other trust administered by the regulator as notified by the Provincial Government in the gazette.

(To be continued)

Copyright Business Recorder, 2021