I am 24 and in the highest tax bracket. Can I form a trust in the name of my child to lower my tax burden? If yes, then how much can I donate every year to the trust? How much time does it take to form a trust and get it registered with the income-tax department?

Ravi Saran, Delhi

Forming a trust would mean gifting of a sum of money or property by one person to a fund for a specific cause that involves benefiting a particular person or class of persons. In your case, forming a trust would mean a father settling property or money in favour of his child and appointing himself as a trustee to manage the funds and property. To form a trust in favour of your child, a registered document (trust deed) is necessary if immovable property is being transferred to it. The deed should be made out on stamp paper and registered with the Registrar of Assurances under the Registration Act.
But if you wish to transfer only money to the trust, you may prepare a trust deed on a stamp paper and sign it in the presence of a witness to avoid any subsequent disputes. Once the trust is set up you can contribute more funds to it as and when you want to and there is no limit specified to it. From the point of view of taxability, the income gifted by you to the trust will not be exempt in your hands. The income from the money transferred by you to the trust will be taxable in the hands of the beneficiary of the trust, that is, your child, if you specify the share of your child in the trust. As your son is a minor, the income shall be clubbed with yours. However, if the trust does not distribute the income, the issue of clubbing does not arise. Instead, the income will be taxed in the hands of the trust, which would then be treated as a separate taxable entity.

olmdesk@outlookindia.com