Common myths about determinate (non-discretionary) trusts

1. A trust, where the shares of the beneficiaries are determined in the trust deed, can only be considered to be a determinate trust.

When the shares of the beneficiaries are determinate, a trust is commonly considered to be “transparent” for tax purposes, and the beneficiaries are liable for tax on their proportionate share of income from the trust. Even if the beneficiaries' shares are determined after the formation of the trust (e.g. by way of contributions in an investment fund by different investors or by way of a resolution passed by the trustees or any other mechanism), the trust can be considered to be a determinate trust.

2. Shares of beneficiaries in a determinate trust cannot be challenged in an inheritance litigation.

In countries with regulated inheritance laws (e.g. in India, succession is governed by The Hindu Succession Act, 1956), if the shares of the beneficiaries in a determinate trust are not to the satisfaction of a particular beneficiary, the beneficiary may challenge the “distribution of inheritance” to be unequal.

3. In a determinate trust, the trustees cannot be liable for payment of tax in cases where the beneficiaries fail to pay the tax.

As in other situations, even in a determinate trust, which may be considered to be “transparent” for tax purposes, where the beneficiaries are liable for tax on proportionate income from the trust, the responsibility for tax compliance, and hence the liability for tax payment, may devolve on the trustees.

4. Benefits of a Double Tax Avoidance Agreement (DTAA) should be considered at the level of the trust.

In jurisdictions where it is an established position that beneficiaries are liable to tax on proportionate income of a trust, the benefit of a DTAA may also be available at the beneficiary level. To determine which jurisdiction’s DTAA will apply, one must determine the tax residence of each beneficiary and apply the provisions for classification of income and applicability of tax on that classification for each beneficiary, based on that particular DTAA.

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