Can Family Members Be Trustees Together?–Conflict of Interest Explained

The appointment of family members as trustees is a common practice in NGOs and trusts, but it raises concerns about conflicts of interest and governance integrity.

Legal Provisions and Bare Act Analysis

The Indian Trusts Act, 1882, does not explicitly prohibit family members from serving as trustees together  Section 10 requires trustees to act with reasonable care and impartiality, implying that  conflicts of interest must be avoided. Section 88 of the Act holds trustees liable for any breach of trust, including decisions influenced by personal relationships.

For societies, the Societies Registration Act, 1860, allows flexibility in appointing governing body members, but state-specific regulations, such as the Bombay Public Trusts Act, 1950, Section 20, mandate that trustees act in the best interest of the trust, 2

The Income Tax Act, 1961, Section 13(1)(c), is critical for trusts claiming tax exemptions under Section 12A. It prohibits private benefits to related parties, including family members, which could be scrutinized if multiple family members serve as trustees.

Judicial Interpretations and Case Law

In Commissioner of Income Tax v. Sarvodaya Charitable Trust (2017), the Gujarat High Court revoked the tax exemption of a trust where family members dominated the board and were found to derive personal benefits, such as inflated salaries for relatives. The court emphasized that family-dominated boards must implement strict conflict-of-interest policies.

In Shri Ganesh Trust v. Charity Commissioner (2019), the Bombay High Court al lowed family members to serve as trustees but mandated transparent decision making processes, such as recusal during discussions involving personal interests. This case highlighted the need for robust governance mechanisms.

Practical Implications and Examples

Consider a trust, “Community Welfare Trust,” where a father, son, and daughter serve as trustees. If the trust awards a contract to a company owned by the son, it risks violating conflict-of-interest norms unless the decision is transparently documented, and the son recuses himself from the decision-making process. In 2021, a Rajasthan-based trust faced scrutiny when family trustees approved a land purchase from a relative at an inflated price, leading to an investigation by the Charity Commissioner.

Conversely, family members can serve effectively if proper safeguards are in place. For example, a Tamil Nadu-based educational trust with three siblings as trustees implemented a conflict-of-interest policy, requiring independent audits and public disclosure of decisions, thereby maintaining credibility.

Advantages of Compliance

Managing conflicts of interest when family members are trustees:

• Preserves Tax Exemptions: Ensures compliance with Income Tax Act requirements.
• Enhances Transparency: Builds trust with donors and regulators.
• Mitigates Legal Risks: Reduces the likelihood of investigations or penalties.

Professional Advice

Trusts with family member trustees should:

• Adopt a formal conflict-of-interest policy, requiring recusal in decisions involving personal benefits.
• Ensure independent trustees or advisors form a significant portion of the board.
• Conduct regular third-party audits to verify financial transactions.
• Document all decisions transparently to withstand regulatory scrutiny.

Additional Points: Recent Trends and Challenges

Recent amendments to the Income Tax Act, 2020, have increased scrutiny of trusts with family-dominated boards, particularly for tax exemptions. A key challenge is balancing family involvement with professional governance. Best practices include diversifying the board with non-family members and establishing an independent audit committee to oversee major decisions.