Build trust to avoid legal hassles

Affluent families will need to implement comprehensive estate planning

A recent research report by Oxfam estimated that over the next 20 years, 500 people, consisting of India’s elite, will hand over ₹2.1 trillion to their heirs — a sum larger than the GDP of India, a country of 1.3 billion people. Against this backdrop, there are ground realities of disagreements between siblings over control of businesses after the death of the patriarch, feuds breaking out in the family on account of marital discords, leading to court battles or discord between generations over the family business management and wealth transfer.

Most affluent families will, therefore, need to implement a comprehensive estate plan that would ensure seamless inter-generational transfer of their wealth. Such a plan would necessitate making decisions today to control the events that may unfold tomorrow. This can be done through two succession planning tools — a will and a trust structure.

A will is simply an expression of one’s wishes on paper concerning how and to whom assets are to be distributed in the event of one’s death. The will is acted upon only after one’s death and is also open to legal challenge by disgruntled heirs.

A private trust is a legal structure set up under the Indian Trust Act, 1882, into which a person (called a ‘settlor’) during his/her lifetime can transfer assets (financial or non-financial) to be managed by a person (called a ‘trustee’) for the ultimate benefit of another (called the ‘beneficiaries’). The legal document that creates the trust determines how it will function, along with specifications of all conditions for distributions to be done in the present and future is called a ‘trust deed’.

The key benefits of such a structure are as follows:

Protection of interest

A trust structure can be used to separate ‘ownership’ of an asset from ‘economic interest’, especially where not all family members are involved in the family business. For example, shareholding of the family business could be transferred to one or more private family trusts while entrusting operational control to some family members, but ensuring dividends and other income from the shareholding flows in a pre-defined proportion to all family members. All of this can be agreed and implemented during the lifetime of the patriarch/settlor.

Asset protection

A trust can be structured to protect or ‘ring-fence’ assets from creditors and even provide for the welfare of family members who are minors, financially irresponsible or who have special needs. This protection is made possible in an irrevocable trust structure because once assets are transferred to the trust, they no longer legally belong to the settlor, but technically become the legal property of the trust/trustee to hold for the benefit of the beneficiaries.

Legal intervention

A trust formed under a legal structure, once created, is very difficult to challenge in the courts by family members. Apart from this benefit, assets in a trust are seamlessly distributed by trustees to the pre-defined beneficiaries without the need for a probate from the court in the event of untimely death of the settlor.

Philanthropy

A charitable trust is most notably one of the best vehicles for ensuring the benefits of one’s estate, used for charitable or philanthropic purpose in accordance with one’s wishes.

The finest example of the successful working of a charitable trust is of India’s oldest industrial house where free cancer treatment is still being provided to the poor and the needy several decades after the death of its settlor.

Asset management

Trusts can also be a convenient means of having one’s worldwide assets in one holding vehicle, thus simplifying asset management and financial reporting in a tax-efficient manner.

Creation of a trust is highly flexible and is usually always tailor-made to the requirements of the family for which it is created. Obviously, there are costs to be entailed for structuring, setting up and operating the trust which may be a drawback for some, but the long-term benefits far outweigh the costs. A trust structure can be considered when one’s estate is at or above a threshold of ₹5-10 crore, whereas a will may suffice for relatively less complex smaller estates.

The writer is CEO & MD of ASK Wealth Advisors. The views are personal.

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