The last two decades, post liberalisation, have seen a significant step-up in the wealth creation process in India, especially amongst business families.

Their own businesses continue to be a dominant part (on an average comprising of 80-90 per cent) of their overall wealth.

Surpluses generated by these families are largely deployed back into their business. This is where they see real wealth creation over the medium to long term.

It is important that they plan the ownership and succession of their assets, particularly their business holdings, in order to ensure business continuity and make sure that wealth continues to be made available across generations.

Complex process

Planning succession is a complex process mandating a formal and structured approach. The use of private family trust structures addresses the key requirement of effectively segregating economic ownership and control while laying down an effective framework for family governance.

Trust structures can be of different types, namely revocable and irrevocable. In the case of revocable trusts, the settler (one who declares confidence for the benefit of others or himself and others) retains the right to revoke the trust in accordance with the terms specified in the deed. Trusts can be determinate or discretionary, based on beneficial interest in the trust. In a determinate or specific trust, the beneficial interest of each beneficiary is specifically defined in the trust deed. Alternatively, the beneficial interest could be unspecified in the deed, making it a discretionary trust. Trusts can also be a combination of the mentioned four types depending on the conditions specified in the deed.

The trustee (the person in whom confidence is reposed) is responsible for managing the financial and taxation obligations of a trust. Tax is recovered from the person who receives the income at the earliest point (typically the trustee) even if he may not be entitled to the benefits or ownership. This is just to simplify the financial process. In turn, the trustee is permitted to recover the taxed amount from the beneficiaries. The taxation obligations of trusts depend on the type of trust settled. If revocable, it would be in the hands of the settler of the assets. Income of irrevocable discretionary structures is taxed at the maximum marginal rate.

Early approach

While the solutions and eventual structure are dependent on multiple factors with respect to family dynamics and business structure, an early approach to a formal and structured succession has many benefits. Apart from preventing difficult situations that families tend to avoid, it also provides a sense of participation and builds an environment of trust amongst family members. Given the complexities involved, the entire planning exercise through the use of trusts is usually fairly detailed. Due diligence involved when dealing with multiple ‘what if' scenarios relevant to each family.

While there are a number of legal and tax issues that also need to be dealt with, a structure created without giving due thought to all these factors could be suboptimal in the long run.

Planning for succession is important and must be initiated as soon as possible. It has been used over the ages as a means to transfer wealth and distribution of assets in case of demise. Instead, it must be effectively used for securing the future interests of the beneficiaries, for protecting and distributing the assets appropriately.

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