[Opinion] Succession Planning via Private Trust

Anjul Mathur & Deepak Sharma – [2022] 145 taxmann.com 159 (Article)

1. Introduction

India has been a family-run economy. Families run large, medium, and small businesses very successfully, providing significant employment as well as returns to stakeholders. Many of these corporations have listed their shares on stock exchanges, allowing the general public to share in their profits.

Families have amassed significant wealth over the last few decades, and succession is always a concern for the patriarch of the family. Many times, wealth protection is more important than increased profits. In addition to the economic succession of the family’s assets (financial and business assets), management succession (handing over the reins of the business to family members or professionals) is an important part of any succession planning.

Effective estate and wealth planning ensures that families retain control of their businesses and that leadership of businesses is transferred smoothly between generations of families. It strikes a balance between the needs of businesses and the interests of family members. Effective wealth planning for high-net-worth individuals can avoid lengthy and costly legal battles between heirs based in multiple jurisdictions. Various structures provide varying degrees of control over the purpose for which wealth can be used and how it can be used. The private family trust is one of the most commonly used structures for managing personal assets, including both tangible and intellectual property, and succession planning.

This article focuses on estate and wealth succession via a ‘Private Trust’ mechanism.

2. Private Trust

As previously stated, one of the most commonly used structures for managing personal assets, including both tangible and intellectual property, and succession planning is the private family trust.

Private Trusts are governed by the provisions of the Indian Trust Act, 1882 (‘Trust Act’). Trusts with a public character are not administered by the Trust Act, instead the particular State Public Trust Act would be the applicable law. Example: Bombay Public Trust Act, 1950, Punjab Trust Act, 1950.

As per the Trust Act, a trust is ‘as an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared or accepted by him, for the benefit of another, or of another and the owner.’

The person who reposes or declares the confidence is called the “author of the trust” (commonly referred to as a ‘settlor’). The person who accepts the confidence is called the “trustee”. The person for whose benefit the confidence is accepted is called the “beneficiary”. The subject matter of the trust is called “trust property”. The “beneficial interest” or “interest” of the beneficiary is the right against the trustee as owner of the trust property. The instrument, if any, by which the trust is declared is called the “instrument of trust” (commonly known as the ‘trust deed’ or ‘indenture of trust’).

A private trust offers several advantages, including

• Efficient mode of managing and passing the family assets as it helps create a legal framework for the family assets.
• Bypasses the probate process which is susceptible to frivolous claims and delays in the court process.
• Safeguards interests of family members including maintenance of members with special needs/disabilities.
• Possible to attach conditions to gifts such as on attaining a particular age or fulfilment of the settlor’ wishes
• Avoids family disputes over the property
• Helps structure business succession which may be based on a balance of merit and family control, and facilitate philanthropic activities.

In addition to the above-mentioned essential components of a trust, a trust structure may also include a Protector and/or Trust Advisor. The Protector of a trust is a trusted individual, generally known to the family, who advises the trustee in various circumstances. His primary role is to ensure that the views of the family are represented, especially in cases where the trustees may be a non-family member, an institution, or a private trust company. However, the ultimate decision with respect to any trust matter remains with the trustee or in some cases with the Settlor depending on the structure of the trust.

Click Here To Read The Full Article