Aradhana Bhansali & Amit Kolekar
A trust is formed for various purposes and can prove to be an effective vehicle for succession and estate planning. Trust is a concept which generally features around the author, the trustee and the beneficiary / beneficiaries having rights and obligations assigned to each of them. There are many advantages of creating a trust such as protection of wealth, welfare of family members, succession of property and much more. If the trust is formed with all the required legal procedures then it is an impregnable fortress. The instrument creating the trust is termed as a deed of trust.
In a trust, assets are transferred by one party (called settlor) held by another party (called trustee) for the benefit of a third party (called beneficiaries). The beneficiaries may be definite and ascertained individuals (in a private trust) or the unascertained individuals (in a public trust). A Private Trust can be bifurcated into two, i.e.:(i) Revocable Trust: When the settlor establishes a trust and retains the right to amend, modify or revoke the trust at any time, however if the author is deceased before the expiry of tenure of the trust - the status of the trust automatically changes to irrevocable; and
Types of trust:
Generally, there are two types of trusts in India, private trusts and public trusts. While private trusts are governed by the Indian Trusts Act, 1882, public trusts are divided into charitable and religious trusts. The Charitable and Religious Trust Act, 1920, the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Maharashtra Public Trusts Act, 1950 (governing the public trust in the State of Maharashtra), Societies Registration Act, 1860 are some of the statutes governing the functioning of a public trust in India. If a trust is created by a Will it is subject to the provisions of Indian Succession Act, 1925.
Need for succession planning:
Due to frequent contesting of Wills (inter-se disputes among legal heirs), which results in protracted litigation, trust has become the need of the hour not only for individuals with a high net worth but also for individuals who wish to provide for their future or for specific needs of certain members of their family such as minor children, aging parents or siblings with special needs.
Mode of creation of trust:
A family trust may be created either during the lifetime of the author/ settlor (called Living Trust) or under a testamentary instrument (called Testamentary Trust) being a Will or Codicil.
Under the mechanism of a Living Trust, despite the assets being owned by the trust and managed by its trustees, there is a separation of ownership and control over the assets. The author may retain a certain degree of control over the assets by providing for a mechanism for investments, the power to revoke the trust at any time during his lifetime and reversion of assets to the author at any time.
In case of a Testamentary Trust, the testator records in his Will his desire to set up a trust for the benefit of beneficiaries (may or may not be family members), and upon demise of the testator, the Trust is either required to be set by the Executor of the Will or as directed by the testator under his Will and after probating the Will of the deceased testator, the assets so bequeathed, are transferred to the trust so formed pursuant to the Will.
Importance of setting up a Family Trust:
Succession planning through private trusts, allows the settlor/ author to have complete control over the Trust and freedom to pass on the assets unto the beneficiaries, which can be set out in the Deed by the settlor.
There is greater flexibility for appointment of Trustee/(s) for managing, maintaining and holding the assets of the trust for the benefit of the beneficiaries. The trustee may be a beneficiary, family member, relative or even professional trustee. The author/ settlor can also be one of the trustees or the managing trustee of the trust.
Such a trust is effective not only for tax-planning, but also to safe-guard the interests of family members (who are the beneficiaries) by specifying the management, investments of monies in the trust/ dealing with assets, distribution of assets amongst the beneficiaries and minimising not just family disputes over the assets but also to safeguard the assets from the claims of various parties including the creditors.
Income Tax aspects to consider before settling a Family Trust:
Under the Income Tax regime, the taxability on income generated out of a private Family Trust depends upon the structure adopted for creation of the Family Trust. Similarly, the point of incidence of tax and responsibility of payment of tax will change depending upon the nature the trust, specific or discretionary trust i.e. tax may be levied in the hands of the author, the trustee or beneficiary, as under:
Specific Trust: The share of the beneficiary/ beneficiaries is specific, and therefore, all such income received will be taxable in the hands of the beneficiaries.
Discretionary Trust: The trustees have complete discretion to decide the proportion in which the income/ share in the trust property/ corpus is to be distributed to the beneficiaries from time to time and the extent of such distribution, and therefore, the income is taxed in the hands of the trustee in their representative capacity.
Revocable Trust: The author can at any time during the tenure of such trust, revoke the trust (on revocation, the trust property reverts to the author), and therefore, the income of the trust is taxed in the hands of the author.
Irrevocable Trust: This trust can only come to an end upon the object/ tenure of the trust being fulfilled or the death of the beneficiary, whichever is earlier (and in no other case), and therefore, the income is taxed in the hands of the trustee in their representative capacity.
There is another facet of Family Trust that must be carefully planned, i.e. the appointment and succession of trustees. It is advisable to have an odd number of trustees for better and effective decision making. In recent times, trusts have been employing the services of corporate trustees (having extensive experience) as professional managers of the assets of the trust. A professional trustee being a legal judicial person, does not require to be replaced by virtue of retirement, death, illness as in case of natural person, and does not affect the Family Trust structure unlike a natural person who would relinquish his responsibility. Thus there is continuity in the management of the trust (as long as remuneration is paid from time to time), which ensures smooth operation and management of the trust property.
Although appointing corporate trustees is largely restricted to estate planning of high net worth individuals who have a large asset base and are capable of bearing the recurring costs of fees of the corporate trustees and other expenses, it can be an effective tool if used together with certain other estate planning methods to slowly multiply, grow and balance the assets of the Family Trust and provide stability and continuity to the purpose of the trust.
As a family planning tool, Family Trust is very effective and efficient at allocating, maintaining and ensuring that the assets of the author are utilised for the benefit of the beneficiaries at the right time and in the right proportion, depending on the nature of the trust. And whatever may be the reason for setting up a trust, there is always an object or purpose that can be accomplished through the trust mechanism.Aradhana Bhansali is Partner at Rajani Associates and Amit Kolekar is Associate Partner at Rajani Associates