Trust: An Effective Vehicle for Succession and Estate Planning

The growth in
personal wealth fueled by the overall growth in business in economy,
especially mushrooming of affluent businesses governed by families, has created
the need for structures that provide effective and hassle-free wealth
management, asset protection and tax efficiency. In this respect, trusts are
increasingly being recognized as a vehicle for effective succession and estate
planning.

The law relating to private
trusts is governed by the Indian Trusts Act (“Trust law”). A trust is
basically a vehicle under which property is transferred from the original owner
and held by the person to whom it is transferred for the benefit of another. The
“author of the trust”, the “trustee”, the
“beneficiary”, the “trust-property”, the “beneficial
interest” and the “instrument of trust” are the integral
elements of a trust. A trust can be created for any lawful purpose.

A
trust, in relation to an immovable property, must be in writing and registered.
A trust is created when the author of the trust indicates an intention to
create a trust along with its purpose, beneficiary and the trust-property, and
transfers the property to the trustee. A trust is different from a gift.

A trust
structure comes with certain inherent advantages. A trust provides the
flexibility to be set up in more than one form or in hybrid forms as per the
requirement. A trust can be either private or public. As opposed to a public
trust, a private trust is a trust generally for the convenience and support of
individuals of families. Trust can be structured as revocable or irrevocable.

A
revocable trust can enable the settler to exercise control over the property
but can be prone to clubbing provisions under the tax laws. An irrevocable
trust can provide safeguard against future creditor claims on the assets in
case of bankruptcy, since the settler ceases to have the title to the trust
property, yet at the same time enable indirect control over the property
through terms of the trust deed.

This is
one the prime benefits of a trust structure which allows ring fencing of
wealth, the downside, however, being the settler losing ownership.

Further,
while settling equity stake of a loss making company in a trust to ensure asset
protection, one may need to be careful of tax provisions due to which losses
could lapse in case of a substantial change in stake. A trust can be further
set up either as discretionary, where trustees can have the discretion as
regards distribution of benefits to one or more beneficiaries and extent
thereof which may be especially useful if the settlor is the trustee, or as
determinate, where entitlement of beneficiaries is fixed by the settlor through
the trust deed.

Trusts
can be set up inter vivos or by will. Both have their own characteristic
advantages and purposes to serve. Multiple trusts can be set up to suit
multiple purposes or even hybrid trusts combining various forms, thus, obviating
the need to have multiple trusts.

Except
for necessary governing provisions, the trust law provides enough flexibility
in creating and managing a trust. Any person competent to contract can create a
trust and any person capable of holding property can be a beneficiary including
a minor. Any person capable of holding property can be a trustee. A trust can
be an efficient tool for succession planning without the need for probate
process through Court, thereby protecting privacy by preventing public disclosure.