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Alternative Tool for Succession Planning - Private Trust

Introduction

In India, Succession Planning has evolved from the notion that “protection of wealth (both personal and business), many a times, is more important that increased profits”. In other words, well-structured and well thought succession planning ensures that the wealth of a family is properly safeguarded by smooth transfer of business or property over the generations of families.Succession is broadly categorized into intestate and testamentary succession, wherein the difference between the two lies with respect to the making of Will by the person who has the right over the property. Apart from making the instrument of Will, wealth of an individual could also devolve by way of executing a Gift deed, formation of an HUF and creation of a Private Trust. For the purpose of the present discussion, the focal point is Private Trust:


Private Trust: Meaning, Structure and Purpose

A trust, in simple terminology is a kind of legal relationship created by the actual owner of the property with the trustee, by placing its property under trustee’s control for the benefit of a third party. In common parlance, the concept of “Trust” is associated with charitable and religious Trusts which fall within the category of “Public Trust”. However, in addition to such type of Trusts, the concept of Private Trust has gained prominence over the years for undertaking Succession Planning by Business families, HNI and UHNI individuals. A Private Trust is usually created by business families where multiple generations are involved. In such cases it becomes imperative to have a succession plan for not only the 'ownership' but also 'management' of the business for the benefit of its members and for smooth transfer of family property to its future generations. It is created by a specific person for a specific purpose. It can either be revocable or irrevocable.


A Private Trust has majorly three components: an Author/Settlor, Trustee and a Beneficiary. An Author/Settlor is the one who creates the trust and transfers his/her property to the Trustee for the benefits of certain persons, whereas the Trustee is the one who manages and administers the property of the Author. Lastly, a Beneficiary, as the name suggests is the person/entity designated to receive the benefits from the assets held in the trust.


A Private Trust is effective in terms of risk management and provides an effective legal structure for families to hold their income/investments. In addition to this, such trusts are also created to manage the assets of the author by providing flexibility for distribution of wealth, its seamless transition through generations and as a result of it lower the possibility of legal dispute between the family members.

 

Benefits & Disadvantages of a Private Trust over HUF

  1. Ring Fencing: A Private Trust protects the family assets from contingent liabilities or unforeseen losses in the business of that family. This is done by utilizing the concept of “ring fencing” wherein the Author of the trust segregates its family assets and business assets and protects the former from being exposed to claims and disputes that may arise in Author’s other individual or business affairs. This feature of Private Trust makes it a more efficient option over an HUF wherein, the assets are already compartmentalized under the head of “ancestral property”.

  2. Tax: A Trust structure is generally subject to tax at the highest rate of 30%, plus surcharge and cess (effective tax rate of 39% flat) under the new tax regime. However, in case the shares of the Beneficiaries are determinate, the Beneficiaries can include their respective shares from the trust income in their personal tax returns and the same would be taxed at the individual slab rates. There are no specific benefits or deductions available to theTrusts.

  3. Revocation/ Dissolution: In terms of dissolution or revocation, a Private Trust can be revoked by the Settlor at any time, depending upon the nature of the trust. However,dissolution of a HUF is a complicated process wherein the property would be divided after determination of the shares of each coparcener.

  4. Registration: Ultimately, in terms of registration, the Indian Registration Act requires Private Trusts to be registered.


Conclusion

The most common purpose of Private Trust is for the Settlor to transfer his assets to the trust, so that though he is not the legal owner of those assets, the Beneficiaries can still get the benefits of those assets, which on their transfer becomes “trust property”.


From the above analysis, it can be concluded that both Private Trust and HUF have their own benefits and disadvantages. However, a Private Trust provides a more secured and structured way of handling individual’s assets and its devolution through the line of generation, as it is not restricted to an individual’s ancestral property and does not require partition of the Joint family property for devolution of shares to its members.


If you believe that a Private Trust could benefit your succession planning and requires more information feel free to reach out to us.


The above article is authored by Mr. Shantanu Malik(Partner)

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