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.

 Source: www.economictimes.com