Is Family Trust Safer than a Will? - Network FP
September 13, 2019

Is Family Trust Safer than a Will?

Jatin Popat
Founder, Willjini.com

Is Family Trust Safer than a Will?

A Trust is more useful an instrument than a Will to protect the wealth of a High Net Worth Family. This may come as a surprise to many of us, but last year’s CFA survey found that where the money is involved, 70% of Indians choose to work with professional advisers, compared to 54% globally, reported[1]Economic Times.

The survey also found that younger investors (25-34) are more trusting than their older counterparts and what this 56 % of Indian investors fear the most is a sudden financial crisis that may loom up in their lives, three years down the line. In other words, Indians are more risk-averse than their global counterparts, and the reason for this is not difficult to guess.

Indians presumably have little faith in their political leadership and more in their independent financial advisors (IFA), so they do not want to take any chances with their wealth maintenance, even during the times of a politico-economic crisis. Historically, poor succession planning is another reason for their apprehensions.

Although family businesses have traditionally been the mainstay of the Indian economy – according to one statistic [2]nearly 65% of India’s GDP in the organized sector comes from family businesses – Only 10% of family businesses are able to survive into the third generation due to the inevitability of family feuds.

Take the case of industrialist Vijyapat Singhania, the patriarch who positioned Raymond Ltd as one of India’s most popular textile brands, only to hand over the reins to his son Gautam Singhania and let the wealth dwindle.

Experts contend that most family disputes over assets — Ambanis, Singhanias, Baroda Royal family, Thackeerays, Birlas – can be avoided with the careful constitution of a Family Trust Vehicle, especially in case of high net worth families. Yet, according to a PwC India Family Business Survey 2016, “Only 15% of family businesses have a robust, documented and communicated succession plan,” reports[3] LiveMint.

A Will is ineffectual in the protection of such wealth because while a Will comes into effect only upon the death of the wealth creator, a Trust is functional while the person is alive. Furthermore, unlike a Will, a Family Trust cannot get challenged in a court.

A case in point – nearly, so many years on, the Will of Priyamvada Birla, widow of Birla Corporation promoter Madhav Prasad (grand uncle to Kumar Mangalam Birla of the Aditya Birla Group) is still pending for trial in the Calcutta High Court. Priyamvada bequeathed her estate, rumored to run into Rs 5,000 crore, to her Kolkata-based chartered accountant, Rajendra Singh Lodha in July 2004 by means of a purported Will of 1999[4] by revoking a few family Trusts which were for charity  purposes just three days prior to the purported Will being made and the entire Birla clan was up in arms against its covenants. The said Rajendra Singh Lodha has passed away and his son Harsh as his legal heir is claiming bequest.

Need for a Private/Family Trust

A Family Trust is a separate legal entity that holds/protects the assets of a wealth creator for the benefit of persons (Beneficiaries) under the management and control of the Trustees. Such a Trust can include the wealth owner (“Trust creator”) who also can be a Trustee, as well as a Beneficiary.

The objectives behind the creation of a Trust could be to protect the financial interests of minor heirs, a child with special needs, old / dependent parents, to avoid challenging of a Will, to handover the wealth to young legal heirs until they are mature enough to manage the wealth themselves, to protect a business empire, protect someone’s Intellectual Property Rights, to manage charities and/or social welfare schemes etc., as willed by the wealth creator

The Process of Creating a Trust

Following steps are required for establishing a Trust in India:

Step 1: Prepare a family Trust Deed –including the name of the Author, Trustees, Beneficiaries, purpose of the Trust, administration of the Trust, whether Discretionary or Specific, etc.

Step 2: Transfer of Immovable Property to the Trust – The Trust deed is drawn upon a stamp paper, registered with a Sub-Registrar (the Registrar of Assurances), under the Registration Act. No registration is necessary for the transfer of movable property to the Trust, such as handing over the fixed deposit certificate or such movable assets to the Trust.

Step 3: Once a Trust is set up, the settlor (e.g. a parent) can contribute more funds to it whenever he/she wants to. There is no limit to such contributions.    

A written trust-deed is always desirable for the reason that it’s a prima facie evidence of the existence of a Trust; it clearly states the Trust-objectives; it facilitates devolution of Trust property; for control, regulation and management of the Trust operations; it sets the procedure for appointment, rights, duties, and removal of the Trustees and even facilitates the dissolution of the Trust, if required.

Last but not least, taxation aspects are an important consideration in the establishment of a Family Trust. Eventually, it’s the IFA’s responsibility to guide the client on all such aspects. Given below is a brief snapshot of the tax treatment for the income of trusts:

Capture

 

[1]Do you know why 71% of Indian investors trust their financial advisers?, ET Bureau | Apr 09, 2018, https://m.economictimes.com/wealth/plan/do-you-know-why-71-of-indian-investors-trust-their-financial-advisers/articleshow/63653888.cms, Accessed on 6.9.2019
[2]https://valuendow.com/wp-content/uploads/2018/07/Succession-Planning-in-Family-Business-in-India.pdf, Accessed on 6.9.2019
[3]Ashwini Kumar Sharma, How trusts can help in succession planning, LiveMint, https://www.livemint.com/Money/lkhI22uV7rxXbvhMNBbUyM/How-trusts-can-help-in-succession-planning.html, Accessed on 6.9.2019
[4]Priyamvada will case: SC dismisses Birla Corp SLP on document theft, Busienss Standard, May 10, 2019,  https://www.business-standard.com/article/companies/priyamvada-will-case-sc-dismisses-birla-corp-slp-on-document-theft-119051001204_1.html, Accessed on6.9.2019

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