Disclaimer: Formation of a trust and transfer of property into the same should not be done without consulting legal, financial and tax professionals.
We have heard about various types of trusts. Charitable, educational, religious, family trusts, etc. Have you ever wondered what kind of people opt for trusts and what needs do they serve? Here’s a basic primer on whatever you need to know to understand why people may opt for making trusts to manage their assets:
A. Mechanism:
A trust functions as an independent entity formed under the relevant law. The person forming a trust to manage their assets is called “the settlor”. The assets of the settlor are transferred to the trust, and to be used for the benefit and interest of a person or group of persons called as “the beneficiaries”. The management of the trust by way of handling these assets for the benefit of the beneficiaries is done by persons specifically appointed by the settlor called as “the trustees”. The governance of the trust generally finds its roots in the “trust deed”.
So, it is an arrangement where the assets of one party(parties), are handled by another party(parties) for the benefit of a set of persons.
B. Purposes for making a trust: People may opt for making a trust with the following objectives:
– Transmission of assets to legal heirs (inheritance can take place smoothly)
– Taking care of young/old/incapacitated/challenged members of the family
– Avoiding complex family feuds
– Smooth transition of business across generations
– Ring-fencing of assets against litigation and claims
– Charity
– Other specific needs
C. Types of trusts that can exist:
– On the basis of beneficiaries: Public or private
– On the basis of source of authority: Testamentary (made under instructions of a will) or non-testamentary
– On the basis of the share of each beneficiary: Specific(we know what share of benefits goes to each beneficiary or discretionary(undefined shares for the benefit)
D. Benefits:
– Organisational structure written down in the trust deed
– Trustees’ role is only that of a caretaker, so assets are protected from fraudulent intent and people and interests of the beneficiaries are protected.
– Sometimes some tax benefits are available
– If used for inheritance, it helps to avoid estate tax/duty (currently not a concern in India but it may be in future)
– Beneficiaries who may not be equipped to manage assets and take care of their interests are taken care of by the trustees.
– Protection from inheritance claims and disputes
– Specific needs can be taken care of (e.g. taking care of specially-abled children, pets, aged parents, etc)
E. Possible challenges:
– Cost (of registration of the trust, accounting, legal and tax advice, etc)
– Finding willing trustees
– Stamp duty and registration costs for transfer of assets to the trust
– Challenges with terms of the trust deed
– Additional costs for dissolution of trust
– Organisational hassles
– Advisory challenges (hasty decisions taken without adequate advice)
– Cross country challenges
What should you do?
If you are able to identify the need to manage your assets in a very specific way or want to explore ways to streamline the management of these assets in a proper framework, then you may want to consider getting advice about setting up a trust. Most commonly, we see family trusts being set up to manage the assets and businesses across multiple generations, taking care of the various members of the family and at the same time keeping management fairly streamlined. We also see testamentary trust being formed under the instructions of a Will. E.g. Mr. A is his will, mentions that after his demise, all his assets should be transferred to a testamentary trust and mentions the objectives that the trust should achieve. While you may feel that you need a trust to manage your assets, it is always better to seek an opinion about the costs associated with setting up a trust, organizational requirements, restrictions, tax impact, etc. The rule of thumb in any asset management or transmission strategy should be to keep it as simple as possible, while catering to the requirements of the situation.