“No one size fits all” is used aptly for private trusts. A private trust commonly used for succession planning is a bespoke document and one can customize a trust deed to meet one’s family objectives. Though a private trust is governed by the Indian Trust Act, 1882 and Income Tax Act, 1961, if offers great flexibility to provide for the wishes of the Settlor with respect to management and distribution of his/her wealth for successive generations.
For a company which holds wealth for its stakeholders, the laws are prescribed such as the Companies Act, SEBI laws, employee laws etc. to protect its shareholders, employees, directors, lenders etc. On the other hand, a private trust which holds the family wealth will last for multiple generations and rules under the trust deed can be defined by the Settlor. This requires careful thought, deliberation, and foresight. The Settlor can pen down the rules for preservation, investment, and distribution of personal wealth for the benefit of family members for successive generations.
Based on the objectives of every client, lawyers commonly use terms such as a Special Child Trust, Asset Protection Trust, Business Trust, Investment Trust, Inheritance tax planning trust, Minor Children trust etc. It is primarily due to the varying objectives of the client, the above terms are used. Accordingly, the structuring of the trust and the language in the trust deed changes to fulfil the above objectives. Some of these trusts are highlighted below:
Business Trust – A promoter/founder transfers the shares of company into the trust and defines the succession plan with respect to the business. A private trust is useful to consolidate the business shareholding and delink the ownership of the business from its management. The benefits from private trust are distributed to all active and non-active members including retired members, dependent members. The trust deed could contain language for non-compete obligations, exit policy, right of first refusal etc.
Special child trust – It is similar like any other private trust. Focus is on the investment and distribution of assets for benefit of special child and detailed guidelines are laid out for the same along with giving some discretion to the trustees. Under a special child trust choosing the right set of trustees is very important. The chosen trustees should share a close bond with your child, should have the requisite skill set to manage assets and use them for the benefit of special child for their regular maintenance, lifestyle expenses, medical requirements, property maintenance etc.
Minor child trust – Under a special child trust, the guidelines for investment and distributions are provided for lifetime of a special child. However, under a minor children trust, these restrictions could be withdrawn after the minor child has attained an age of maturity and the child could be provided with overriding powers under the Trust after attaining the age of maturity. The trust may also be dissolved, and the entire corpus can be distributed to the child on his/her attaining the age of maturity.
Investment Trust – It is created to hold the financial assets of family and it provides guidelines for investment and distributing the same for ongoing expenses of family members including health, education, maintenance etc. A trust avoids the process of probate and ensures smooth succession. The Settlor could also appoint investment advisor(s) under the Trust Deed.
Inheritance tax planning trust – It is primarily created by parents for their children who are NRIs settled in countries which already has an inheritance tax, e.g. U.S. U.K. Such trusts need to be structured and drafted very carefully in accordance with the laws of the other country so that they do not fall in the trap of such inheritance taxes. Several UHNI families in India have also formed a trust with an anticipation that inheritance taxes may be introduced in India.
Asset protection trust – This trust is primarily used to shelter assets from creditor claims or matrimonial claims. If the Settlor is looking for asset protection during his lifetime, then he/she should relinquish control and beneficial enjoyment over trust assets (i.e. form an irrevocable trust). A private trust would offer asset protection for future generations if setup as discretionary.
While setting up a trust we have detailed discussion with the clients to understand the family requirements and suggest an appropriate structure which is not only tax efficient and legally sound but also fulfils the objectives of the client.