Return of death tax? Trusts back in business to transfer wealth

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© Provided by The Times of India

NEW DELHI: Recent reports that the nation’s wealthiest family is creating a succession plan through private trusts has once again generated jitters about the return of the dreaded death tax. But of late, regardless of estate duty, even those with many fewer zeroes to their name are focussing on legacy planning, often using trusts as the vehicle to transfer wealth to their descendants.

A new generation of wealth creators are communicating more openly and practically about money and mortality – subjects that have traditionally induced indigestion on the dining table. They are willing to relinquish control in favour of smart succession management. The focus is on enabling perpetuity in the family business. Not just business owners, even high net worth professionals are viewing trusts as a smart way to organise wealth distribution, especially after the pandemic.

“In the last five years, we have seen an explosion of trust and succession planning,” says Vishal Gada, whose boutique firm specialises in estate and succession planning. “Families are suddenly realising that there is a better method of managing and bequeathing their wealth. Not just those from business families, but we have seen professionals say that if something were to happen to me or my spouse, we would like a guardian trust which will hold the wealth until our children mature.” And maturity does not neccesarily mean legal adulthood, but one could keep a higher threshold, say 30 or 35 years, post which the children may be added as trustees into a family trust, adds Gada.

Broadly, a private trust — as distinct from a charitable trust— is a non-legal entity but with its own PAN number, bank and demat accounts, into which you can transfer assets. Once the assets are transferred into the trust, the ‘donor’ loses control over them. Designated trustees thereafter manage the assets based on what has been laid out in the trust deed, and the beneficiaries accordingly benefit.

So, why are more people looking at the private trust as a succession vehicle other than the fear of an impending estate tax? Tax planners and wealth managers say that there has been a spurt in wealth creation in the last ten years, leading to smarter legacy planning. Many are taking a cue from wealthy families in the west, like the Waltons who have run Walmart via private trusts and separately created charitable trusts.

Today, family structures are growing more complex. With divorce becoming common, the trust ring fences the beneficiary’s assets against alimony claims.

“There are many cases involving litigation over alimony settlements. Counsels are taking the view that, if the trust deed does not give the right to the beneficiaries to withdraw the assets, then even a court may be unable to direct the trustees to discharge the alimony liability of a particular beneficiary,” says Gada.

Gradually, the inheritance bias favouring male inheritors is also changing, and families might use the trust as a way of ensuring that a daughter and her descendants will receive disbursements in perpetuity, without her husband or her in-laws having any control over the asset.

Finally, it allows parents to pass on their wealth in a staggered manner while they are still alive. A Mumbai businessman and father of two adult children sums it up. “I have created a trust because I want to pass on my wealth to my children at different points in their life — at the time of marriage, at the time of a possible divorce. The trust enables that. A will can only be executed after death and it can always be challenged. Besides, the trust shelters my assets from any potential liabilities I might have along the way.”

Succession skirmishes and inheritance intrigues have been legendary. Families often tiptoe around these issues and live in perennial insecurity. “In addition to being a lawyer, I am often called to bridge the softer issues,” says Abhijit Joshi whose law firm specialises in succession planning.

“Love and insecurity tend to coexist. Often, my job is to bridge the communication gap between two generations and mitigate the insecurities between the family members… then implementation becomes much smoother.”

But lawyers advise that a trust makes sense only after a particular threshold of wealth has been crossed. Otherwise, the extra administrative burden of maintaining files, and the transfer taxes or stamp duty in the case of real estate, does not make it worthwhile. “We do not actively advise our clients to create such trusts,” says senior solicitor Rustom Mulla.

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