Create private trusts to transfer assets efficiently

Anju Gandhi

Trusts are well established and recognised in India. There are essentially two types of trusts in India: private and public.

A private trust is one that is constituted for the benefit of one or more individuals who are, or within a given time may be, definitely ascertained. A public trust is one that is constituted wholly or mainly for the benefit of the public at large and, accordingly, the beneficiaries in the public trust constitute a body that is incapable of ascertainment. Public trusts can further be classified into religious and charitable trusts.

This column focuses on private trusts in India, which are governed by and may be set up under the Indian Trust Act 1882.

Beneficiaries and trustees

India does not recognise trust as a separate entity (except for tax purposes). A trust is identified as a legal obligation that is attached to the ownership of property arising out of a confidence placed by the settlor in the trustee for the benefit of the beneficiaries (as identified by the settlor), or the beneficiaries and the settlor. The trustee is the legal owner of such trust property, whereas the beneficiaries have beneficial interest in the trust property.

Important terms defined:

• The Trust creator, sometimes known as the ‘Grantor' or ‘Settlor', is the person who started out as the owner of the property that is to be transferred to and held by the Trust.



• The Trustee is the person or financial institution (such as a bank or a Trust company) who holds the legal title to the Trust estate. There may be one or more trustees. The trustee is obligated to act in accordance with the terms of the Trust for the benefit of the Trust beneficiaries.



• The beneficiaries are the persons who the Trust creator intended to benefit from the Trust estate. The rights of the beneficiaries depend on the terms of the Trust.

A person may set up a private trust under a written instrument; that is, either through a will (testamentary trust) or through a written trust deed during the person's lifetime. A trust having immovable property and created through a non-testamentary instrument has to be declared through a registered written instrument (section 5 of the Indian Trusts Act 1882).

India, being a common law jurisdiction, not only acknowledges the concept of trust, but also recognises trusts governed by other jurisdictions. Depending upon the need of the settlor or family various trust structures are prevalent which include discretionary, non-discretionary, revocable, irrevocable, specific, general, determination linked to happening of an event or non-occurrence of an event. In a private trust, one has to be conscious to address the rule against perpetuity as provided for by Indian laws, which imposes a time limit on the age of the trust.

Gaining traction among HNIs

Trust formation is an important tool in the hands of private client practitioners and is gaining momentum in India as most wealthy families, high net worth individuals (HNIs) and ultra high net worth individuals wish to adopt appropriate trust structures to address the needs arising in the area of estate planning, family succession and business succession. There is a growing need for a trust platform for promoters or families to have a bankruptcy remote vehicle for wealth protection and preservation by creating legally valid structures at the right time. A need for trusts has also arisen owing to the large non-resident Indian population. Trusts are subject to different laws in the respective jurisdiction where they are located and people usually desire to address their succession issues by creating suitably fitting structures in India. This need to set up private beneficiary trusts has also gained momentum due to the various news items from time to time related to the re-introduction of inheritance tax in India.

The benefits of having a private trust are enumerated below:

• better and efficient control of assets;



• planning for the family needs present and future;



• better succession planning;



• Better tax planning in the event of inheritance tax being reintroduced;



• Precautionary exercise to avoid attachment of assets in the event of any liquidation / insolvency threat etc.

A trust holding shares of family business prevents/restricts disintegration as there is no scope for the individual family members to transfer/dilute the shareholding of the family business.

(The writer is Partner at the law firm SNG & Partners)

Original Source: https://www.moneycontrol.com/news/business/personal-finance/create-private-trusts-to-transfer-assets-efficiently-4109361.html