Succession planning: How to navigate the fault lines

A well-planned and thought-out separation of assets remains key to avoiding family disputes

Published: Feb 18, 2025 04:14:08 PM IST

Updated: Feb 18, 2025 04:24:14 PM IST

Disputes over the last decade among prominent business families have only added to the urgency with which this matter is dealt. Image: Shutterstock

In early February, an entry in Ratan Tata’s will created a flutter. According to reports, he had willed assets worth about Rs500 crore to Mohini Mohan Dutta, an old acquaintance. The administrators of his estate have not commented and it is also unlikely this entry would be challenged in a probate. But the news raised a broader issue that India’s wealthy are increasingly beginning to grapple with: How does one bequeath assets in an efficient manner?

Disputes over the last decade among prominent business families have only added to the urgency with which this matter is dealt. Prominent among them are the Kirloskars, Birla- Lodha, Kalyani and Murugappa disputes. While the facts in each case may be different, they all arise from improperly crafted wills or family settlements.

Legal experts point to the increasing complexity in bequeathing assets. Topping the list is the issue of no planning on either leadership or ownership succession. Kavil Ramachandran, executive director at the Thomas Schemedheiny Center for Family Business at the Indian School of Business, points three problems arising. First, is the issue of a strong-willed founder not willing to let go. Second, the lack of thought put into ownership and management of the business in the long term. Third, reaching an agreement without spending sufficient time thinking it through. This almost always leads to problems later as ego clashes ensue.

Based on his observations of family disputes, Ramachandran points to a 5D framework that he has developed. According to him, dilemmas arise when there is no clarity on management and ownership. This then leads to deviations where policies governing the family are made in an ad-hoc manner. Post this, differences between the family members arise leading to disputes and finally destruction. To prevent disputes, issues must be addressed at the dilemma stage itself. “Once ego clashes come in it becomes much harder to resolve,” he says.

Through all this, the tools available to sort through a family dispute remain the same. Prominent families could go through either a family settlement or inherit through a will or move their assets into the trust with defined beneficiaries.

The good news is that having read about family disputes, succession planning is now becoming a more thought-through process. “While the top 200 business families would have already done their succession planning through wills/trusts, etc. The current trend is that families with a modest wealth are also thinking about succession planning,” says Inder Mohan, partner with Shardul Amarchand Mangaldas.

Also read: Luthra and Luthra Law Offices India: How one of country's biggest law firms is balancing legacy with change

The Nitty Gritty of Devolving Assets

The most popular means among the wealthy to bequeath assets is the family settlement.

This is usually made in the lifetime of the patriarch who, in consultation with others, decides who gets how much. In the absence of a family settlement or a will, personal laws would take over and assets divided according to the Indian Succession Act or the Hindu Succession Act or personal laws for other religions. One advantage of a settlement is that “when assets are transferred as part of a family agreement, there is no tax on that transfer”, says Ajinkya.

“A family arrangement is a formal document on which stamp duty is paid. The law says that family arrangements are sacrosanct and a will cannot override this,” says Bijal Ajinkya, partner at Khaitan and Co. She points out that while earlier most assets would be held in India, overseas assets are now common. Immovable property overseas is subject to laws in their respective jurisdictions, while international transfers are subject to taxation at differing rates depending on where the asset is held. Adding family members with different citizenships result in unforeseen problems.

Here, drafting and getting members on board is the key. “Family settlements and wills are often made in an informal setting with no input from lawyers and accountants. This leads to disputes that may not be envisaged at the time of the drafting of the settlement and may lead to parties unable to reach a compromise,” says Nitin Potdar, an independent counsel and former partner at J. Sagar Associates. Examples here include the Kirloskar family settlement or the settlement between the Lodha brothers both of which are now in dispute.

Drafting also becomes key as settlements are signed by all parties concerned and getting it revised requires consent again. As business realties change disputes may arise. For instance, a particular business may do better or worse post a settlement and a party may not agree to taking over a business not doing as well. Wills, on the other hand, can be revised as many times as needed.

Last, some families look at the trust structure to pass on assets. Advantages include identifying beneficiaries, appointing trustees and setting up rules on how the trustees are to act. Once assets are transferred, the trust becomes operational. “While one needs to keep revising a will over a period of time, a Trust provides a more robust, flexible and structured approach of devolution of wealth to the successors," says Mohan. Also on the back of people’s minds is the noise about the introduction of a tax on inheritance. A trust structure may circumvent that.

As devolving wealth becomes more complex, Ramachandran of ISB has a piece of advice. “Spend time understanding the various options in plain language. Play out some scenarios and think through what could go wrong. Only once that is done, freeze your option on a legal document,” he says. It’s advice some Indian business leaders would wish they had received earlier.