Trusts are usually a central part of estate planning in countries which have estate duties. Are trusts really relevant in India, when we can gift our assets during our time to the next generation without any tax liability and when transmission of assets through a will can happen without attracting taxes? The fourth article in this series on estate planning will give you some perspectives on when to choose trust structures for your clients, and the benefits of trusts in certain typical scenarios. Estate planning is a key win-win service you can offer your clients - you add significant value beyond markets and products, and get really sticky relationships as a consequence. Saturday School hopes every IFA will imbibe the estate planning tips from this series to grow and strengthen their client relationships.

Check out previous articles in this series:

Launch this service to strengthen your advisory business (Click Here)

Wills vs joint ownership vs beneficial transfer (Click Here)

Common estate planning mistakes you must avoid (Click Here)

Many financial advisors will tell you that inter-generational transfer of wealth is a major concern for many of their clients as they worry about how effectively and smoothly assets can be transferred without too many disputes and transactions costs.

While wills are the most common tool of estate planning for many clients, trusts are an option that is recommended by many financial planners due to its flexibility. For family business owners, a major concern is how to separate the ownership of the business and the right to income from the business. A trust structure is recommended by many financial planners as it allows a person to navigate many of the estate planning issues that arises from having complicated family structures with interwoven cross holdings in the family business. To understand the differences, lets look a little closer - what are trusts and how are they different from wills?

Trusts vs Wills

Trusts involves transferring one's estate to a trustee for the benefit of certain beneficiaries. Unlike a will which comes into effect after their lifetime, a trust allows a person to manage their estate during their own lifetime and after.

With a trust, a person also has the opportunity to grow and manage their assets like property. Wills do not provide for longer-term management of property.

A will is simple until it becomes disputed. A major advantage with trust is that it is difficult to contest a validly created trust. Depending on the jurisdiction of the Indian Succession Act or if the will is contested, a will may require a probate to be executed. A probate is a copy of the will signed by a registrar and certified under the seal of court that a will has been proved. In comparison, a trust does not need any probate.

During a probate or if the will is contested, contents of the will can become public. In comparison, a trust document can be kept confidential except when third parties dealings require some disclosure.

What are some of the disadvantages? With a will, a person has the advantage of changing their mind depending on life events. They are free to update, make changes or cancel the will any number of times during their lifetime. A trust however cannot be revoked unless the power of revocation is built into the trust deed or all the beneficiaries consent to a revocation.

Unless the person wishes to, a will is not required to be stamped or registered. A trust deed is required to be stamped and if there is property, it is also required to be registered.

If there is a business failure and the client becomes insolvent, the will cannot come into effect if the client decides to dispose the property. With a trust, the client has transferred the property to the trustee. There are no provisions of winding up or declaring a trust as insolvent and an insolvency of the client will not have any effect on the trust property. It can be both an advantage and disadvantage that assets in a trust are safeguarded from creditors.

Asset protection

For clients hesitant and unsure about considering trusts, financial planners should ask clients to consider the following questions. If the answer to the questions is yes, then a trust may be the better estate planning tool.

1. Are you disinheriting a family member? Are you worried about separating ownership and right to income from business?

2. Are any of your heirs minor? Are you worried about misuse of wealth among your children?

3. Are you worried your spouse does not have the necessary skills to handle assets?

4. Are your children/heirs living abroad? Are you worried about how they will be able to inherit and transfer that wealth if they are NRIs?

5. Does anyone rely on you for financial support? Are you worried about your parents? Or a family member with a disability?

Trust structures are commonly used to protect misuse of inherited wealth and to preserve wealth for future generations. For families that have NRI children, the trust may be an effective tool in transferring wealth and can help with tax savings. With trusts, non-resident Indian children do not have to obtain successor certificate like they would have to with wills. If they were to inherit Indian assets, they might have to pay a huge estate duty but with a trust, one is liable to pay taxes on the beneficial interest as opposed to the entire value of the assets.

Family businesses

In the context of a family business, clients may worry about the viability about the business surviving successfully after their lifetime. Many generational-family businesses disintegrate due to competing priorities and fight for control by successive generations with diverse family members. If there is no competent family member to take over the reins of the business, an external party may be required to run the business but how does one ensure the family still continues to earn income? If there is a clear successor who is capable of running the business, how does one protect the successor to be able to run the business without interference from other family members? These are questions that plague many business owners.

A trust can help by segregating management control from economic interest while defining the succession plan. By placing the shares of the family business in a trust, a patriarch can effectively separate income from business from management control (including voting rights). Since income and management are clearly separated, an external person can be hired to run the business. So a trust can help ensure a founder's legacy through the longevity of the business.

Even for professionals, trust is an option for estate planning. Families are often unaware of how and where the money is invested and having a trust addresses that issue for some. Having a trust structure in place ensures there is proper and disciplined financial planning undertaken for the assets in case of any unforeseen eventualities and for any family liquidity requirements

In the next article, we will take a further look at how trusts are set up and the different trust structures, that are available.

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