Estate Planning Through Trust

Be it transferring your wealth to your next generation or succession of a business, a  trust structures helps in meeting these objectives very efficiently. Although a trust formation is situation based, it has some inherent advantage when compared to other legal forms available for estate planning.

When a Trust is Created?

There are many situations when a trust formation may be beneficial. For e.g. when you have large amount of your assets in real estate, a business or an art collection which you want to pass on to next generation, writing a will can suffice the purpose after your demise but there may be litigations against the will which may defeat your objective. A trust creation can ensure the succession happens without any probate. Some of the other situations which may demand trust creations are safe-guarding interests of family members including maintenance of members with special needs/disabilities, attaching conditions (be it attaining a particular age or fulfillment of the settlor’s wishes) and avoiding family disputes over the property.

Benefits of Trust

One of the larger benefit of creating a trust is that the asset Is not transferred directly to the beneficiary but put in control of the trustee for the benefit of the transferee. The trustee depending upon the nature of the trust either transfers the property or its earnings at the happening of certain events or applies the property and/or its gains for benefit of such a transfer.

There can be types of trust created-Revocable, Irrevocable, Offshore and Hybrid. If settlor want to retain the control over assets and distribution of income & capital then a revocable trust can be formed. But it can be prone to clubbing provisions under income tax laws. Contrary to this an Irrevocable trust is beneficial in safeguarding the assets against the claims of the creditors of the settlor and/or the beneficiaries. The benefit is derived from the fact that in such type of trust the settlor has to transfer the title to the trust but retain an indirect control over the property through terms in trust deed, although the lost of ownership can be a downside.

In a family owned business the needs of protection of assets from creditors’ claims is very high. To avoid such situations, especially in case of bankruptcy, a trust formation helps provided the assets have been transferred as per the laws applicable.

There are also offshore trust which are helpful for family members moving across countries and creating their assets outside India. However, such trust falls in jurisdiction of foreign exchange restrictions including those relating to remittance limits and capital account transactions.

Finally a mix of these type of trust can be created especially  where the family assets are spread across the countries or philanthropic objective is involved.

 Tax Advantage

The creation of a trust throws up many tax benefits. If set up early the future earnings from existing family assets will incur lower costs and will be taxed at lower rate on any capital gains derived. If properties are transferred at initial stage then there will be lower tax on stamp duty and capital gains in comparison to later years when they will appreciate in value. Also, if the members who will derive the benefit from the trust are within income tax exemption limit there will be advantage of lower taxation.

There are tax exemption available to assets which are acquired and later transferred to the trust.. However, income of trust from business or profession is taxed at maximum marginal rate of tax in hands of trustee or beneficiary as the case may be. Moreover, if the tax rule changes tomorrow then trust crated before will keep on enjoying some of the benefits.

Thus, laying conditions, reducing taxes, avoiding probate and public disclosures, protecting assets from creditors and lawsuits and finding a successe trustee who not only manages trust after you die but also manages trust assets when you are unable to do so are some chief advantage which  a trust can  effectively achieved provided the tax, regulatory and other aspects governing such trust structure are addressed.

As Published in Business Bhaskar on 01/09/2012