A multi-Trust setup helps avoid family friction
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Research into Asian family businesses has concluded that the majority of the Asian businesses fail because of internal factors rather than the external. Insecurity towards ownership of assets has always been a big concern for business families. Often, family members are not clear, or aware of, what is their share in the family’s wealth and when they are likely to get it. This creates insecurities.
The challenges that business families face can be classified as tangible challenges and intangible challenges. Tangible challenges are the ones that can be valued or quantified, for example: properties, shareholding, complex asset classes, multiple stakeholders, no clear distinction between personal and business assets, asset protection, insecurity towards ownership of assets, and lack of clarity in terms of estate devolution. Intangible challenges are more dealing with some things that are difficult to quantify, for instance: business continuity, leadership, business control, lack of freedom, biases and lack of clarity of roles, and personal aspirations
Tangible challenges can be dealt with by creating a structure wherein the assets can be held in a way that the family avoids litigation. This would clarify the demarcation of assets, which will help a family overcome the challenges that revolve around the tangible issues.
Besides the above-listed reasons; sudden death, divorce, separation, unforeseen business situations and critical unexpected health issues (incapacitation) can also create disturbances in delicate family matters.
Most business families have multiple family members who are involved in the business. Some may be stakeholders and also working in the same business, while some may be just stakeholders and not working in the business. Then there are a few who are neither stakeholders nor do they work in the business. In all these categories, clarity of future devolution plays a critical role. The patriarch can always write his Will and the assets will devolve as per his wishes on his demise. But if this Will gets challenged and is taken to court, all the assets will get stuck and no one will be able to enjoy the said assets.
What should the families do then? If there are multiple family members, then they need to consider creating a multiple Trust formation. Say, a family has three children in the second generation and all are married. In this case, the parents should create a structure that will help all the four families co-exist peacefully and happily. It is recommended that there be a Trust for the parents and three Trusts for the respective children. In this structure, the parents can do a staggered devolution of assets. They can retain the control in their hands during their lifetime. The Trusts that are set up for the children can be used by the children, also to park their individual assets apart from what they would get from their parents.
While creating these structures, one needs to understand that in India, prenuptial agreements are not valid. So, whether to add the son-in-law and daughter-in-law in the Trust structure should be carefully examined.
When you create a multi-Trust structure, the chances of litigation are reduced to a large extent as beneficial interests don’t overlap. One can define the objectives and the milestone needs of the beneficiaries. Needs like education, health care, marriages, retirement and old age can be defined and managed well. And not to forget the hanging sword of estate duty or inheritance tax; these can also be handled in the most effective way.
When should a multi-Trust structure be considered?
•When families are living in a joint family setup or have multiple family members
•When individuals hold significant assets, or the families or individuals have cross-asset holdings
•When one has to provide for someone too young or who lacks the ability to manage money
•For charitable purposes
•If families have internal complications
•Individuals or families considering asset protection
There are many merits to creating a multi-Trust setups.
Privacy: Assets are held in the trustee’s name, therefore the identity and interests of the beneficiaries are kept confidential continuously, until the Trust terminates.
Tax planning: A Trust may be used to reduce tax liabilities. Assets owned by a Trust will not be dealt with in the estate of a deceased person. Hence, estate tax may be minimized or eliminated.
Asset protection: A Trust may protect assets from claims of future creditors to the extent permitted by law.
Succession planning: Trusts enable you to make provisions for family members, relatives and friends, charities and other organisations in the way you desire. They allow flexibility in situations where domestic inheritance rules may otherwise be imposed. They also enable efficient distribution of Trust assets to beneficiaries, without consuming the time and money associated with the complicated procedures for probate.
Asset demarcation and management: Trusts are a convenient means of placing your respective worldwide assets in the respective family member’s Trust, thereby reducing chances of litigation.
Effective contingency planning: Unforeseen situations like sudden death, incapacitation or divorce can be handled well.
Sandeep Nerlekar is founder and chief executive officer of Terentia Consultancy Pvt. Ltd.