Wealth after you’re gone

In 2008, Ramamurthy Thyagarajan, chairman of Chennai-based Shriram Group with annual revenue of ₹ 13,600 crore, had set up a trust—Shriram Employees Welfare Trust. According to him, through this trust all executives who have participated in the growth of the group’s business would be beneficiaries and none of his family members would be part of the management or ownership.

This is contrary to traditional Indian families’ approach to passing on wealth to its next generation. Industry experts say that over the years, the overall outlook towards succession planning and distribution of wealth has changed in India, especially when it comes to the first-generation rich.

“Private trusts have not been considered by rich families in India. Unlike the West, where private trusts are a way of life both from a succession standpoint and a tax perspective, families in India have not seen the need to set up private trusts for future generations. Increasingly, however, families, particularly those with a business background, are now seeing the need for private trusts,” said Sameer Kaul, head, Citi Private Bank, India.

Wealth managers say that as wealth increases, so do complexities. A trust can be a useful tool here. Hence, the ultra wealthy are now considering private trusts as a vehicle for succession planning, and to avoid complications and legal tussles.

“There are often complications arising with partnerships between siblings or cousins, or partner consortium. Whenever we meet the founder, succession is a critical issue on their minds but often unattended partly due to lack of knowledge or clarity and often due to an unknown fear of rocking the boat too early,” said Satya Bansal, chief executive officer-wealth and investment management, India, Barclays Wealth.

Succession planning through trusts has several benefits over wealth transfer done through a Will. For instance, in case of real estate, a Will can be contested and requires to be probated. Not so with a trust. This may be one of the main reasons why the rich prefer to go the trust way in India, where 86% of households’ wealth is in assets such as realty and gold, according to Credit Suisse estimates.

“Of our 10 very affluent clients, at least 7-8 either have or want to start a private trust. So the popularity of private trust is increasing,” said Feroze Azeez, director and head, investment products, Anand Rathi Private Wealth.

Keeping things as clear as possible also seems to be a reason. “Most families are now open to explore structures such as family trusts, family constitution and family boards. Many business families are now reviewing their complicated cross-holding investment companies and looking at limited liability partnerships and trusts or a combination of these two to simplify this in line with their succession needs. They often review shareholders’ agreements in favour of more robust family trust structures as a holding vehicle, as it provides greater flexibility and its own governance and rules in a bespoke manner,” said Bansal.

A trust is created when a property—a trust’s corpus—is held by someone, say, trustees, for the benefit of another—the beneficiaries. A trust is basically a vehicle to transfer wealth to the beneficiary.

“It gives you the flexibility to transfer wealth. It helps maintain confidentiality of the last wishes of the owner of the wealth, optimizes legal costs and is a useful asset protection tool. Seamless transfer of wealth, asset preservation, consolidation, separation of ownership from management and tax neutral structure are other elements of a trust,” said Sonali Pradhan, managing director, RBS Financial Services.

Is a Will not enough for succession planning? “Most rich families have seen enough challenges around Wills as a succession tool. Also, a Will is often seen as a default option rather than one chosen by design. They have witnessed enough litigation around ownership. Equally challenging is distributed ownership whereby the future stakeholders are often not aligned to steer the business in a clear direction,” said Bansal.

“First, you have to examine whether there is a need for a trust. You will then have to design the required structure. Once you draft the trust deed, you will have to accordingly get it registered,” said Azeez.

“The process involves identifying a service provider, followed by a sit-down session to give a background of the family, the business structure and assets. Once the service provider has an understanding of the family’s requirements, it can provide solutions in terms of ‘type of trust’ structure, the composition of the trustees, and a solution on how the trust funds will be managed,” said Kaul.

You can form a family trust, a private trust, or, like Thyagarajan, an employee trust. The average fees could start from ₹ 3 lakh. “For families where the source of income is from business, it is recommended that a succession plan be in place as soon as the children become legally adults in order to use the private trust to divide their assets according to their discretion,” said Kaul.

Succession planning has always been an area of concern. Widely reported litigation cases have only thrown more light upon this. That in itself is reason enough for the wealthy, with new money or old, to form private trusts.