Photo: iStock
Photo: iStock

How trusts can help in succession planning

A Will is not just for the big and wealthy business families. These entities, in fact, are gradually moving to family Trusts to ensure filial peace and business continuity

Some of the biggest business conglomerates in India were started by families, such as: Birlas, Tatas, and Ambanis. Also, many of the top businesses holding companies such as HCL Corp. and Mahindra Group continue to be family-led. Over the decades, all these families—and their businesses too—have grown in size and strength. But in some cases family-led businesses have found themselves mired in ugly spats over succession and control of business units. Whether it is a 3 BHK or a Rs3 trillion firm, inter-generational asset transfer can be fraught with family disagreements.

The issue of succession has always been a difficult one, especially for family businesses. Those who haven’t been able to manage smooth transitions to the next generation have found themselves wasting time and resources on family squabbles. The Bajaj family dispute went on for 7 years before an amicable settlement was reached in 2008. Read more about it here. However, in family-led businesses amicable resolutions are not common. Read more about the Chettinad Family dispute here.

Most of these disputes could have been avoided if a succession plan had been part of the business plan. According to PwC India Family Business Survey 2016, “Only 15% of family businesses have a robust, documented and communicated succession plan." Part of the reason could be that in big family businesses, there are multiple businesses and assets, and there may be many family members interested in leadership roles. As a result, it is not easy to draft a smooth succession pathway.

Succession Planning

While it is important for big business to have a succession plan, the need for such a plan is equally important for families that have assets to bequeath, especially when there is more than one child, differently abled members, joint properties, internal family complications, ancestral properties, mortgage against properties, let-out properties, international assets so on.

Succession planning has a few key aspects. A Will comes to mind first. However, Wills can be—and frequently are—challenged in courts. Family Trust vehicles are also a viable option for succession planning in business families. “Those who are into business or have multiple investments or complex structures around their businesses; those who have families outside India; and those who are high net worth individuals prefer to have a Trust as it is an easy approach to seamless succession," said Rajesh Narain Gupta, managing partner, SNG & Partners, a law firm.

While a Will comes into play upon death, a Trust can become functional while the person is alive. “When you create a Trust, you can transfer your properties while you are alive and it (the arrangement) continues after your death," said Sandeep Nerlekar, MD and chief executive officer, Terentia, an estate planning firm.

Unlike a Will, Trusts help businesses to continue without any difficulty even in case a family member passes away. This helps keep the family together. “A family Trust...provides for the needs of young children, dependants or aged parents. You can also create a family trust to safeguard the assets held in the Trust for the benefit of your family, in cases such as insolvency or attachment," said Amit Kolekar, associate partner, Rajani Associates, a law firm. However, according to law firms and estate planning firms, only about 1-2% people write a Will, and the practice of establishing Family Trusts is at a very nascent stage in the country.

What is a family Trust

A Trust is a relationship in which a person, called a trustor/testator, transfers something of value, called an asset, to another person, called a trustee, said Nerlekar. The trustee then manages this asset for the benefit of a third person, called a beneficiary. An asset is any kind of property.

With increasing complexity of succession planning, family Trusts are gaining ground. “If a Will is made, the beneficiary is expected to get a probate or succession certificate from court. This is a cumbersome process," explained Gupta. Trusts also address the family concerns as to how the assets will be distributed. If there is a special-needs child, Trusts can take care of how they will be taken care of. This provides an easy solution for long-term approach on wealth preservation and protection of family assets.

You can also create a family Trust to safeguard the assets for your family from any action that may arise against you, say insolvency, attachment or otherwise, explained Kolekar.

Most Indian families believe that succession planning is for the rich and affluent. Fact is, even those who don’t own multiple assets should go for it. “Family Trusts can be made by any person having reasonable assets, desiring to effectively manage the assets for herself and for the means and needs of her family," said Kolekar.

Charges to make a Will are low, typically up to Rs5,000 for simple online Will and Rs25,000 to Rs1 lakh for a customised Will. Trust costs can start from Rs3 lakh, again depending on the amount of wealth and complexities. So, Trusts should be setup once there are more number of legal hairs or considerable wealth.

It is expected that the new generations of families will adopt Trusts as the approach to succession planning, which would result in reducing disputes between family members.

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