All you need to know about creating a private trust

Do you want to consolidate all your assets in one place and pass on your wealth to your family members smoothly? Also, do you wish to ring-fence your assets from any business or personal liabilities that may arise in the future? Would you like to provide for the financial needs for a family member with special needs in your absence? How about ensuring that your assets remain insulated from any marital discord-related legal proceedings?

All this, and much more, can be achieved by way of setting up a trust.

The brass tacks

Broadly, there are two types of trusts —public and private. A public trust, as the name suggests is for the benefit of a large number of people such as the general public. In India, trusts are governed by the Indian Trusts Act, 1882. This article focuses on private trusts that are created for the benefit of only a specified set of individuals, typically family members.

A trust has three main parties—the settlor (the one who creates the trust and transfers his assets to the trust), the beneficiaries (for whose benefit the trust has been created) and the trustees (who manage the trust on behalf of the beneficiaries). The trust deed lays out the objective of the trust, and all other details. The settlor himself can also be one of the beneficiaries, practically, though he’s unlikely to be the only beneficiary. A settlor can choose to be one of the trustees too, but he can’t be the sole trustee.

Factors to consider

So, how do you figure out if creating a trust is something worth considering? Experts we spoke with emphasized what matters is the objective you wish to achieve and the complexities involved rather than your net worth per say.

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“Setting up a trust has got more to do with the complexity of a family and the problems at hand, rather than the size of the asset base. Anyone with assets of over ₹50-60 crore could consider creating a trust if it helps in either managing, transferring or safeguarding their wealth," says Munish Randev, founder & CEO, Cervin Family Office & Advisors.

According to Nishant Agarwal, senior managing partner— Advisory at ASK Private Wealth, if someone has a specific objective for setting up a trust, then the asset size becomes irrelevant. For example, setting up a trust for a child with special needs, or for someone who is a spendthrift makes sense even with a corpus of a few crores of rupees.

Then, you need to decide on the type of trust to be set up. For example, if the purpose is simply succession planning, that is, passing on assets to the next generation, Sonali Pradhan, head of Wealth Planning, Julius Baer India, suggests creating a revocable trust. This way you can keep as much control on the trust as you want during your lifetime. On the other hand, if the objective is to ring-fence your assets from future liabilities or insulate yourself from the possibility of inheritance tax (if re-introduced in India in future), you must set up an irrevocable trust. “By creating an irrevocable trust, you are demonstrating that you have set up a trust for your family and transferred your assets to it and that you are no longer in control of them," adds Pradhan. However, transferring assets to a trust cannot be used as a way to evade any anticipated liabilities. “A two-year cooling period applies after you transfer your assets to a trust as per the Insolvency and Bankruptcy Code, 2016," says Pradhan. So, if you get any claims within two years, then the trust structure will not hold good for protecting your assets.

Once you are clear about your objective and have decided to set up a trust, there will be a few crucial details to think through. Rahul Bhutoria, founder, Valtrust Capital, runs us through a few of these. For example, think through who you want as the trustees, how much flexibility you want them to have, and whether you want to have multiple layers of trustees (who can take over if one of them passes away).

When it comes to the cost of setting up a trust, Agarwal highlights that these broadly fall under two heads— one-time and recurring. The one-time set-up cost comprises the lawyer’s fees or the trust company’s charges for advisory services to understand the family’s requirement and, then drafting and registering the trust deed. The recurring expenses encompass the annual management fees of a corporate trustee (if you have engaged a professional) which is a certain percentage of the assets of the trust, and other charges relating to filing of trust accounts and auditing of books, etc. “For a very basic trust for a small nuclear family, the base minimum set-up fee should come to a few lakhs, possibly, ₹4-8 lakh. Depending on the complexities involved, this fee could go up significantly," says Agarwal.

Trust versus will

When it comes to succession planning, creating a trust is not the only way to go about it. You can write a will too, but it may not always be the best option. Neha Pathak, head of Trust & Estate Planning, Motilal Oswal Private Wealth, says, “A will requires a probate which can easily take six to nine months under normal circumstances, and if even longer if it gets challenged." With a trust, this can be avoided. Apart from this, she says that if you want to protect your assets against any creditors, then a will is not going to be helpful. “Creditors will have the first right of claim over the assets".

On the other hand, a trust can be a tricky choice when it comes to transferring your immovable assets. The change in ownership of a property from your name to the name of the trust will attract stamp duty, which can be 5-8% of the property value. Also, when a trust is eventually dissolved (In India, a trust cannot exist for perpetuity), if a property is sold off to distribute the proceeds to the beneficiaries, the sale will again attract stamp duty.

“So, it’s best to plan the succession for property through a will instead of a trust," says Agarwal. “Property passed on to heirs through a will does not attract stamp duty. Though, a probate duty will apply, it is substantially lower than the stamp duty cost," says Pradhan. Note that, no stamp duty applies when movable assets such as stocks and mutual funds are transferred to a trust.

Compliance and taxation

“A trust has to file tax returns. Apart from that, there is nothing which is mandatory in terms of compliance," says Pradhan.

Shailendra Dubey, partner, PlanMyEstate Advisors LLP, concurs, and says it is advisable that the trustees meet at least once a year to clear the finances, review the investments and discuss the audit reports, so that the trustees’ intent does not get questioned in future.

In case of a revocable trust, the income of the trust gets clubbed with the income of the settlor and gets taxed as such. Dubey says, in case of an irrevocable trust, the trust’s income is treated separately and the trustees are responsible for paying the taxes due on this income. Trusts are subject to the maximum marginal tax rate on incomes such as interest and dividends but capital gains are taxed at the usual rate applicable for short and long-term gains.

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