Cross-border succession planning is becoming increasingly complex for families with members residing outside India. Structures that work efficiently within one jurisdiction can create unintended consequences when viewed through the lens of another.
This complexity is compounded by the fact that succession and inheritance rules vary significantly across jurisdictions. While international frameworks such as the Hague Convention have sought to introduce greater uniformity in cross-border succession matters, differences in local tax and remittance laws continue to pose challenges for globally dispersed families.
As part of his succession planning, nearly 80% of his father’s wealth was settled into a revocable trust established in India during his father's lifetime. During his father’s lifetime, the structure was treated as a revocable foreign grantor trust for US tax purposes.
Following his father’s demise, the beneficiaries were Hari, his wife and their two daughters, all of whom were US citizens and residents. The trust deed provided that after the settlor’s death, the trust would continue for the lifetimes of Hari and his wife, with the daughters having the power to dissolve the trust 20 years after the settlor’s death (in this case, Hari’s father).
From a US tax perspective, upon the settlor's death, the trust ceased to qualify as a foreign grantor trust and became a foreign non-grantor trust under the Internal Revenue Code (IRC). This change in status gave rise to several implications:
Hari, his wife and their two daughters were considered the beneficial owners.
If the trust continued, its annual income would need to be subject to US tax each year, regardless of whether the income was distributed.
If income was not offered to tax in the year it was earned, distributions of prior years’ income could be taxed in the hands of beneficiaries from the date the trust first earned that income, with interest and penalties potentially applying.
Further, if the trust invested in mutual funds, alternative investment funds or similar vehicles, the Passive Foreign Investment Company (PFIC) rules could require growth in NAV to be offered to tax on a mark-to-market basis, even if the investments were not redeemed, with such gains being taxed as ordinary income rather than capital gains.
While the trust may be able to claim benefits under the Double Tax Avoidance Agreement if income and gains are offered to tax annually, the ability to claim credit in the US for Indian taxes paid by the trust could be significantly restricted where income or gains are not offered to tax in the year they arise.
This is further complicated by the fact that India taxes gains on a realisation basis, whereas the US may tax them on a deemed accrual basis.
From an Indian tax perspective, the structure created a different set of challenges. The trust had been settled as a discretionary trust, under which the tax liability arises at the trust level under Section 164 of the Income Tax Act, 1961. This could further limit the ability to claim relief under the India-US Double Taxation Avoidance Agreement, particularly where the structure had not been designed with these cross-border tax considerations in mind.
From an Indian regulatory standpoint, the position under the Foreign Exchange Management Act, 1999, further compounds the issue.
Indian residents are permitted to remit up to $250,000 per fiscal year under the Liberalised Remittance Scheme (LRS), which includes gifts to non-resident relatives. Trusts are treated as pass-through entities and do not have a separate remittance limit, meaning distributions could fall within this cap. Arguably, they could also fall under the non-resident Indian (NRI) limit, which is pegged higher at $1 million per annum.
The larger lesson is that succession planning for families with NRI heirs cannot be undertaken solely from an Indian legal or tax perspective. Before implementing a trust or will-based structure, families should evaluate how the arrangement will be treated in the country of residence of beneficiaries, whether treaty relief will be available, and whether remittance rules could affect future distributions. Structures that work efficiently for resident beneficiaries can produce very different outcomes when heirs reside overseas.
Thus, this advance tax planning becomes particularly relevant when comparing trusts and wills in a cross-border context.
Trusts vs wills
Trusts are widely used in India for succession planning, particularly where there is a need for control, ring-fencing of assets and continuity across generations. However, in cross-border situations, the tax treatment of trusts can vary across jurisdictions, resulting in timing mismatches, dual taxation or limitations on repatriation.
In contrast, a will-based structure may offer greater flexibility for non-resident beneficiaries. Had the assets in this case been bequeathed directly through a will, each non-resident beneficiary would have been able to utilize the higher remittance limit of $1 million available to NRIs. In addition, any income they earn in India from such a bequest could be repatriated without limits.
The choice between a trust and a will, therefore, needs to be driven by the specific cross-border context. While trusts remain effective for control and inter-generational planning, they can introduce complexity in cross-border situations. In contrast, wills may offer greater simplicity and flexibility, particularly in relation to taxation and repatriation for non-resident beneficiaries.
Remedies do exist under the Indian Trusts Act and tax laws to mitigate some of these issues. In Hari’s case, the trust deed contained provisions that helped address the challenges, though such flexibility may not always be available.
For ultra-high-net-worth families, especially those with NRI heirs, succession planning should begin with an assessment of the jurisdictions in which future beneficiaries reside. The choice between a trust and a will should be informed not only by control and asset protection considerations, but also by taxation, treaty relief and repatriation rules in those jurisdictions.
While trusts may be appropriate where control and inter-generational planning are key objectives, they require careful cross-border evaluation before implementation. In many situations, simpler structures such as wills may offer greater flexibility, particularly where ease of access and the movement of funds are priorities.
Ashvini Chopra is the executive director and head of family office solutions at Avendus Wealth Management.