Planning to set up a trust? Reduce litigation risk, say analysts

It's exempted from the probate process; courts don't get involved in its execution

With stories of loss of life due to the pandemic coming in every day, those who have not given any thought to estate planning should do so at the earliest to secure their family’s future.

A Will works well for smaller families with simpler inheritance objectives. It is also cost-effective. However, in many instances, the authenticity of the Will gets challenged, resulting in lengthy court cases. This can be avoided by setting up a trust. 

Moiz Rafique, managing partner, Privy Legal Service LLP, said, “There is no court involvement in a trust, which is why I would recommend creating one for your family’s security."   

A trust is a legal arrangement where the owner, known as the settlor, entrusts another party, called the trustee, to take care of his/her assets for the benefit of the beneficiaries, whom he/she selects via a document called the trust deed. 

There’s a trust for each need  

A trust can be private or public. One that is created and made operational during the settlor’s lifetime, it is called a living trust. A trust that is created through a Will is called a testamentary trust and comes into force after the settlor’s demise. Then, there is the minor beneficiary trust, which is set up for a child’s benefit. A life insurance trust is irrevocable and is set up to invest the proceeds of a life insurance policy for the beneficiaries after the policy owner’s demise.

While a trust is generally created to manage and preserve property for the benefit of one or more persons, special purpose trusts can be created to meet the specific needs of the settlor and the beneficiaries.

For instance, a trust can be set up to meet children’s educational goals, family’s maintenance, and even to meet the needs of future generations. "A trust can be created for the benefit of immediate family members, relatives or even friends,” says Sunil Jain, partner, Anantlaw.

No court involvement

One advantage of a trust is that it is completely exempted from the probate process. “There is an absolute absence of any court process in its execution and administration,” says Sameer Jain, managing partner, PSL, Advocates and Solicitors. Moreover, according to him, a trust can come into operation from the day it has been created, unlike a Will, which comes into effect only after death of the writer of the Will.

A trust is a more flexible arrangement. "With a trust, there can be greater flexibility in the allocation of assets to beneficiaries. 

Trusts can accommodate the needs of various family constituents. They can also handle complexity, as the size of the family grows," says Suraj Malik, partner, BDO Consulting. Execution is easier in a trust.

Loss of control

One issue with a trust is that the asset owner needs to transfer the assets into it. People fear they may cede control of the assets to the trustee during their lifetime. However, experts clarify that this concern can be mitigated by making necessary provisions in the trust deed. The management costs involved in running a trust are also higher. 

A person setting up a trust must be ready to pay the cost, like stamp duty, involved in its creation. 

How income from a trust is taxed depends on the beneficiary’s age. "If a trust is created for the benefit of a minor, the income from it could be chargeable in the hands of the guardian of the minor," says Malik. 

For residual assets retained by the individual, or assets that cannot get transferred to the trust, one should also write a Will.

HOW TO CREATE A TRUST

• A private trust can be set up either through a Will (testamentary trust) or written trust deed during one’s lifetime
• The application needs to be submitted to the Registrar of Trusts with all the relevant documents
• A trust deed needs to be prepared on stamp paper
• Lastly, the settlor and two witnesses need to be personally present, along with their identity proof, for registration before the Registrar