Trust-ing a tried method to handle the future

Creating a Trust is one way to plan your future and that of your successors, the way you’d like it.

Recently, a 96-year-old businessman approached a leading wealth management firm to set up a trust for his 54-year schizophrenic daughter. The trust, an irrevocable one, earmarked an amount for her future treatment and financial needs. “The father opted for the irrevocable structure as he did not want it to be changed in the future,” says the head of a firm that specialises in trusts.

This businessman is not alone; many high net worth individuals (HNIs) are taking the trust route. Wealth management companies say one in seven clients is opting for this structure.
 

WILL VS TRUST
WILL	TRUST
Only enforceable on death	Can be enforced even while a person is alive
Used only for distribution of wealth	Used for financial planning and even to settle succession issues
Needs to be registered. Therefore becomes a public document	Does not require any registration. Assets can be held in secrecy from public

There are many reasons. Some form trusts to take care of their loved ones. Others want to ensure the succession plan they have envisaged is carried out to the T. So, there are irrevocable trusts — ones that cannot be changed — and revocable ones, that can be changed over time according to changing circumstances.

For instance, a 43-year-old techie with an information technology company has started a trust wherein he has specified the amount of money his son and daughter will use for their respective weddings, the annual maintenance they will get for foreign education, what his wife will get for monthly expenses in case of his demise, and so on.

Such a trust, a revocable one, allows the person to plan for both family and self. It can be tinkered with as the situation changes.

However, under Indian law, a private trust – whether revocable or irrevocable – cannot be a perpetual entity. While forming it, the Settlor (the person who starts the trust) needs to specify the tenure. “Most families plan it for at least two generations. So, they usually specify that the trust will get terminated on their youngest grandchild reaching a certain age, say, 25 or 30 years,” says Atul Singh, MD and head of global wealth and investment management, DSP Merrill Lynch, India.

Inheritance tax
Another reason why trusts are in vogue is because HNIs and professionals are anticipating the re-introduction of inheritance tax. “Industry professionals, including wealth management firms, chartered accountants and law firms, had anticipated the introduction of inheritance tax in the last Union Budget after the draft of the direct tax code was released,” says the head of a domestic wealth management firm.

A trust, in such a scenario, will help save tax. “A private trust may work out to be tax-efficient if the Centre implements inheritance tax. However, it will depend on the wording and how the government structures it,” says Vikas Vasal, executive director, KPMG.

The cost of forming one, according to experts, could be Rs 50,000-20 lakh. The time taken could be as long as six months. “It all depends on the complexity of the detailing that one wants to introduce,” says a trust manager.

Planning through a trust can include
Asset allocation: Specification of asset allocation at different stages in life. This can include instruments and even institutions. Most seek to invest the corpus in debt in case of death. The idea is to ensure fixed regular income.

Expense allocation: A person can state how much money the family should receive for monthly expenses. There can be specifics like marriage and study expenses.

Planning for self: Ensures regular income in old age or in a critical health condition if the family does not support the person financially. “We get many cases where people specify how a trust should take care of them in such circumstances,” says Rajesh Gupta, managing partner of SN Gupta & Co.

For a rainy day: Business owners with heavy liabilities form trusts because no lender can bring a court order to liquidate a trust’s assets, as long as it is not formed with an intention to default. There are stockbrokers who have formed a trust to give their family comfort in case there are business-related problems. But, the tricky part is that if the lender can establish the trust was formed with an intention to default, it can get these assets liquidated.