Family discretionary trusts: A shield for wealth, debt, and divorce

Once seen as a tool for the ultra-rich, family discretionary trusts are now helping more Indians protect assets, plan succession and avoid family disputes.

A family discretionary trust (FDT) is increasingly being seen as a tool to safeguard wealth. Legal and tax experts say that while these trusts can ring-fence assets, their effectiveness depends on careful structuring and genuine intent.

 

What is a family discretionary trust?

A family discretionary trust is a legal arrangement where trustees manage assets for beneficiaries, but have full discretion over how and when to distribute them. Unlike a fixed trust, where shares are predetermined, or a will, which takes effect only after death, FDTs allow flexibility and privacy during the settlor’s lifetime.

 

“Beneficiaries of a discretionary trust do not have any vested interest in the trust property. Their interest is contingent and dependent upon the trustees exercising their discretion,” explained Kunal Savani, partner at Cyril Amarchand Mangaldas. Courts have echoed this view, noting that beneficiaries merely have a “hope” rather than an enforceable right until a distribution is made.

 

Shielding Assets: How Courts View FDTs

Experts say Indian courts do recognise FDTs as legitimate asset protection tools.

 

“Assets in a discretionary trust generally cannot be attached by creditors or in divorce litigation because beneficiaries do not have fixed rights,” noted Shweta Tungare, co-founder of Law Tarazoo.

 

Citing a 2014 Supreme Court ruling, Ashutosh K Srivastava, partner at SKV Law Offices, pointed out that trust assets are not part of a beneficiary’s estate until actually distributed. However, he warned that if a trust is revocable or created to deliberately defeat creditors, courts may pierce the trust veil under Section 53 of the Transfer of Property Act.

 

Alay Razvi, managing partner at Accord Juris, summed it up. “Indian courts uphold such trusts when used genuinely for succession or asset planning, but will pierce their veil if the trust is merely a cover to evade creditors or lawful alimony claims,” he said.

 

Tax and Structuring Considerations

 

From a tax perspective, discretionary trusts are treated as separate entities and often taxed at the maximum marginal rate. “There may not be an immediate tax advantage, but families prefer these structures to mitigate estate duty or gift taxes in certain jurisdictions,” Savani noted.

 

Divi Dutta, partner at Khaitan & Co, added that careful design is crucial. “If the settlor retains too much control, the trust can be treated as a revocable transfer and taxed back in the settlor’s hands. Poor drafting may also trigger gift tax or scrutiny.”

 

Who Should Consider an FDT?

While discretionary trusts were once seen as the preserve of industrialist families, experts say the middle class can also benefit.

 

“Upper-middle-class families with property, business assets, or vulnerable dependents are increasingly using FDTs for asset protection and succession,” said Tungare.

 

Dutta cited the example of an industrialist couple who set up a discretionary trust in 2017 to hold business shares and properties. By appointing professional trustees and distributing dividends equally among their daughters, the family avoided sibling rivalry while ensuring smooth business governance.

 

For families with special needs children or significant liabilities, a trust can be a way to ensure long-term security. But costs vary widely, from professional drafting fees and stamp duty to ongoing compliance.

 

Bottom Line

Family discretionary trusts offer flexibility, privacy, and protection from liabilities, but they are not bulletproof. Courts can still override them if intent is dubious. As Razvi stressed, “True strength lies in careful structuring, transparent intent, and legal compliance.”

 

For Indian families weighing succession and asset protection, a discretionary trust may not be a silver bullet, but it can be a valuable shield.