Vishal Gada, co-founder and partner at Dhruva Advisors LLP, weighs up the pros and cons of a Will and a trust when planning succession.
Succession is the biggest challenge being faced by Indian families. Also, it is not uncommon of businesses being passed on to next generations where individuals with different ideologies and varied vision are obligated to manage the business cohesively.
At times, families have to deal with intergenerational frictions, peer pressure to perform, family discords foraying into business decisions and unclear divisions of functions, authorities, and accountabilities. A well-planned structure which can ease family succession is the need of the hour. It is also important to lay down a clear succession plan for the distribution and management of family wealth to ensure that such wealth is protected, preserved and passed on to the future generations in the desired manner. The need for succession planning has become more pressing with murmurs of the introduction of an estate tax levy gaining more and more noise.
Traditionally, a Will has been employed for succession purposes. A Will in common parlance is a legal declaration of a person’s (testator) wishes regarding the disposal of his or her property after death. Wills can be amended as many times as desired and per the law, the latest will of the testator would apply. The transfer of property under a Will does not attract stamp duty. However, a Will has certain inherent limitations:
• A Will can be operational only after the death of the testator
• It can only provide for disposition of assets in existence as on a particular date (i.e. date of demise)
• Disposition under a Will is not automatic, but takes place through the probate process
• The probate process is prone to litigation
• Exposure of potential estate duty.
Giving due consideration to the above limitations of a Will, more and more families are now adopting a family trust structure for succession and estate planning. While succession through a Will has an absolute exposure of estate duty, in case of trust structure the same needs to be evaluated considering the structure and future inheritance tax law, if re-introduced.
In India, private family trusts are governed by the Indian Trusts Act 1882 and a trust is not treated as a separate legal entity. Rather it is an obligation to administer the property reposed by the settlor and accepted by the trustee for the benefit of identified persons. A trust structure provides a lot of flexibility and involves the drafting of a trust deed which documents the understanding and desire of the family in relation to the running of family business and management and distribution of family wealth in a codified manner.
A trust structure provides an opportunity for the promoters to pre-empt possible scenarios and document the same in an orderly manner to avoid any potential family disputes and ensure conducive operation of the family business. It can help strengthen family bonds by reducing uncertainty on roles of family members and stipulating expressly what is expected of them. It can help in creating an enduring family legacy by keeping intact the vision of the predecessors for family business, though not at the cost of dynamism and adaptability to required changes. A trust structure can also lead to a structured format of a family office and enable efficiency in management and running of family office.
A trust structure requires the family to deliberate and decide on various matters and document the same to ensure seamless transition of family business and wealth to next generations in the desired manner. Key points for decision making are:
• Succession of trustees
• Decision making matrix—to provide for matters which would be decided by majority/unanimous consent
• Providing veto power to a trustee
• Policy for distribution of corpus and income of the trust
• Safeguarding interests of specific family members, for instance, spouse (after demise of head of the family), members with special needs, minors, etc.
• Appointment of lifetime trustee/caretaker trustee/executor trustee
• Determination of share of beneficiaries—whether to be decided upfront or to be discretionary as of now
• Allocation of certain portion of wealth for philanthropic purposes
• Specific policy for personal expenses of members like purchase of jewellery, international leisure trips, etc
• Specific policy for behavioural and disciplinary aspects for the next generation.
While the trust structure offers a lot of benefits, migration to the same requires a thorough analysis of costs (including stamp duty), tax implications, and regulatory laws surrounding it.
With today’s dynamic business environment, technological advancements, and global exposure to local businesses, a successful succession strategy clearly warrants a deep forethought on the philosophies and principles underlying the succession ideology. Such ideology should be then roped into a simple and easy-to-implement construct such that the business does not lose its mettle through generations.
Have you planned your succession for the wellbeing of your family?
Vishal Gada, co-founder and partner at Dhruva Advisors LLP