Creating trusts as part of succession planning is gaining ground in India. Those running family businesses and with family members spread across the globe are among the people taking to the trust structure, Sonali Pradhan, Managing Director, RBS Financial Services (India) tells Business Line . Excerpts from an interview:

In most cases of succession, the ‘will’ tends to be a point of contention. How do you ensure that it is foolproof?

In the past, the ‘will’ was considered and used by many families to transfer wealth to the next generation. But now, because of many cases discussed in public domain, families have realised that a will has limitations.

When it gets challenged, it needs to be probated in the court. But this is a long-drawn legal process and expenses such as probate fee are involved. So, to work around the limitations of a will, we recommend appropriate nominations and joint ownerships for assets. This is a good house-keeping practice, which many families tend to overlook. Not just for financial instruments, even for immovable assets, it is always a good idea to get joint ownership and nomination done.

In case of nominations, disputes continue when the nominee is not the legal heir. How can one work around this?

Except demat account, i.e. shares or instruments that are governed by the Companies Act, the nominee holds the position of a custodian or a trustee. He is not the beneficiary to that asset. So, in such cases banks or other institutions may discharge the money to that person and absolve themselves, but it is always subject to the rights of the legal heir. We recommend that for the sake of operational convenience it is a good idea to have the beneficiary of the will as nominee. But in case of demat account, nominee is the ultimate beneficiary. The title that he gets is better than the title of the will owner.

When does creating a trust as part of succession planning help?

There are three or four types of clients who explore trust as part of their options. One is family business owners.

For them, it is not only about the transfer of shares but also about who manages and runs the business. In situations like these, you transfer the asset or share to the trust and also define who will manage the company. So, here, you differentiate between the ownership and the right to dividend. The second are professionals in a nuclear family, with nobody to fall back on in case they pass away. They typically make use of the living trust. They set up the trust and choose to be trustees during their lifetime, so that they will be able to manage the investment or assets of the trust the way they want. After their lifetime, a professional trustee will be appointed to manage this trust.

Third, most Indian families are global families these days. You will always find children or grandchildren settled abroad.

When looking at transferring assets to them, you need to be careful in terms of the global inheritance taxes they are subject to. So, in these families, instead of giving the asset to an individual beneficiary, they stipulate in the will that that asset goes to the trust that is specifically set up for that beneficiary.

By this, they also save the stamp duty which is otherwise applicable. Besides, there are clients who don’t want to give everything to their children in one go. If the children receive it lumpsum, they will not have motivation to go out and work. So, those professionals look at setting up trusts and give wealth step by step to their children.

Lastly, clients who anticipate disputes or disagreements over distribution of the wealth in their absence would also look to set up a trust. It is a private document and less contestable as compared to a will.

Gifting in the form of cash, jewels or creating a mutual fund portfolio and giving it to children is common. Is there a specific way to make it foolproof?

All gifts should be supported by a gift deed. For any amount that you are gifting to relatives – if it falls under the definition of relatives according to the Income Tax Act, no tax is involved. Depending on which state you live in, you need to execute a gift deed on a stamp paper.

For all movable assets, such as shares, money and jewellery, there is no need for registration. But it has to be signed by both the donor and the receiver. If you are gifting a property, it has to be registered and stamp duty needs to be paid.

What challenges in succession planning are unique to India?

Globally, people are well aware about issues related to succession because of inheritance taxes. So, they take steps to save these taxes. In India, we have various religion-based personal laws applicable to the succession of assets, in case a person passes away without writing a will.

There is not much awareness about these laws and their applicability. We also have this peculiar process of probate which is a state dominated process. Court fees along with the method of application are different in each state.

It is a good idea to get joint ownership and nomination done not just for financial instruments, but even for immovable assets. SONALI PRADHAN, MD, RBS FINANCIAL SERVICES (INDIA)

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Published on December 29, 2013