Setting up a trust

You have substantial assets and would like to bequeath them to your family (and maybe also to those outside of the family) to secure their future. But, you are not quite sure how that wealth will be managed after you are gone. Then consider creating a trust. If you have people with special needs to be taken care of, a trust can help you deal with that too.

So, how does a trust come into being? The settlor, who is the person creating the trust, transfers his property to the trust, to be managed by the trustees for the benefit of the beneficiaries. The trustees, who can be a mix of family members and professionals, are entrusted with the task of managing these assets on behalf of the beneficiaries. All details — such as the purpose of creating the trust, the list of beneficiaries (the creator of the trust too can be a beneficiary) and their shares in income generated and other rules governing the management of the trust — are laid down in the trust deed which has to be registered.

How does a trust score over a will as an instrument of succession planning? Unlike a will which comes into effect only after the person’s death, a trust can be used to pass on your wealth even during your lifetime.

The income generated by the trust can be enjoyed by the beneficiaries even while the settlor is still alive and afterwards too, as specified in the trust deed.

“For instance, if you get incapacitated and are unable to provide for your family, the income generated from the trust corpus can be used to support your family,” explains Gautami Gavankar, Principal Advisor, Kotak Mahindra Trusteeship Services.

Also, while a will is subject to challenge, a carefully created trust is immune to such concerns.

But it makes sense to go for a trust only if you have substantial wealth to bequeath, which needs to be managed on behalf of your family.

“When you form a trust, you create an additional vehicle whose affairs have to be managed. The trust has to obtain a PAN; maintain bank, demat and trading accounts; books of accounts of the trust have to be maintained and income tax returns too have to be filed,” explains Gautami.

She adds, “You may also want to give a thought to the kind of assets you own. When an immovable asset such as a house is transferred to a trust, stamp duty has to be paid. So, if real estate is a substantial part of your wealth, you may want to re-think on creating a trust. But, if your real estate investments are miniscule compared to your financial assets, you may transfer your assets to a trust.”

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