Private Family Trusts
You may set up a private family trust for the benefit of your family members by transferring specific assets into the trust. It is a very powerful structure to ensure the safety and security of your assets during and after your lifetime. Private trust as a tool to safeguard your wealth is not yet explored by most wealthy Indians.
A private trust is a separate entity which holds your assets, the terms and conditions for its investment and distribution are specified by you. Your appointed trustees and successor trustees will manage the assets.
Top ten reasons for setting up a private family trust
- Support a beneficiary with special needs such as a minor child, aged parents, a child or any other family member who is disabled or to continue the education of a beneficiary, such as a child or grandchild.
- To hold back to inheritance until your child is mature enough to handle the responsibility – Trust can be set up to control the timing and amounts of distributions, and the reasons and conditions under which those assets might be withheld or given. The trustees shall hold and invests your assets on behalf of your children but allows distributions to meet only certain expenses — education, healthcare and so forth – until they reach a certain age.
- Ongoing financial management – If you no longer want the burden of managing your financial assets, or if you are unable to manage them effectively due to an accident or illness, a trustee can assume the management and investment responsibilities, often with no significant disruptions.
- Hold an important asset, such as the shares of your company, patents, copyrights, trademarks, an ancestral property etc.
- Sometimes to reduce the tax burden.
- Provide ongoing support to charity
- Maintain privacy – unlike a Will, a trust agreement can remain a private document between you and your trustee
- Provide income to a loved one for life without the burden or responsibility of managing the trust’s assets
- Provide for children from a previous marriage while providing for your present spouse during their lifetime.
- Segregate your assets so that in case of bankruptcy those assets cannot be attached by the creditors and your children who are the beneficiaries continue to benefit from the trust, if the trust is set up as irrevocable.
Structuring a trust
It may be set up as revocable or irrevocable trust
- In a revocable trust the settlor has the right to change any terms or provisions of the trust, withdraw assets, and terminate the trust.
- In an irrevocable trust the settlor loses control over the assets in the trust. The settlor does not have the right to change any terms or provisions of the trust.
It can be set up as a specific trust – where the share of each beneficiary is predefined. E.g. both my children shall receive 50% of the trust property during their lifetime. Or it may be set up as discretionary. E.g. the trustees will have the discretion to distribute the assets amongst your children as per their needs and requirements.
The duration of the trust can be specified so that it is terminated after the desired number of years or the purpose or objective of the trust can be mentioned on the happening of which the trust will be terminated. E.g a trust set up for education will be terminated upon the completion of education by the beneficiary. A trust for the support of a disabled beneficiary will be terminated, upon the death of such a beneficiary.
Setting up a trust is highly customised and will require discussion and deliberation with you to structure it in a manner to achieve your long term objectives. The tax implications have to be kept in mind while structuring the trust. The powers, rights and duties of the trustees need to be accurately spelled out. Selection of trustees and the successor trustees is extremely crucial. The trustees could be your family members or a professional trustee can be appointed. You may act as the initial trustee during your lifetime.
Drafting of a trust deed is highly meticulous and all eventualities have to be considered, because if set up as an irrevocable trust, it cannot be modified.