Setting up a Trust for Corporates, Family offices and Family business in India

Safeguarding Your Financial Interests Through a Trust Structure

A “trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner:

The person who reposes or declares the confidence is called the “author of the trust” (settlor): the person who accepts the confidence is called the “trustee”: the person for whose benefit the confidence is accepted is called the “beneficiary”: the subject-matter of the trust is called “trust-property” or “trust-money”: the “beneficial interest” or “interest” of the beneficiary is his right against the trustee as owner of the trust-property; and the instrument, if any, by which the trust is declared is called the “instrument of trust”.

In simple words, through a trust, the settlor transfers their property to the trust, the trustee manages the property, and the beneficiary receives the benefits of the said property.

This structure helps safeguard financial interests in following ways:

• Asset protection: Through a trust, property and assets are protected from creditors, lawsuits and other legal claims. as ownership is transferred to the trust and cannot be attached. However, this protection depends on the type of trust and applicable laws.
• Tax efficiency: Certain types of trusts can help reduce estate, gift, or income taxes. Trusts can be structured to maximize tax savings.
• Inheritance: Trust allows the inheritance of property to occur smoothly, as everything is pre-decided, how and when the property will be inherited across generations.
• Continuity in case of incapacity: If the settlor becomes mentally or physically incapacitated, the trustee can continue managing the assets without legal intervention.

 

How Can a Trust Be Formed?

Following are the steps for formation of the trust:

1. Determination of the Trust’s purpose and type: The distinct purpose for which a trust may be created has bearing on the type of trust that is to be created in favour of the individual or family. Hence, it is crucial to be clear on the objective envisioned with respect to the trust, be it wealth preservation and transfer, succession planning or financial/commercial engagements.
2. Draft of the Trust Deed (or Family Constitution): The Trust deed is the foundational legal document that details the administration of the trust. The deed should cogently include the trust’s objectives, details of the settlor, trustee and beneficiaries, the property contemplated within the trust, the terms in relation to management of the trust and the distribution of assets to its beneficiaries.
3. Transfer of assets: Assets are transferred by the settlor to the trust.
4. Appoint a trustee: Settlor appoint a trustee to manage the asset, it can be an individual, firm, or corporate trustee.
5. Register the trust: In India, private trusts governed by the Indian Trusts Act, 1882, must be registered if they involve immovable property.
6. Obtainment of necessary tax identification: PAN must be obtained for the trust and compliance with regard to its tax obligations is to be taken care of.

 

How Can a Trust Help Safeguard Financial Interests?

Following are some ways to safeguard financial interests:

Asset Protection

For many business owners and families, protecting assets from lawsuits and creditors is a priority. Trusts are a powerful tool in this regard, shielding assets from legal claims. By transferring property into a properly structured trust, you can help ensure your wealth remains intact and accessible to your beneficiaries. It’s essential to act early moving assets into a trust after legal troubles arise may not offer protection. Proactive planning is crucial to building an effective asset protection strategy.

Ensuring Business Continuity Through Succession Planning

Business owners often worry about what happens to their company after they step down or pass away. Trusts can simplify succession by outlining rules for ownership transfer and management, helping avoid the delays and costs associated with probate. This is especially important for family-run businesses, where keeping control within the family is a priority. Trusts can also set conditions for successors, ensuring they are prepared before taking the reins and safeguarding the business legacy.

Probate and Preserving Privacy

Probate is a long, public process that verifies wills and distributes assets under court supervision. Placing assets in a trust allows to bypass probate altogether, making transfers faster, more private, and less expensive. This can save fees and spare families from lengthy legal proceeding. Privacy is another key benefit, keeping sensitive family financial details out of the public eye.

Tax Benefits

• Indian Tax Regime: Trusts in India are fiscally transparent entities and the income of the trust is effectively taxed in hands of its beneficiaries. However, the obligation to pay tax is on the trustee who does so in the capacity of a representative assesses. The scope of this obligation extends to all income received by the trustee for the benefit of or on behalf of the beneficiaries to the trust. The trustee would be assessed to tax to the same extent that would be recoverable and levied upon the beneficiary. Hence, the aggregate liability of the trustee cannot be greater than the aggregate liability of the beneficiaries.The income received by the trustee is taxed in a manner as if such income was directly received by the beneficiary. Therefore, the applicable rate of tax would depend on the type of income received on behalf of the beneficiary as well as the legal status of the beneficiary. If the beneficiaries are individuals, then the income received by the trustee would be taxed in accordance with the prescribed slabs applicable to the taxation of income received by an individual. But, if the beneficiary is a company, then such income would be taxed at the fixed rate applicable to companies.
• Inheritance Taxes: In India, while there is currently no inheritance tax, trusts are still widely used by family businesses to mitigate future tax risks and ensure smooth succession planning.
• Reducing Taxes: Assets placed in irrevocable trusts are removed from the taxable estate, lowering tax burdens upon death. They also enable tax-efficient gifting during one’s lifetime by using gift tax exemptions. These strategies can preserve more wealth for beneficiaries.
• Income Distribution and Tax Planning: Trusts provide flexibility in how income is distributed to beneficiaries, allowing support to needs like education or living expenses. From a tax perspective, trusts can optimize income taxation by distributing earnings to beneficiaries in lower tax brackets or deferring income accumulation. This strategic planning can lead to meaningful tax savings for families.

What Sort of Challenges Can Be Handled Using a Trust?

Trusts can be used to address a wide variety of legal, financial, and personal challenges:

• Family disputes: A trust can help to avoid family disputes, as it reduces ambiguity in asset division, and legal heirs inherit the property according to the distribution already decided by the settlor.
• Marital conflicts: If a person transfers their asset 2 to 3 years prior to marriage or marital dispute into an irrevocable trust, the asset will not be part of the marital property. In the event of a marital dispute or divorce, the spouse cannot claim the asset, and it will remain with the settlor. If properly structured, such assets are no longer legally owned by the individual (settlor) but by the trust and therefore may be excluded from matrimonial proceedings.
• Avoiding Probate: Trusts allow assets to be distributed more quickly and easily without going through the lengthy probate process, which is required for a will.
• Special needs planning trust: A special needs trust allows families to provide for a dependent with disabilities without affecting their eligibility for government assistance.
• Tax exposure: Trusts can be structured to maximize tax savings.

 

When to Use an Indian Trust vs. an International Trust

The choice between setting up an Indian trust or an international trust is mainly based on the residence status, location of assets, legal purposes, and tax planning.

Indian Trust

Under the Indian Trusts Act, 1882, private trust is mostly used for estate planning, tax planning, and charitable purposes. Indian trusts are often used:

• The assets and beneficiaries are mainly located in India
• The objective is to avoid probate in India in relation to immovable property
• If the settlor is managing the Hindu Undivided family (HUF) or wants to separate business and personal assets.

International Trust (Offshore Trust)

Offshore trust, in an Indian context, means a trust formed outside India. While an Indian resident can remit funds abroad from India to set up an offshore trust, a settlement/ transfer of his offshore asset, subject to fulfillment of conditions of the regulatory authority viz: Reserve Bank of India (RBI). Restrictions have also been laid down in respect of transfer of certain classes of assets to an offshore trust viz: a non-resident (not being a non-resident Indian) is not permitted to own immovable property in India. With respect to shares, restrictions may range from the quantum of equity being transferred in a listed company, which may trigger off the takeover code, to the extent of holding that a foreign transferee may acquire in the Indian company, which will be subject to sectoral caps as prescribed under Foreign Direct Investment Guidelines. An offshore trust set up in jurisdictions like Singapore, Mauritius, and provide:

• Asset protection
• Privacy and confidentiality
• Access to more flexible trust laws
• Estate and tax planning benefits (depending on residency and tax laws)

Offshore trusts are often used:

• When the assets spread across countries
• If the heritance across borders
• To manage global wealth in simple way.

In a case where all the beneficiaries of an offshore trust (specific/ determinate or discretionary) are Indian residents then, to that extent, the trust would effectively be an Indian resident for income tax purposes, i.e. the income of trust will become subject to tax in India. This may lead to the offshore trustee being considered as a representative assessee of the Indian beneficiaries of the trust and accordingly subject to Indian tax and reporting obligations on behalf of the beneficiaries.

Apart from the beneficiaries test, an offshore trust could also be considered to be a tax resident of India, if India is considered to be the place of effective management and control for such trust. It may be noted that in such a case, the trust may be treated as an association of persons, which is a separate taxable entity under the Income Tax Act.

Conclusion

Trust is a versatile framework for safeguarding financial interests. Whether the objective is to protect assets from lawsuits, plan for succession, or negotiate complicated family dynamics, trusts offer stability, form, and long-term viability. Once created, a trust, though, can be the foundation of good financial planning, ensuring not just current needs but also those of future generations. We at India Law Offices can provide a comprehensive bouquet of Trustee services, for onshore, offshore and hybrid structures. We understand the complexities of the Indian taxation and regulatory environments and have deep knowledge of foreign jurisdictions too, which equips us with the adequate tools to provide cutting-edge and world-class solutions to our clients. Our repertoire of Trustee services includes: 

• General Consultancy
• Tax Advisory (India and abroad)
• Setting up the Offshore Trust
• Drafting of a Trust Deed / Instruments
• Trustees
• Regulatory approval in India and abroad
• Administration and Accounting
• Preparation of management accounts and financial statements