Documenting the Trust Framework
By Vishal Gada and Zeel Jambuwala
Private Trusts are emerging as the most popular vehicle to address the growing need of multi-generational Indian families to create succession in businesses and family wealth, increasing complexities in human relationships and an anticipation of re-introduction of inheritance tax in the near future. Private trusts in India are governed by the Indian Trusts Act, 1882. While the trust law is archaic, considering the ease and flexibility a trust offers for planning an effective succession, more and more business families are now migrating business and family wealth under a trust structure.
In a strict legal sense, a trust is not a separate legal entity, unlike a company. It is more akin to a legal arrangement between the author of the trust and the trustee and is made for the benefit of the beneficiary. A trust typically involves three parties – a settlor, also known as the author of the trust, a trustee and a beneficiary. A trust gets created when the settlor hands over any property to the trustee to be used and employed for the benefit of the beneficiary. This legal arrangement is codified vide a trust deed. Thus, a trust deed becomes a document of prime importance since it would lay out the essential framework for the governance, control and management of family business and wealth across generations. It thus needs to be drafted with utmost care and caution.
While laying succession policy for family business, two factors needs consideration: first, the legal conduct and relationship between the trustees and beneficiaries; Second, the softer aspects of human behaviour. Many families also develop a separate family charter along with a trust deed providing guidance on softer aspects of joint family nuances viz. spending guidance, direction on routine conduct of family members, behavioural expectations etc. However, such aspects can also be very well roped in under a singular trust document.
Trusts can be of various kinds. To begin with, one needs to confirm whether a Trust is desired to be a revocable trust or an irrevocable trust. A revocable Trust can be revoked (cancelled) at any time by its settlor, while an irrevocable trust continues till the term of the trust expires. The tax and regulatory implications of revocable and irrevocable trust vary and hence such determination becomes important. Further, one needs to ascertain whether the trust is desired to a specific trust with the shares of beneficiaries being fixed or whether a discretionary trust better serves the purpose. A discretionary trust is a trust where while the beneficiaries are identified, their beneficial interest in the Trust is not ascertained upfront. A trust may also be formed as discretionary trust which becomes specific on happening of a trigger event. Say in case of a family with father and three children, while the trust is set up as a discretionary trust with father as a trustee, the same can be made specific with shares of children being fixed on death of the father. Further, trust can also be created for a specific purpose or for specific assets. There is also a rise in creation of offshore trusts by HNIs to house their overseas assets for better succession and potential mitigation of estate taxes in offshore jurisdictions.
There are no formal rules on the format or content of the trust deed. While the contents vary from family to family, depending upon the family philosophy, socio-business ideologies and the relations inter-se family, the following points needs consideration:
- Defining Trustee lineage – this is important so that the structure continues even where the original trustees cease to exist
- Delegation of authority and decision-making matrix– to provide for matters which would be decided by majority /unanimous consent of the Trustee
- Policy for distribution of corpus and income of the trust
- Providing veto power to identified trustees for specific decisions
- Directions with respect to non-compete; exit conditionality; divestment restrictions, etc.
- Providing distribution and support policies in case of specific circumstances like deaths, divorces, marriages etc.
- Safeguarding interests of specific family members, for instance, spouse (after demise of head of the family), members with special needs, minors, etc.
- Specific policy for behavioural and disciplinary aspects for the next generation
- Allocation of certain portion of wealth for philanthropic purposes
Many times, the concept of a protector is imbibed in a trust deed. A protector is a person appointed to supervise the trustees and he would normally step in when the affairs of the trust are not run according to the mandate provided in the Trust deed. Whether a family advisory council should be appointed under the trust deed to guide inexperienced trustees also needs consideration.
As evident, finalising a trust document warrants a deeper forethought on many aspects to ensure smooth transition throughout generations without frustrating individual desires and wishes of the family members. It is also important to ensure that the deed offers enough flexibility to adapt to ever changing socio-economic and business circumstances. Hence, the power to amend a trust deed in future under specific circumstances by the Trustees with or without the consent of beneficiaries needs to be carefully planned. Above all, it needs to simple for each one to understand and implement effectively so that its mettle is not lost amongst legal verbiages.
Vishal Gada is partner and Zeel Jambuwala is principal at Dhruva Advisors LLP. Views expressed are personal.