Estate Planning – Part II
By Girish Venkataraman, CEO, IIFL Investment Adviser & Trustee Services Ltd
In our previous issue we discussed how different modes of estate planning lead to family trusts as an effective tool and now we take our discussion forward.
Considerations for setting up Family Trusts
“All happy families are alike; each unhappy family is unhappy in its own way.”- Leo Tolstoy, Anna Karenina
Each family is unique and hence there are various aspects a planner needs to consider while setting up a Family Trust, which include:
Family Tree to understand Age, Gender, Residential Status and any other Special Considerations.
Asset Ownership Listing where we talk about categories of assets being Business vs Personal Assets, asset classes being Equity, Debt, Real Estate, Jewelry, Artifacts and ownership i.e. single/ joint, HUF, partnership, private company.
Risk identification that will include Creditor Risk, Regulatory Risk, Jurisdictional Risk, Estate Tax Risk, Environmental risk, etc.
Wish list for devolving assets that include broadly two categories firstly, structured distribution to meet requirements of Lifestyle, Medical, Business, Educational, Asset Purchase and secondly, Full Control Distributions that may Period based, Age based, Event based.
Trusts are being increasingly considered as preferred mode of managing and passing on the family assets in the most efficient and seamless manner.
Types of Trusts: Depending on the requirements of each family any structure out of the two below may be recommended:
1. A Revocable trust is a trust that can be revoked (cancelled) by its Settlor at any time during the Settlor’s lifetime. Under the Income Tax Act, a transfer with a provision for reversal or re-transfer directly or indirectly of whole or any part of the income or assets to the transferor is deemed to be a revocable transfer. Since a Settlor continues to control the asset indirectly through a revocable trust, it does not essentially provide asset protection.
2. An Irrevocable trust is a trust that cannot be terminated or revoked or otherwise modified or amended by the Settlor. An Irrevocable Trust can be closed only on the occurrence of a pre-defined event e.g. demise of all beneficiaries or with the consent of all beneficiaries or on completion of a predefined term.
Tax Treatment of the Income of the Trust
As per Section 61 of the Income Tax Act, the settlor continues to pay tax on the income generated from a revocable trust.
In case the trust is Irrevocable, tax treatment is as follows:
Determinate Trust – Assessment can be raised on the beneficiaries and benefits / deductions, etc. available to the beneficiary, with respect to that beneficiary’s share of income can be availed.
Discretionary Trust – A trustee will be regarded as the representative assessee of the beneficiaries and subject to tax at the maximum marginal rate under certain circumstances.
Planning for Global Families
It is advisable to have a separate Estate Plan in place for Indian assets and Non-Indian assets as there might be differences in reporting requirements and tax implications under different jurisdictions. With appropriate structuring, Global Indian families can optimize the tax impact on Indian situs assets.
A Family Trust is an appropriate structure, that is tailor made to protect, preserve and pass on your wealth efficiently and an expert wealth planner can assist you organize the ownership, management and distribution of your assets with an aim to ensure that you and your family are best placed to financially deal with changing circumstances or unexpected events.