Efficient Estate Planning through Trusts

A Will is not always hassle free and cannot be subjected to ample of constrains, but a Trust can be made to accommodate your specific requirements.

There are two ways in which you can plan your Estate: firstly, by writing a will, and secondly, by creating a Private Trust. Both are legal in India, but with growing wealth and convoluted asset holding structures within the families, the ‘Trust’ route is bound to gain popularity. The most common advantage of making a Trust is that it can circumvent third party claims prevalent under the new bankruptcy laws. This gives higher incentives to the upper middle class and wealthy families to take the ‘Trust’ route.

Trust or Will – For Estate Planning

When asset holding, asset structure and family structure is simple and straight forward, a Will can be the most effective tool to plan your estate. But if there are several branches in your family tree, and assets are spread out across the country (or world), then it makes more sense to create a Private Trust. The most problematic aspect of a Will is that it needs probate (a court certificate which proves that the Will is genuine) after the death of testator, but this is not the case with Private Trusts. Probate is often time consuming, expensive, and a big hassle for the family. Also, probate is a public document, which means that you and your family are inadvertently exposed to the glares of public and unknown people. In contrast, the Trust offers Privacy by circumventing the need for probate.

A will is also susceptible to being challenged in the Court of law by an unhappy heir and the testator cannot express his/ her wish when the matter becomes sub-judice. This often leads to bitterness amongst the families and prolonged litigation. In contrast, the grounds to challenge a trust are fewer and the Courts, in most cases, would not delve in a matter where a Trust is involved with respect to inheritance executed though this method. The Will only becomes effective after the death of the testator but a (Living) Trust can be created even when the person is alive.

How to Set up the Trust

A Trust is a special vehicle in which all the assets (that the person wants his heirs to inherit) are transferred by the person who creates the trust (the ‘settlor’). Trust is an entity which, along with its assets, is managed by the trustees for the benefit of beneficiaries according to the objective(s) of the Trust mentioned in the Trust deed. By implementing this strategy, the settlor gives the ownership of his assets to the trust.

Trust deed is executed between the settlor and the trustees. Under trust deed, the settlor transfers the identifiable property to the trustees and makes it obligatory for the trustees to work and manage the trust as per the terms and conditions specified in the trust deed.[1]

The creation of Private Trusts is governed under The Indian Trusts Act, 1882 and is created under section 6 of this Act.

Every person capable of holding property may be a trustee; but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract.

Every person capable of holding property may be a beneficiary.

How to register a Trust:

• A registered document called as trust deed is necessary to set up trust and should be registered with the Registrar.
• The deed should be executed on a stamp paper of appropriate value.
• The trust deed should have: Details in relation to trust property, Purpose of trust, Beneficiaries of trust.[2]

To complete the legal formality, the Trust deed has to be signed by the settlor; at least two trustees and by at least two witnesses. The deed needs to be registered with an appropriate authority only if an immovable property is passed on to the Trust. It is highly advisable to take the services of a lawyer to ensure the legal validity of the Trust deed.[3]

The Trust and the Trustee

A trust can be created to take care of the family members in case the settlors become incapacitated, unable to take decisions, or dies. The Trust might also be created to take care of a special child after the Settlor dies. The Trust can also be used for regular payments to cater the needs of the beneficiaries.

The Trust can also have conditions which have to be met before the benefit can be passed on to the beneficiaries. The conditions can also specify when a beneficiary might be excluded as the beneficiary of the Trust. The condition might include that if a person is alcoholic or a person has committed some serious offense, he would not be entitled to benefits as beneficiary and/ or should be removed as the beneficiary.

A Trust can also be used to protect the wealth of the settlor by transferring the assets to a different entity and hence, making the assets escape from the clutches of alimony arising from divorce proceedings, or third party claims under bankruptcy laws. But in such cases, the competent Court(s) of law might adjudicate on the intent of the creation of Trust, and if the intent is found to be fraudulent, the Court(s) may void the Trust Deed.

Trustees play a crucial role in any Trust. The Trust Deed shall also explicitly specify the powers, duties, functions, disqualification conditions, and replacement procedure for the Trustees. To avoid future litigation and disputes, an unbiased trustee who has no vested interest shall be appointed. Generally, your attorney, a third party professional or corporate trustees can be appointed as Trustees to look after the functioning of the Trust. The Trustees have a fiduciary relationship with the beneficiaries and they are duty bound to act according to the Trust Deed.

Structure of the Trust

An appropriate structure has to be given to the Trust and it would depend on a case-by-case basis. The basic types of structures of a Trust are given below:

• Revocable Trust – It’s an alternative to Will. It does not protect any assets, as they can be withdrawn from this trust.
• Irrevocable Non-Discretionary Trust – Assets cannot be withdrawn here. Settlor has complete control over trust norms as he can decide which beneficiary receives which asset, and in what proportion. For e.g. the settlor may grant 40% of the trust’s benefits to 1st child and 60% of the trust’s benefits to 2nd child. Or the trust may be established for a handicapped child to ensure that he or she is   properly cared for if the child’s parents or guardians die. Such a Trust is effective in preventing any third-party claims as the property now belongs to the Trust and not to the settlor.
• Irrevocable Discretionary Trust – In this case, Settlor lets the trustee decide which beneficiary gets which asset and in what proportion. The Settlor only decides beneficiaries. In other words, while the beneficiaries are identified, their beneficial interest in the Trust is not ascertained upfront. A well-drafted discretionary trust allows the trustee to add or exclude beneficiaries from the class, giving the trustee greater flexibility to address changes in circumstances. The beneficiaries cannot compel the trustee to use any of the trust property for their advantage.[4]

Revocable Living Trust:

There are five key benefits to creating a Revocable Living Trust:

1. assets in the trust avoid the court-supervised probate process(thus saving time, money and headache) at the time of your death
2. trust ownership is an effective tool in planning for potential periods of mental or physical incapacity, when a successor trustee can immediately become responsible for management of trust property
3. a trust provides a detailed distribution plan of your property upon your death, as determined by you
4. if desired, a trust allows you to designate what happens to your property in a manner other than an outright gift (for example, property could be held until an intended recipient reaches a particular age, could be given at varying intervals, or could be designated for particular specific uses)
5. a trust can often be structured in a manner to significantly reduce estate tax liability[5]

When should settlor consider Revocable Living Trust

• The value of your assets is significant.
• Your property (or business) requires active management.
• You plan and make it as a future insurance in case you become incapacitated, or unable to make decisions.
• You want to simplify the process of your asset distribution and wish to avoid probate by the Court of law.
• You want to specify the explicit manner and condition(s) under which your assets shall be distributed.

Other Types of Trusts:

There is no perfect fit solution for all kinds of circumstances. If you have goals such that Living Revocable Trust might not be able to meet, here are the potential Trust structures that you can consider:

1. Testamentary Trust:

A testamentary trust (sometimes referred to as a will trust or trust under will) is a trust which arises upon the death of the testator, and which is specified in his or her will. A will may contain more than one testamentary trust, and may address all or any portion of the estate.[6]

Such Trust can be considered in following circumstances:

• The intended beneficiaries are specially abled, young, or immature.
• The beneficiaries are incompetent, or old.
• The beneficiaries are disabled.
• Some control over the gifted assets has to be maintained.

The trust comes into existence at the completion of the probate process after the death of the person who has created it for the benefit of his or her children or others; note this differs from “inter vivos” trusts, which are created during the lifetime of the settlor.

Unlike an inter vivos trust, a testamentary trust does not take effect until the trust maker’s death, at which point it becomes irrevocable. Since it does not take effect during the settlor’s lifetime, he or she is free to make changes to the trust up until death.[7]

Testamentary trusts are most frequently used to leave money to the settlor’s children via a will. Since minors may be too young to effectively manage substantial property immediately, a testamentary trust allows the settlor to leave estate to a child and also to name a trusted guardian as the trustee. The trustee manages the trust until the minor becomes old enough to manage the property him or herself. Generally, the document indicates a certain event, such as when the child graduates or turns 18, at which point the trust expires and the beneficiary can take control of the trust property.

While the primary purpose of most living trusts is to avoid probate, testamentary trusts, unlike living trusts, do not avoid probate. A testamentary trust must go through probate before the trust is created. The executor will probate the will and create the trust in the process. The trustee may also require legal advice on how to administer the trust, which can take legal fees from the trust amount. Thus, while testamentary trusts are relatively inexpensive to create, they may become costly once they take effect.

But the biggest benefit of these trusts is that as the assets are transferred to the Trust through a Will there is no Stamp Duty involved to transfer the assets from the owner to the trust. In a non-testamentary trust the stamp duty must be paid to transfer the assets to the trust.[8]

2. “A-B” Marital Deduction Trust:

An A-B trust is a joint trust created by a married couple for the purpose of minimizing estate taxes. An A-B trust is a trust that divides into two upon the death of the first spouse. It is formed with each spouse placing assets in the trust and naming as the final beneficiary any suitable person except the other spouse. The trust gets its name from the fact that it splits into two upon the first spouse’s death – trust A or the survivor’s trust, and trust B or the decedent’s trust.[9]

3. Revocable Life Insurance Trust:

A Revocable Life Insurance Trust is a trust that is created to be the owner of a life insurance policy and the beneficiary of the policy’s eventual insurance proceeds. The trust can be revoked at any time. The primary benefits of this type of trust are (i) allowing for control/supervision of life insurance proceeds, (ii) allowing for divided distribution of life insurance proceeds among multiple recipients, (iii) avoiding probate, and (iv) remaining flexible and revocable.[10]

4. Irrevocable life insurance trust (ILIT):

An irrevocable life insurance trust (ILIT) is a trust that cannot be rescinded, amended, or modified, post creation. ILITs are constructed with a life insurance policy as the asset owned by the trust. Once the grantor contributes property or life insurance death benefits to the trust, he or she cannot change the terms of the trust or reclaim any of the properties held within. As an alternative to naming an individual beneficiary, ILITs offer several legal and financial advantages to heirs, including favorable tax treatment, asset protection, and the assurance that the benefits will be used in a manner concurrent with the benefactor’s wishes.[11]

Conclusion:

Using Living Revocable Trusts is a refined strategy to pass on the assets to your heirs without getting into the realm of probate. Several considerations must be taken into account before determining the structure of the Trust vehicle.

[1] https://cleartax.in/s/trust-deed-format-download: Verbatim

[2] https://taxguru.in/income-tax/private-trust-india.html: Verbatim

[3] https://www.businesstoday.in/magazine/money-today/cover-story/bequeath-your-assets-without-hassles/story/324505.html: Verbatim

[4] Supra Note 2

[5] https://www.alllaw.com/articles/nolo/wills-trusts/do-you-need-living-other-type-trust.html: Verbatim

[6] https://en.wikipedia.org/wiki/Testamentary_trust : Verbatim

[7] https://www.nexgentransfer.com/testamentary-trust-india.aspx: Verbatim

[8] Ibid

[9] https://www.investopedia.com/terms/a/a-b-trust.asp : Verbatim

[10] https://www.alllaw.com/articles/nolo/wills-trusts/do-you-need-living-other-type-trust.html: Verbatim

[11] https://www.investopedia.com/ask/answers/10/irrevocable-life-insurance-trust.asp: Verbatim