Estate & Succession Planning through Wills, Private Trusts & Nomination (IV)


Estate & Succession Planning through Wills, Private Trusts & Nomination (IV)



In the earlier issues of The Tax Talk, we have discussed the importance of Estate and Succession Planning. We have also discussed about nomination, joint holding, family arrangement & settlement, gift & will as a tool of succession planning. Another powerful tool of Estate & Succession Planning could be by way of setting up a “Private Trust”. Let us know about it.

What is Private Trust & different Persons involved in the process of formation:

A “Trust” is an obligation annexed to the ownership of property and arises out of a confidence reposed by the owner and accepted by the trustee for the benefit of beneficiaries The person who reposes or declares the confidence is called the “Settler” or “Author” of the trustThe 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 Assets” or “Trust Money”. The documents, byelaws, etc by which the trust is created & governed is called the “Instrument of Trust”.


Why Private Trust may be considered as a powerful tool of succession planning:

It has been observed that the gifts, will, family settlement etc may not be ideal to ensure the proper estate planning in various individual cases. Private Trust ensures the succession during the lifetime of the person itself. More particularly, the advantages of the family trust can be recognised in following cases:

  1. Special Child:
    Innocent Child or child with mental issues or physical issues often finds it difficult to handle the situation independently on their own. They may need regular medical & financial support when parents are not around. Even the same is required for the preservation of wealth. Private trust may be of help in such a situation.
  2. Business Risk:
    Businesses are always full of risk and contingencies. During growing time, everything looks promising and the risk is often taken at the cost of the family and estates. Before making a long jump, entrepreneurs can ring fence or demarcate a few assets by transferring it to the family trust for the benefit of self as well as family. One can safely distinguish personal assets with the business assets by creating the family trust. By this, one can protect some of their assets against any liabilities that may arise due to wrong business decisions in future.
  3. Married Daughter:
    There may be a case where the parents want to keep some funds for the daughter (married or unmarried) and wish to ensure that the fund is kept intact as a safeguard & not used by her or her in-laws for any other purposes. Forming the Family trust could be one of the most powerful tools in such a case.
  4. Taking Care of Parents:
    A Person may wish to keep some funds to take care of his parents as well as for various religious and social obligations. Earmarking the fund through family trust may be an effective solution in such a scenario.
  5. Confidentiality:
    The trust deed often remains a secret document as compared to “will” which may not be that confidential.
  6. Avoiding subsequent Disputes & Litigation:
    A “Will” becomes effective only after the demise of the maker whereas “Trust” can still be run even when you are around. By private trust, one can transfer the assets and ensure the control over the same as well.

The chance of litigation and court cases is minimal as compared to “will” which is executed only after the death of the person. Private trust is often considered as a practical tool to balance the control and the ownership of family assets.

  1. Inheritance Tax:
    There are rumours of reintroduction of Estate Duty which levies tax on inheritance. Private trust may be a tool of avoiding such tax impact.
  2. Tax Planning through Private Trusts:
    Earlier private trusts were used to be formed from the perspective of income tax planning. However, with the introduction of the concept of taxation at Maximum marginal rate (MMR) in the year 1985 on the discretionary trusts, the tax planning scope has been reduced considerably. However, minor trust can still be an area of some tax planning.

Types of the Private Trust:

To use the private trust as an ideal succession planning tool, one need to know the different types of private trust that can be formed:

  1. Specific Trust:
    If the name as well as share of the beneficiary is known and defined then the trust is known as specific trust. For example, the settler may provide that the two minor children will receive the income in equal ratio.
  2. Discretionary Trust: 
    In this type of trust, the beneficiaries’ shares may not be determinate and may be kept at the discretion of the trustee.
  3. Revocable Trust:
    In this type of trust, the settler has a right to revoke the transfer of assets done in favour of the beneficiary through trust.
  4. Irrevocable Trust: 
    In this type of trust, the settler doesn’t have a right to revoke the transfer of assets done in favour of the beneficiary through trust. Once the assets are settled in the trust, the transfer cannot be revoked in such a case.


Above is just a short overview of the private family trust as a tool of succession planning. Of course, it requires a great deal of thought and planning and needs to be backed by adequate preparation and groundwork before creating it. It can certainly be a very effective and convenient tool not only for succession planning, but also for managing assets, finances and investing in securities and utilizing the returns earned by the trust for the benefit of the beneficiaries.

Factors which may be relevant in the private trust could be the cost of stamp duty while transferring the immovable property, the efficiency and capability of the trustee, and the visionary power of the settler. Before creating the private trust one also needs to know the tax provision for private Trust in the Income Tax Act-1961. We will discuss it in the next issue of The Tax Talk.

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