Transfer of Funds or Assets to a Family Trust with Non-Resident Beneficiaries: Need to have a cautious approach.
Recently, questions have arisen regarding whether a resident can transfer funds or assets to a family trust where the beneficiaries are non-residents. This issue has gained relevance under the FEMA (Foreign Exchange Management Act) regulations, particularly in the context of the Liberalized Remittance Scheme (LRS).
Under the LRS, a resident individual can make a gift to a non-resident up to USD 250,000 per financial year. Further, if the gift is of shares and securities, the maximum permissible value is limited to INR equivalent to US $ 50,000 that too with prior approval of RBI.
By creating a family trust with non-resident beneficiaries, a resident individual might potentially transfer amounts exceeding the LRS limits for both monetary gifts and in-kind transfer of shares and securities. For example, transferring securities to such a trust could even surpass the prescribed US $ 50,000 cap (that too with prior approval of RBI) applicable for gifts under the LRS.
This raises further concerns about income by way of dividend etc. generated from such assets after the transfer and also income by way of capital gain on sale of such securities by such transfer. Current year Income such as dividends, rents, or returns on securities is eligible for full repatriation by the non-resident, which effectively means transferring income from a resident to a non-resident.
However, under FEMA regulations, what cannot be done directly cannot be accomplished indirectly. Therefore, creating a family trust with non-resident beneficiaries may be considered as a way to bypass the above restrictions /LRS limits and hence impermissible.
To ensure compliance, it is advisable that while setting up family trusts one should proceed cautiously under proper legal advice after due diligence and where beneficiaries are NRI, the trust preferably be established, and funds or assets transferred, while the intended beneficiaries are still residents. This approach may prevent potential regulatory issues that could arise once the beneficiaries become non-residents.
Regards
The copy of the Press coverage on the issue is as under:
