Zero litigation, greater flexibility and better control over assets are some of the reasons why trusts score over a will
Increasingly, high net worth individuals (HNI) are going in for trusts as a means of succession planning as opposed to wills. A trust is a relationship whereby the property is managed by one person (or persons, or organisations) for the benefit of another.
Say, Mr X has 100 acres of land which he wants to pass on to his sons. He would have two options to do so: one through a will and the other through a trust. To make a will, he would have to write how his property is to be divided among his sons or daughters on a piece of paper that is attested by two witnesses. Mr X also has the option of using a trust. In this method, he, as the owner of the land, can put his land into a trust, and appoint another person (who will be the trustee) to manage this land for his sons who would be the beneficiaries. He also has the option of appointing himself as the trustee. The idea of controlling the end use of your wealth even when you are no longer alive is gaining currency among individuals whose wealth runs into hundreds of crores. Out of 10 clients who come to us for planning their estates, at least six want to go in for trusts.
Earlier, people mainly opted for wills, but this is changing now. A number of factors are responsible for this change. Earlier, there used to be the joint family system, where the head of the family would take care of all the matters. But with fragmentation of families into small nuclear families, uncertainties have increased. There may be a situation where the mother lives alone in India and her sons are abroad. If she were to die suddenly, then how would the property be divided? Given the change in the outlook of people, and increase in wealth, people are now increasingly opting for trusts.
WHY THE RUSH FOR TRUSTS?
Usually, trusts work very well for people at the very high end. It is an efficient tool for management of wealth for people who are promoters of businesses or have large family businesses.
Many legal experts are of the view that trusts save you from a host of problems that most HNIs are prone to. For instance, huge assets need protection. Asset protection is one of the key features that a trust offers.
HNIs go in for trusts not only to plan their succession but also for other reasons, the main being asset protection. Trusts are a great way to ring-fence your assets. Your Company may get into trouble or there may be huge losses in your family business but the assets that you put into the trust will remain safe. That way at least that portion of your wealth is safe.
Another major hurdle that a trust would help you overcome is litigation. As an HNI, numerous dealings force you to interact with a host of people and institutions, any of whom could drag you into a legal tangle. A trust would safeguard you from many such legal issues. You may even encounter a major problem if there is a family dispute.
Many a time, when spouses separate, one of them may just walk away with 50% of the wealth. If your assets are put into a trust, you may be able to avoid many litigation hassels. Considering these numerous benefits that trusts offer, it is not surprising that HNIs are going in for them to plan their succession and wealth.
THE OLD PRACTICE OF WILL
The traditional method of handing down family wealth from father to son/daughter was through a will. The father or the family elder would write the will on a plain piece of paper, which should be attested by two witnesses, where he would state clearly as to whom and in what proportion his wealth was to be distributed after his death. But this simple practice of using a will is fast losing its popularity.
The main reason for this is the lack of flexibility and control over the end use of your assets. You cannot list out an investment mandate for your wealth nor can you allocate your wealth for somebody who is yet to be born, which you can do with a trust. With a trust, you have the flexibility of listing out an investment mandate, helping you control the end use of the fund, which you cannot do so with a will.
Also, India doesn't have the concept of a living will. A trust helps you manage your wealth during your lifetime, unlike a will which is operational only after your death. Given these drawbacks, it is only natural that HNIs tend to opt for trusts.
TRUST VERSUS A WILL
A will can be challenged in court. Usually, in a high-profile family, some member is likely to be unhappy over the distribution of wealth under a will. Such a person could always raise hands in a court. But he cannot do so if wealth has been put into a trust.
Apart from being 'challenge-free', a trust provides you with privacy that a will does not. The court declares the will, which makes it a public document, but such a procedure is not necessary for a trust, making it private.
Another major advantage of a trust is that you skip the mandatory probate period for a will. Thus, the beneficiaries of a trust are entitled to the benefits almost immediately. Given these numerous advantages, a trust definitely scores over a will in a big way.
BEFORE YOU OPT FOR A TRUST
Though trusts give you the much needed flexibility, you need to be careful of certain bloopers that you might make. First, choose the right trustees. A major problem could arise if you don't get the right trustee. After all, it is the trustee who manages your trust. There have been cases where people have not appointed the right trustee. So, it's important that you choose the right trustee.
Second, envisage your beneficiaries well. There's very little that you can do if you choose the wrong beneficiaries. Not envisaging the beneficiaries properly is the most common mistake.
A disadvantage of using trusts is that you cannot pull out an asset that you have put into a trust. So, make sure you only put that part of your wealth into the trust that you are not going to require in your lifetime. That's why I feel that a trust may not the best tool for individuals who own about just a crore or more. Because it is highly likely that they would need that wealth in their lifetime.
Also, people who have several listed companies need to be careful as to how they use their trusts. Most of the ultra HNIs, who have several listed companies will be advised to create a holding company. In terms of structure, this is perfect but one more step can complete the succession planning, by creating a family trust above the holding company. This trust will hold personal as well as holding company assets. Certain long-term succession and taxation and personal objectives can be met through this structure. There is no thumb rule to this but it could work for most.
COST IS NOT AN ISSUE
For those fretting over the cost of creating a trust, note that it is not a major issue. Says Gupta, A trust will cost you only around 50,000-2 lakh more than a will. So, cost is certainly not a problem for HNIs. Thus, the cost of creating a trust is not an obstacle at all.
So, use a trust to your advantage and plan your succession accordingly. With all the plus points that a trust has, don't forget its minuses. If planned appropriately, trusts can be a great means of succession planning.
Build A Wise Legacy WHY DOES A TRUST SCORE OVER A WILL?
A trust is a completely private document For a trust to be operational, there's no probate period A trust cannot be challenged in a court of law
A will is declared in a court of law, making it public
But for a will to be operational, there's a mandatory probate period A will can be challenged in a court of law
ADVANTAGES OF A TRUST TRUSTS ARE A GREAT WAY
to ring-fence your assets from major losses that you may face
TRUSTS SHIELD YOU from legal disputes that you may be dragged into by your family or other persons
TRUSTS OFFER YOU a unique feature of declaring an investment mandate, thereby helping you control the end use of your assets
TRUSTS ALSO ALLOW VOU
who are yet to be born in to pass on wealth to those this world
AVIOD THESE MISTAKES...
SINCE YOUR TRUSTEES are going to manage the trust, choose them correctly and wisely
THE BENEFICIARIES are going to feast on your trust, so think twice before you finalise their names
YOU CANNOT PULL out assets once put in a trust. So, put only those assets that you are unlikely to require in your lifetime FOR THOSE WHO have several listed companies, create a family trust above your holding company
