High net worth individual promoters (HNIs) across India are faced with the challenge of managing their wealth and succession planning. There have been instances where the absence of succession planning has resulted in bitter fights amongst the siblings and family members.
Historically, a business and its assets were passed onto future generations by way of a legal will in order to ensure a smooth transfer. However, in the current scenario business owners want more than a smooth transfer of wealth and therefore, succession planning is not limited to a will. Family business owners are concerned about the interests of their spouses post their demise, a dispute among siblings over the wealth and the leakage of the family's wealth as a result of a litigious divorce or family fights.
Succession planning involves discussions around financial, tax and business issues of the family business owner's estate. An important objective is to ensure that the interests of all family members are safeguarded. In this respect, trusts are increasingly being recognized as a vehicle for effective succession and estate planning. Some key reasons are continuity and growth of the business and also protecting the economic interests of all family members. Holding family assets through trust have significant advantages like demarcation of equity and control, succession planning for future generations, internal dispute resolution, and so on.
A trust is basically a vehicle under which property is transferred from the original owner (Donor / Settlor) and held by the person (Trustee) to whom it is transferred for the benefit of another (Beneficiary). Typically such trusts are private, either specific or discretionary, governed by the Indian Trusts Act, 1882. In a specific trust, the interest of each beneficiary is defined. A discretionary trust, on the other hand, may either specify the beneficiaries or provide an indicative list of beneficiaries, which may change at a later stage. The trustees have the discretion to decide the distribution amount or ratio amongst the beneficiaries.
A trust enables segregation of ownership and control. Management of properties through a trust creates a legal framework within which assets can be protected and maintained effectively while safeguarding the interests of family members. A trust structure can be effectively used for asset protection and distribution. It also enables the distribution of assets as per the wishes of the settlor and the objective can be achieved during the lifetime of the settlor as opposed to a will which comes into operation only after passing of the Testator.
However, taxing provisions of trust are complex and various aspects have to be considered before analyzing the taxability — tax on settlement or contribution to the trust, tax on income, who should be assessed, applicable rate, tax on distribution of assets by a trust, and so on. A trust is a pass-through entity for income-tax purpose. As trust property is held by trustees for the beneficiary, the tax burden is effectively borne by the beneficiary. However, for convenience, the obligation to pay tax is on the trustees in the representative capacity. Alternatively, the trust income may be directly assessed in the hands of beneficiaries.
At KPMG, we are mindful of the special relevance of personal wealth planning to each individual and the confidentiality or sensitivity concerns it can involve. We endeavor to act as trusted advisors to our international private clients, who primarily consist of high net worth individuals, global business families with residency/assets/family or obligations across countries. To assist them in succession planning, asset protection, Exit Strategies, Wealth Preservation and Philanthropy.