The Covid-19 pandemic has affected lives and livelihoods of people across the world. Right from the poorest to the richest, everyone has been forced to take a long hard look at the situation and a thorough reality check for the future.
While nobody wants this to be the new normal, people are embracing the worst in an attempt to make something better out of it. This has resulted in an unprecedented shift in perspectives.
One such change, Gautam Khaitan has noticed, is the rising popularity of family trusts, among High Net worth Individuals (HNIs) as a preferred mode of safekeeping their wealth, creation of framework for channelizing and distributing property and assets during lifetime of author, planning for future unforeseen circumstances without the issues which are faced while implementing wills in our country as wills become effective only after the death of the author, require probate, and often get challenged in courts, leading to long drawn disputes, taking away precious time effort and money of family members, result in loss of confidentiality and in many cases defeating the whole purpose.
As Trusts are not publicly registered and do not end up in courts under disputes, Trusts offer strict confidentiality and are increasingly becoming popular.
Gautam Khaitan also cites numerous examples in which the promoters of listed companies seek to transfer their holdings into a private trust after making application with the SEBI and getting a case to case approval for exemption from the open offer provisions.
Family Trust Works Best For Families
Every family has its unique needs and circumstances. The advantage of family trusts is that they can be set up and managed just as per the wishes of the author. Trusts can be set up with detailed instructions and clear clauses. Trusts can be testamentary (which is specified in will and arises upon death of the person) or inter vivos (which is created when the when the person is still alive). From the perspective of tax in India, trust is not a separate entity, and the trustee is taxed as representative assessee. From the perspective of FEMA, certain issues may be required to be looked into more closely.
Not only does it safeguard assets for the beneficiaries, it can also keep the money away from those who do not fulfill the set clauses until they prove themselves eligible or at the right age or time or to meet specific needs.
“A family trust can also be used to encourage the next generations to keep the family business running, in order to have access to the funds.”, says Gautam Khaitan.
Gautam Khaitan Evaluates The Trust Fund Boom In The Pandemic
Over the past 15 months or so, several HNIs have started returning home in an attempt to be close to their loved ones in these dire times. However, it has posed a new problem. As travelling has become next to impossible, they are now at a risk of not being to access their money, which is invested or saved abroad.
In order to navigate this situation, more and more HNIs are relying on the safety and flexibility of family trusts to bring their money back to the country and be able to use it as needed.
“This pandemic has shaken people immensely. The fear of isolation, and possible death, has given the push towards legacy planning, remarked Gautam Khaitan. Many HNI funds are saved or invested in foreign banks, in countries with less stringent tax structure. This helps them save up quite some money from government taxes. However, the transfer of funds from these countries to India may require complex structuring. An effective way around this comes in the form of family trusts.”
In case of a change in business situation, it safeguards the personal funds from creditors and even banks. As per a recent Supreme Court ruling, personal guarantors of loans are liable in insolvency cases, which means banks and creditors can initiate proceedings against personal guarantors of corporate debt. Trusts have all along been effective in safeguarding and insulating the assets, and should continue to hold good especially if made earlier in time or in case of business failure in respect of which fraud or siphoning could not be alleged.
A family trust can be an effective tax saving tool. Contribution of property by a family member to a trust created for the benefit of one’s relatives is exempt under Section 56(2) of Income Tax Act, 1961. Once tax is paid by trust at the applicable rates, distribution does not get taxed again in the hands of beneficiaries. Apart from this, Trust may save taxes if estate duty were to be introduced.
Moving On From Family Business And Family Trust
Gautam Khaitan observes several research data and statistics as well empirical evidences show that family run businesses have a 3% chance of continuing to survive and thrive for more than three generations at a stretch. The reason behind this is mostly a change in priorities with every generation.
As the younger generations get better exposure to international education and the world, their ambitions and motivations change. Family wealth is something to fall back on, during these times. It can be the necessary capital for the next generation to start their own venture, or a safety net to ensure quality education and life.
As the current generation of HNI children, who are looking for opportunities to branch out into other fields or make a move away from the family business, they are choosing the responsible way with their family’s assets. By putting these funds into a family trust, not only are they safeguarding the money from being wasted away, but are also protecting it from future laws, sudden changes in the family dynamics and even the courts.
Gautam Khaitan is one of the leading experts in corporate law and has over three decades of experience of working in Power, Oil, Telecommunication, Mining, and Infrastructure Sectors. He is currently a Managing Director in OP Khaitan & Co. , a Delhi-based global law firm.