All you need to know about creating a private trust

All this, and much more, can be achieved through setting up a trust.

brass legs

Broadly there are two types of trusts – public and private. A public trust, as the name suggests, is for the benefit of a large number of people such as the general public. In India, trusts are governed by the Indian Trust Act, 1882. This article focuses on private trusts that are created only for the benefit of a specified number of individuals, especially family members.

A trust has three main parties- the settlor (the one who creates the trust and transfers its assets to the trust), the beneficiary (for whose benefit the trust is created) and the trustee (who manages the trust on behalf of the beneficiaries). ) ) The trust deed states the purpose of the trust and all other details. In practice, the settlor himself may also be one of the beneficiaries, although he is unlikely to be the sole beneficiary. A settlor can also choose to be one of the trustees, but he cannot be the sole trustee.

factors to consider

So, how can you find out if building a trust is something worth considering? The experts we spoke with emphasized that what matters is the objective you want to achieve and the complexities involved and not your net worth.

“The establishment of a trust is more concerned with the complexity and current problems of the family, not the size of the asset base. Any individual who has more assets 50-60 crore can consider forming a trust if it helps in managing, transferring or protecting their wealth,” says Munish Ranadeo, Founder & CEO, Cervin Family Office & Advisors.

According to Nishant Agarwal, senior managing partner, advisory at ASK Private Wealth, if one has a specific objective to form a trust, the asset size becomes irrelevant. For example, setting up a trust for a child with special needs or for someone who is costly, with a corpus of a few crores of rupees also makes sense.

Then, you need to decide on the type of trust to be established. For example, if the objective is simply to do succession planning, that is, to pass on assets to the next generation, Sonali Pradhan, head of wealth planning, Julius Baer India, suggests creating a revocable trust. That way you can have as much control over the trust as you want in your lifetime. On the other hand, if the purpose is to protect your assets Future To separate yourself from liabilities or the possibility of inheritance tax (if re-introduced in India in the future), you will need to set up an irrevocable trust. Pradhan says, “By creating an irrevocable trust, you are demonstrating that you have set up a trust for your family and transferred your assets into it and you are no longer in their control.” Property A trust cannot be used as a way to avoid any anticipated liabilities. “As per the Insolvency and Bankruptcy Code, 2016, when you transfer your assets to the trust, a cooling period of two years is applicable,” says Pradhan. protect your property.

Once you are clear about your purpose and have decided to set up a trust, there are some important details to consider. Rahul Bhutoria, founder of Waltrust Capital, walks us through some of these. For example, think about who you want as trustees, how much flexibility you want them to have, and whether you want to have multiple layers of trustees (who can take over if one of them dies). Is).

When it comes to the cost of setting up a trust, Agarwal highlights that these broadly fall under two heads- one-time and recurring. One-time set-up costs include attorney’s fees or the trust company’s fees for advisory services to understand the family’s need and then draft and register the trust deed. Recurring expenses include the annual management fee of a corporate trustee (if you have hired a professional), which is a fixed percentage of the trust assets, and other fees related to the filing of trust accounts and auditing of books, etc. A very basic trust for a small nuclear family, base minimum set-up fee should come to few lakhs, possibly, 4-8 lakhs. Depending on the complexities involved, this fee can go up significantly,” says Agarwal.

faith vs desire

When it comes to succession planning, creating a trust isn’t the only way to go about it. You can also write a will, but this may not always be the best option. Neha Pathak, Head of Motilal Oswal Private Wealth, Trust and Estate Planning says, “A requires a probate, which under normal circumstances can easily take six to nine months, and even more if it is challenged. It may take longer.” With a trust, this can be avoided. Plus, she says that if you want to protect your assets against a creditor, a will won’t be helpful. “The creditors shall have the first right of claim on the property”.

On the other hand, trusts can be a difficult choice when it comes to transferring your immovable assets. Change of ownership of property in the name of the trust in your name will attract stamp duty, which can be 5-8% of the value of the property. Also, when a trust is eventually dissolved (in India, a trust cannot exist forever), if a property is sold to distribute the proceeds to the beneficiaries, the sale will again attract stamp duty.

Aggarwal says, “Therefore, it is best to plan for succession of assets through a will rather than a trust. Property passed on to heirs through a will does not attract stamp duty. Although a probate fee will be applicable, it is considerable. less than the stamp duty cost,” says Pradhan. Note that no stamp duty is applicable when movable assets like stocks and mutual funds are transferred to the trust.

compliance and taxation

“A trust has to file a tax return. Also, there is nothing mandatory in terms of compliance,” says Pradhan.

Shailendra Dubey, Partner, Planmystate Advisors LLP, agrees, and adds that it is advised that the trustees meet at least once a year to approve finances, review investments and discuss audit reports, so that The intention of the trustees should not be questioned. Future.

In the case of a revocable trust, the income of the trust is clubbed with the income of the settlor and thus taxed. In case of an irrevocable trust, says Dubey, the income of the trust is treated separately and the trustees are liable to pay the taxes payable on this income. Trusts are subject to the maximum marginal tax rate on income such as interest and dividends, but capital gains are taxed at the normal rate applicable to short- and long-term gains.