What is Private Trust?
A Relationship created by an individual, in which more than one person holds an individual’s property to use and protect it for the benefit of others.
An individual can control the distribution of their property during their lives or even after their deaths through the use of a trust.
Private trust is an effective Estate planning and taxation tool in India.
Why One should Form a Private/ Family Trust
1) There is no need to have Will so save on time and court fees for Probate (this may vary from state to state and can be as high as 8.75% in U.P) in case of death of a person.
2) It helps to ring fence the Indian assets from various risks including (Creditor Risk, Country risk and Marital Discords)
3) Trust can be considered Indian entity, if structured properly, hence gives greater flexibility to invest in various financial instruments and Real estate
4) Helps to Consolidate reporting and filing of Taxes in one single entity rather than need for maintaining individual IT Files
5) Onus of compliance shifts from Individual to Trust (Trust can file IT return as Representative Assesse on behalf of beneficiary)
Capital Gains: There are specific exemptions available u/s 56(2)(10) of IT Act to a Private/ Family Trust from any capital gains for transfer of assets from Individual name to a Private trust. However, for the Trust the cost of acquisition of the asset will be same as that of the Individual who is transferring the asset into the Trust.
How Assets are transferred in Trust: Once trust is registered than assets are transferred through:
1) Gift Deed
2) Family Settlement Deed
3) Buying of assets directly into the Trust
4) Through a Will if drafted properly and there is a provision for it.
Creation of private trust can be very helpful but differs in family situation and businesses.
1) Nuclear/Joint families – For a nuclear family, problems like separation, legal hurdles, old age medical care, child’s future and financial security are concerns around which the whole life revolves. Contrary to this in a joint family there have been instances of family litigations leading to business interruptions and assets getting locked in legal battles for years. Many of these issues can be resolved through a private trust.
2) Entrepreneur– An entrepreneur starts his own business with a dream to grow big in the future. During the course he has to ensure his personal and business assets are clearly defined. Sometimes, from any of his client’s a claim can arise and the business gets disrupted if the solution is prolonged. By forming a trust the continuity of business and distinction between the assets can be taken care off.
1) Cost: During transfer of immovable assets, stamp duty is paid as per the rate prevailing in the State. Due to this variation, cost of formation of a trust also varies across states
2) Trustees: Efficiency of a trust is highly dependent on the selection of the trustees. The trustees are to be appointed by the settler. A wrong selection can defeat the objective of forming a trust.
3) Trust deed: Drafting a trust deed is more difficult than a Will. If not drafted clearly, a trust deed is difficult to execute.
How is trust beneficial than Will?
In many instances a written will is insufficient to distribute your assets. The battle fought in courts in various cases has revealed that a Will has its own limitations. Some of the benefits which makes creating a private trust more beneficial than just writing a Will:
1) Since a trust deed is never disclosed in media, it is more confidential than a Will.
2) There is no probate when you create a trust.
3) When you want to make some changes in future a trust deed can be easily modified in comparison to a Will.
4) While planning for succession, especially during one’s lifetime, one would not want to lose control over the assets. This can be achieved efficiently through a private trust as a Will gets executed only after the death.
To ensure your trust runs efficiently do remember some points before creating it:
1. Lay down your long term objectives very clearly. It will help the trust to accommodate any changes later.
2. To make your trust more efficient, make sure the trustees you decide have the skill and experience necessary for their prescribed tasks.
3. Identify clearly who will be your beneficiaries to avoid any dissatisfaction later.
4. Identify the list of assets which you want to include during your lifetime and in future when you are not around.