In the previous article of this series on Estate Planning, we explored the circumstances when trusts may be a more robust estate planning solution compared to just a will (Click Here). If the decision for a client is to set up a trust, as an advisor, there are a few basics you must know to ensure that you put your client in the right direction. Its not enough for you to simply contact a lawyer for this - you need a basic understanding of what is involved in setting up a trust, the different types and structures of trusts and the circumstances when each one may be more appropriate. That is what will enable you to make sure that your client is getting what is really the most suitable solution for him. This article gives you a primer on exactly these issues - so that you can take your conversations forward with clients and lawyers with confidence.

Check out previous articles in this series:

Launch this service to strengthen your advisory business (Click Here)

Wills vs joint ownership vs beneficial transfer (Click Here)

Common estate planning mistakes you must avoid (Click Here)

Wills vs trusts: how should you choose the right option? (Click Here)

Trust - process and structures

In India, trusts can be mainly private, public (charitable or religious), foreign, or mutual funds. Private trusts are created and governed by the Indian Trusts Act, 1882. Families that use trusts as a tool for estate planning create a private trust.

Outside India, a primary motivation to setting up trusts is to avoid inheritance tax. However, as we do not have such a law, the driving force behind setting up a trust here is asset protection.

In essence, how does a trust work? A person transfers his or her property to another person/s to hold it for the benefit of certain beneficiaries. Lets look at the definitions of the common terms:

1. Author of trust/settlor - The owner of the property and is the person creating the trust to settle their assets.

2. Trustee - The person who is appointed by the settlor to administer the trust. They have the fiduciary obligation and services to maintain and administer trust properties and can do so with the help of expert asset managers. Trustees can be individuals as well as corporate financial entities.

3. Beneficiary- The person for whose benefit the trust is created. The person who creates the Trust can himself be one of the beneficiaries and enjoy the benefit of his or her own estate during their lifetime.

4. Trust property/subject matter of trust - The assets that are covered/administered by the trust and can be any asset capable of being transferred. It can be both movable property such as cash and shares and immovable such as residential properties.

5. Administrator/Protectors of the trust - While appointing a corporate trustee, a settlor can also appoint certain family persons as administrators to retain control indirectly over the trust. By appointing an administrator that supervises and guides the trustee, the settlor can ensure that the activities of the trustee are in accordance with their instructions in the trust deed. The protector has veto over specific trustee powers and can remove and replace trustees.

6. Trust deed - The instrument by which the trust is declared and is also known as instrument of trust or indenture of trust. It contains the name of the author, trustees, beneficiaries, purpose of the trust, and other important clauses. The trust deed provides the basis administration regulations that helps to control, regulate and manage the working and operations of the trust. It also lays down the procedure for appointment, rights, duties and removal of the trustees.

Process of creating a trust

1. Step 1: Prepare a trust deed

2. Step 2: Transfer of property - With movable property such as a fixed deposit, transferring to a trust can be done simply by physically handing over the property such as fixed deposit certificate to the trustee with a direction that the property be held under trust for benefit of the beneficiaries. In order to transfer immovable property, a registered document is required. The written document should contain complete description of the property and the title of the property should be free from mortgage and litigation in order to be transferable to the trust. The trust deed should be made on stamp paper and registered with the Registrar of Assurances (under the Registration Act).

3. Step 3 - Managing the trust - Once a trust has been set up, a settlor can contribute more funds whenever they want. Even trustees, friends and other relatives can gift funds to the trust.

Forms & Structures

A trust is a customized document in India and settlors have the flexibility to choose a trust structure that best suits their needs and of their beneficiaries. There are various structures the trust can follow:

1. Revocable: A trust that can be revoked (cancelled) by its settlor at any time during this life

2. Irrevocable: A trust will not come to an end until the term / purpose of the trust has been fulfilled

3. Discretionary: An arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent

4. Determinate: The entitlement of the beneficiaries is fixed by the settlor at the time of settlement or by way of a formula, the trustees having little or no discretion

5. Combination Trusts namely: It is possible to have a combination structure. For example, a trust that is revocable and discretionary or a trust that is both irrevocable and determinate.

There are two forms of trusts. The Living trust is created when the settlor is still alive and can have a revocable or irrevocable structure. With a living trust, the settlor can also be a beneficiary of the trust. The living trusts are popular with angel investors and other professionals in risky professions who want to protect their personal assets from liabilities and creditors.

Testementary trust become effective on the demise of the settlor. This kind of trust is an effective choice where beneficiaries are either minor, or disabled. With trusts for children, the settlement or assets are handed to the child upon attaining a certain age or married and till then, managed by trustees.

Concerns

For Indian families, a primary concern is the potential loss of control. Since legally, the ownership of the trust passes from the settlor to the trustee who holds them for the benefit of beneficiaries, many families struggle with the perception that they may not have control of their own assets. However, settlors can use the flexibility of trust structures to decide the level of control. For example, by forming a non-discretionary trust, one may appoint professional trustees for predefined activities and thus have complete control.

In order for a trust to be set up successfully, it is crucial to have family meetings that also involve a financial planner and lawyer. Families need to discuss to decide the priorities and purpose of trust, determine the type of trust structure and identify the beneficiaries of the trust. Decisions must also be made on when the trust will dissolve, who from the family will control the management of the trust, appointing a trustee, choosing a protector.

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