Estate planning: Creating Pvt family wealth trust

By Dr. Neelam Rani and Samarth SaxenaFamily welfare trusts are widely suggested as being better tools for securing succession and estate plans. However, while opting for the same, one must take into consideration its various modalities.Increased flexibility, exclusion of probate proceedings and amicable distribution of assets are some of the advantages of setting up a trust over a simple will or intestate succession (succession where there is no valid will). However, an improperly set up trust can easily result in litigation thereby defeating the very purpose it had sought to achieve. Thus, the need to set-up a legally valid family welfare trust cannot be over-emphasized. A trust is formed when the owner of a property reposes confidence in respect of ownership of that property into another, for the benefit of someone (which may also be the owner himself). The person reposing such confidence is called the 'author of the trust', the person accepting the confidence is called the 'trustee' and the person for whose benefit the trust is created is called the 'beneficiary'. In India, trusts are of two primary types: (i) Private Trusts and (ii) Public Trusts. Since the latter are trusts made for a public / charitable purpose, it is private trusts which families set up for the purpose of estate planning and allocation. Such trusts are commonly called Private Family Welfare Trusts ("PFWTs") and are governed by the provisions of the Indian Trusts Act, 1882.PFWTs can be either revocable or irrevocable. Further, they can either specifically identify their beneficiaries or let its trustee discretionarily identify the same. Additionally, PFWTs can also be for a specified purpose e.g. trusts set up for taking care of the assets that are to be vested in a minor upon attaining majority. As all families are different, there can be no strait jacket approach when it comes to setting up a PFWT. This is exactly the reason why most PFWTs are mere variations or combinations of the above mentioned forms.While assessing whether to set up a PFWT or not, a person must also consider the legal pre-conditions. Only a person above the age of 18 and of sound mind can be an author of a PWFT. However, a PWFT may also be created by or on behalf of a minor provided prior sanction of the appropriate civil court is taken. On the other hand, the eligibility criteria for being a trustee or a beneficiary is fairly simple. Every person capable of holding property can validly discharge such roles. This means that even minors can be designated as trustees or beneficiaries. Having said that, it must be noted that where the PWFT requires exercise of discretion by the trustee, the trustee must be 18 years of age and of sound disposition.Further, the trust can only be for a 'lawful purpose'. This essentially means that the purpose of the trust cannot be immoral, fraudulent, forbidden by law, in contravention of a provision of law or injurious to someone else or their property. An elementary example would be that 'A' cannot create a trust over the property of 'B' which it had illegally acquired.Also, though not mandatory for trusts solely concerning movable properties, it is advisable that any PFWT is always set up by a duly stamped and registered trust deed. Doing so enables all the stakeholders to clearly assess their respective rights and obligations. At the time of executing such a trust deed, the trust deed must express an unequivocal intention of the author to create a trust. The purpose of the PWFT, the specifics of the trust property, the trustee(s) and the beneficiaries also have to be mandatorily provided in the trust deed. As is evident from the above, there are obviously certain legal aspects which ought to be considered before deciding in favour of a PFWT. Adherence to such legalities may not necessarily be desirable in cases involving smaller business families or estate plans involving assets of small value. In such scenarios, a simple will still appeals as a better alternative. Please note that the above listed legalities for setting up PFWTs are not exhaustive. Those looking to set up a PFWT must consult a licensed legal professional and discuss all the necessary legal requirements. (Dr. Neelam Rani is an Associate Professor (Finance) at the Indian Institute of Management Shillong and Samarth Saxena is a practicing advocate at Bombay High Court.)

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