Inheritance and Trust Structure in India

As India anticipates the next wave of intergenerational wealth transfer, conversations around succession planning are gaining renewed urgency. Among the tools available to preserve and pass on wealth thoughtfully, trust structures stand out for their strategic and long-term benefits—especially in the context of a potential reintroduction of inheritance tax.

India’s journey with inheritance tax—referred to historically as estate duty—offers important context. Introduced through the Estate Duty Act of 1953, the tax aimed to reduce wealth concentration and generate government revenue. It applied to the principal value of the estate exceeding a set exemption limit, with rates ranging from 7.5% to 40%, depending on the estate’s size and the heir’s relationship to the deceased.

By the 1980s, however, estate duty was seen as ineffective. It generated limited revenue, involved high administrative costs, and was widely avoided. In 1985, the government abolished estate duty under Finance Minister V.P. Singh.

While the tax has not returned, periodic discussions on the reintroduction of inheritance tax in India continue, driven by growing wealth inequality. If reinstated, inheritance tax could significantly reduce the wealth passed on to beneficiaries—making proactive estate planning essential.

Trusts offer families a powerful way to protect, preserve, and transition wealth across generations—efficiently and with greater control, making them a key tool in estate planning in India. By moving assets into a trust during one’s lifetime, individuals can manage inheritance tax risks while ensuring their legacy is stewarded as intended

A trust is a legal structure where a settlor transfers assets to trustees, who manage them on behalf of beneficiaries, often in accordance with the inheritance law in India. The trust becomes a distinct legal entity, guided by a trust deed that outlines the rules for managing and distributing the assets.

Common types of trusts include:

• Revocable Trusts: Can be altered or dissolved by the settlor during their lifetime.
• Irrevocable Trusts: Cannot be changed once established; commonly used for tax planning.
• Discretionary Trusts: Trustees decide how and when assets are distributed.
• Specific Trusts: Clearly define the beneficiaries and their share in the trust

Trusts offer several benefits in the context of inheritance tax planning:

Exclusion from Estate Value

Assets placed in an irrevocable trust are no longer part of the settlor’s estate, reducing the taxable value upon death.

Optimised Use of Tax Allowances

Trusts can help maximise exemptions such as nil-rate bands, especially when structured thoughtfully for spouses or dependents.

Control Over Wealth Distribution

Trusts provide flexibility to delay or stage distributions—useful when heirs are minors or lack financial maturity.

Exempt Transfers and Early Gifting

Transfers to trusts can qualify as exempt gifts under the Income Tax Act, 1961. If inheritance tax returns, similar provisions may apply—making early planning crucial.

Avoiding Probate

Trust-held assets bypass the probate process, ensuring faster, smoother transitions with reduced legal and administrative costs.

While trusts are powerful tools, they also come with complexity. Some key factors to consider include:

Loss of Legal Ownership

In irrevocable trusts, the settlor gives up ownership. However, by appointing themselves as trustee, they may retain effective control over the assets.

Set-Up and Maintenance Costs

Trusts require legal documentation, ongoing administration, and may involve professional trustee services.

Tax Treatment for Beneficiaries

Depending on the structure, beneficiaries may face varying tax implications.

Changing Legislation

Tax laws evolve. What works today, based on previous inheritance frameworks, may require review once new laws are introduced.

A well-structured trust is not just a tax planning tool—it’s a way to ensure continuity, preserve values, and protect future generations from potential financial and legal complications. With careful planning and sound advice, families can approach succession not as a transfer of assets alone, but as a meaningful handover of responsibility, legacy, and intent.