January 18, 2023

Trust & Succession planning

Nurture the marriage, trust the Trust

by Rajmohan Krishnan

Once upon a time, a man of destiny met a woman of substance. He was a brilliant CXO, she a beautiful daughter of a powerful man. They fell in love. It seemed like a match made in heaven. The marriage didn’t last long, but the post-marital bitterness continues till date. Many arms of the law and order machinery got involved. Accusations were met with counter accusations. Alimony debates added pungency to the bitterness. And the former sweethearts are now actively attempting to sabotage each other’s future.

This is just one of many such stories unfolding in modern India.

The collapse of a marriage is traumatic enough without having to deal with vindictiveness and threat to one’s financial security.  And when the money involved is gargantuan, an already terrible situation becomes catastrophic. So the wealthy have two options to safeguard their wealth and wellness: the pre-nuptial agreement and a Trust. The former is becoming popular in India while the latter remains the most underrated instrument wielded by the country’s elite.

What’s a Trust?

Here’s what you need to know about Trusts:

  • A Charitable Trust protects the wealth earmarked for social causes whereas the Family Trust protects the wealth of those loved ones listed as beneficiaries
  • It can have just a single Trustee. Or it can have many Trustees with a Managing Trustee having veto powers. Or it can have a corporate Trustee that is not allowed to deviate an inch from the original Trust Deed
  • A marriage is revocable, but a Trust can be designed to be irrevocable. Which means that the money cannot be touched by the Trustees anymore, although they control its movement
  • A Trust is a financial cost centre. It takes effort and money to administer it and ensure that it is compliant with the laws of the land

Advantages of a Family Trust

A wealthy person/family can set up a Family Trust to:

  1. Create a succession plan that delineates roles, responsibilities and privileges accorded to each family member. Unlike a will, this plan can unfold when the creator of the Trust is still alive
  2. Secure his/her own healthcare in case of incapacitation. No retired business magnate should keep their fingers crossed for a daily dose of insulin
  3. Build a firewall between business calamities and the financial security of loved ones. Money in the Trust cannot be confiscated when the family business experiences huge losses
  4. Protect the dilution of the family’s wealth in case Estate Duty makes a comeback in India. In some countries, this tax is as high as 60%

Going forward, we shall discuss the fifth advantage of a Family Trust: its ability to counter the threats posed by divorce.

Trust trumps Divorce

Wealthy Indians of all ages (including those close to retirement and those beginning to ascend up the ladder) are getting divorced in larger numbers. So it’s never too late or too early to start a Family Trust. But keep in mind some best practices:

  • Welcome the new entrant warmly to the family, but not to the Trust. Many wealthy families wait and watch for the first 5 years of a marriage. Some go to the extent of forever keeping the “outsider” out of the list of beneficiaries. The wealth is simply passed down to the next generation
  • When the wealthy person chooses to be a homemaker and her spouse takes over the business, it makes sense to tie back all business holdings to the Trust. The homemaker needs the Trust even more than a business-savvy professional
  • Sometimes, the elderly wealthy person might struggle to identify the beneficiaries. If the parents are no more and the children wasteful, should the money go to the extended family or to fund a social cause? The answer depends on the vision the person has for the money. Also, are the immediate family members forever disqualified from inheriting this money?
  • In some Family Trusts, the new entrant to the family can stay a beneficiary only till they remarry. This is to avoid the influence of the “new new entrant” on the ex-spouse. Unfortunately, it’s difficult to implement this safeguard in case the ex-spouse is in a live-in relationship and has not actually remarried
  • Wealthy men additionally have to worry about custody of children. Since the Guardians and Wards Act does not acknowledge Joint Custody, such an arrangement becomes possible only under a Mutual Consent agreement. Perhaps the Trust’s benefits can be used as leverage by the father to get sufficient access to the children. Since Trusts are created during the honeymoon period, both parents are able to see children as humans with emotions, not objects to be owned

Overall, a Trust is like an insurance policy one takes against the aftermath of marrying an eminently unsuitable person. That’s the reason safeguarding clauses are put in the Trust Deed. Like the umbrella one carries to a picnic, one ho

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