Creating a Trust Fund

What is Trust? Learn How to Create a Trust and Safeguard Your Assets

How are you protecting your wealth? According to a recent Fortune India Rich List, almost 25% of the cumulative wealth of 38 of India’s top billionaires is held through trusts, HUFs, and foundations. This isn’t surprising! Trusts are increasingly becoming preferred for affluent Indians to preserve, protect, and distribute their wealth.

In the past 20 years, while managing the wealth of India’s wealthiest families, I have seen innumerable occasions where first-generation entrepreneurs and businessmen have regretted not creating Trust during good times. More often than not, the importance of a Trust is only evident in times of crisis.

What is a Trust?

A Trust is a legal structure designed to hold, manage, and distribute assets to designated beneficiaries. Trusts are an integral part of India Inc.’s ownership grid. According to the Fortune India Rich List, 38 billionaires have 24.9% of their cumulative wealth of INR 32.5 lakh crores secured in trusts.

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Source: Fortune India

Why Should You Set Up a Trust?

  1. Wealth Preservation: A Trust can shield your assets from potential liabilities and ensure wealth preservation in case of disputes or unforeseen circumstances.
  2. Smooth Succession: Establishing a Trust offers control over asset management and distribution in high-net-worth families.
  3. Incapacity Planning: In case of a debilitating condition, a Trust serves as a valuable tool for managing financial affairs in case of incapacitation.
  4. Asset Transfer: Enables efficient transfer of assets among family members without extensive paperwork or probate proceedings.
  5. Confidentiality: Private Trusts help wealthy families maintain privacy and confidentiality when managing family assets.

How Does a Trust Function?

A Trust typically involves the following parties:

  • Settlor/Trustor: The individual who creates the Trust and transfers assets into it.
  • Trustee: An individual or entity that manages and administers the Trust.
  • Beneficiary: The person or people who receive distributions from the Trust.

The process involves transferring assets into the Trust, which are then managed by the Trustee to benefit the Beneficiaries.

Setting Up a Trust

How to get started?

  1. Drafting the Trust Deed: This legal document explicitly mentions the objectives, terms, and conditions.
  2. Identifying the Trust Property: The settlor designates and allocates the assets forming the Trust’s corpus.
  3. Selecting the Trustees: The settlor appoints Trustees to oversee the Trust management on behalf of the beneficiaries.
  4. Specifying the Beneficiaries: The Trust deed must specify those individuals who benefit from the Trust assets.

Major Types of Trusts in India

Private Trust

Private Trusts are created exclusively for the benefit of designated individuals or families.

  • Revocable Trust: Allows the settlor to retain control over the Trust assets and modify or terminate the Trust during their lifetime.
  • Irrevocable Trust: Cannot be modified or revoked by the settlor; often used for estate planning and asset protection.
  • Discretionary Trust: Distribution of assets and income among the beneficiaries is left to the discretion of the Trustee.

Public Trust

Public Trusts are established to benefit the public or a specific segment, often serving charitable, religious, or educational purposes.

  • Charitable Trust: Established for charitable purposes, such as promoting education, religion, or other charitable activities.
  • Religious Trust: Established for religious purposes, such as building temples, mosques, or churches.
Trust typeGoals
Revocable TrustAllow the settlor to retain control over the trust assets and have the option to modify or terminate the trust during their lifetime.
Irrevocable TrustCannot be modified or revoked by the settlor; often used for estate planning and asset protection.
Discretionary TrustDistribution of assets and income among the beneficiaries is left to the discretion of the trustee.
Determinate TrustThe beneficiaries and their respective shares are clearly defined by the settlor at the time of the trust’s creation.
Charitable TrustEstablished for charitable purposes, such as promoting education, religion, or other charitable activities.
Religious TrustEstablished for religious purposes, such as building temples, mosques, or churches.

Conclusion

Trusts, whether private or public, help individuals or families to ensure that the wealth created is safely and appropriately safeguarded, utilised, and transferred to the desired parties. As a family’s wealth increases, the need to ring-fence assets becomes pivotal. However, every family dynamic is unique, and creating a solution that meets your unique requirements and needs is critical.

Disclaimer

The information contained herein is for informational purposes and should not be interpreted as soliciting, advertising, or providing any advice.