Are you protecting your wealth effectively? According to the recent Fortune India Rich List, almost 25% of the cumulative wealth of 38 of India’s top billionaires is held through trusts, Hindu Undivided Families (HUFs), and foundations. This trend isn’t surprising! Trusts are increasingly becoming a preferred vehicle for affluent Indians to preserve, protect, and distribute their wealth in a structured manner.
In the past 20 years, while managing the wealth of India’s wealthiest families, I have seen numerous instances where first-generation entrepreneurs and businesspersons have regretted not creating a Trust during prosperous times. More often than not, the significance of a Trust becomes evident only in times of crisis.
What is a Trust?
A Trust is a legal entity designed to hold, manage, and distribute assets to designated beneficiaries. It serves as a pivotal element in India Inc.’s ownership grid. The Fortune India Rich List reveals that 38 billionaires have 24.9% of their cumulative wealth of ₹32.5 lakh crore secured in trusts, underscoring their importance in asset management and protection.
Source: Fortune India
Why Should You Set Up a Trust?
- Wealth Preservation: A Trust can shield your assets from potential liabilities and ensure wealth preservation in case of disputes or unforeseen circumstances.
- Smooth Succession: Establishing a Trust offers control over asset management and distribution in high-net-worth families.
- Incapacity Planning: In case of a debilitating condition, a Trust serves as a valuable tool for managing financial affairs in case of incapacitation.
- Asset Transfer: Enables efficient transfer of assets among family members without extensive paperwork or probate proceedings.
- 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?
- Drafting the Trust Deed: This legal document explicitly mentions the objectives, terms, and conditions.
- Identifying the Trust Property: The settlor designates and allocates the assets forming the Trust’s corpus.
- Selecting the Trustees: The settlor appoints Trustees to oversee the Trust management on behalf of the beneficiaries.
- 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 type | Goals |
| Revocable Trust | Allow the settlor to retain control over the trust assets and have the option to 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. |
| Determinate Trust | The beneficiaries and their respective shares are clearly defined by the settlor at the time of the trust’s creation. |
| 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. |
Conclusion
Trusts, whether private or public, help individuals and families 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 specific requirements is critical. Setting up a Trust is not just about wealth preservation but also about ensuring a legacy for future generations.
Disclaimer: The information contained herein is for informational purposes only and should not be interpreted as soliciting, advertising, or providing any advice. Please consult with a financial advisor or legal professional for personalised guidance on Trusts and estate planning.