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Planning for a lasting legacy

Mar 07 2014, 03:00 IST
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SummarySuccession planning should take care of promoters’ interests and also future tax concerns

History—either making it or making it up—has suddenly become fashionable again. Migration to trust structure seems to be the flavour of the season. Since the tax pressure on investment holding companies has become burdensome with the introduction of the dividend distribution tax and the minimum alternate tax, and given their other inherent inefficiencies, trusts have come into limelight as efficient vehicles for succession planning, consolidation of control and laying down the governance structure for the promoter family.

Given that India is producing more and more millionaires, there is arguably a case for the introduction of inheritance tax and, hence, finance minister P Chidambaram put up a proposal for the reintroduction of this tax in India. However, so far, there has been no concrete step to implement the same. Possible reasons for the reintroduction of estate duty could be revenue generation and manifestation of a socialistic objective. Historically, estate duty collections were quite small; however, with the growing fiscal deficit and socio-economic disparities in India, revenue collection as well as reduction in socio-economic inequality could be the triggers for the possible reintroduction of estate duty.

At present, India has a significant number of family-run businesses, primarily run by large families. In most cases, the third and fourth generation family members have already joined the business. Hence, succession planning should be a strong motive for the promoters and their families to realign their structures such that they have the same degree of control as a holding company and lay down future governance structure for the gen-next.

‘Trust’ is becoming an increasingly popular and useful instrument in succession planning. Most promoter-owned businesses and affluent families are migrating to a trust structure for effective wealth management and succession planning. It would be prudent to say that by setting up a trust one can bridge all the gaps, as holding family assets through a trust structure enables segregation of ownership and control, succession planning for future generations, internal dispute resolution, protection from business risks during the lifetime, etc. Further, trust can also provide for an efficient exit of a particular family/member from the business, maintenance of identified family members, say, female members, etc.

With the advantages stated above, what needs to be evaluated is how the existing structures will get migrated to trusts, considering the challenges of taxes in form of capital gains tax, general anti avoidance rules, stamp duty, deemed gift tax and regulatory hurdles of takeover code

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