How family trusts can help in succession planning

January 12, 2021 10:06 AM

Family Trusts not only help to keep a predecessor’s vision of the family business intact, but also help reduce disputes among family members.

In addition to avoiding legal battles between heirs and beneficiaries, trusts are also adept tools to initiate children into the family business.

With the Covid-19 pandemic having destabilized markets across the globe, there is a general sense of volatility and uncertainty surrounding the financial world. Amidst such precarious circumstances, it is more important than ever for HNI and UHNI families to secure their wealth and plan for unforeseen circumstances.

An important aspect of planning ahead is an air-tight succession plan that can help with a smooth transition of power, wealth, and business control within a family. Traditionally, most business-owning families or HNI and UHNI individuals have opted for wills as a tool for succession planning. However, with the possibility of wills leading to long-drawn legal disputes among family members, many families are now considering the option of creating business as well as private family trusts.

A trust typically involves an agreement between three parties: the settlor of the trust, the trustee, and the beneficiary. A private family trust is essentially a trust established for the sole purpose of benefiting members of a particular family. The main purpose of creating a private family trust is to protect and manage family assets and other wealth for the current and/or future generations. Overall, as a succession planning tool, a private family trust is very effective in safeguarding the assets of the settlor and ensuring that they are utilized for the benefit of the beneficiaries at the correct time.

Apart from the selection and grooming of a successor/ key leaders in a business setup, one of the other main purposes of succession planning is to also pave the way for business continuity and financial security. In order to do that, it is crucial that there isn’t a succession battle or disputes over property, power and wealth within a family. And here is where the role of a business trust comes into play; business trusts are effective tools to manage wealth, investment of monies, distribution of assets and other such functions that minimize disputes and maintain the business and family legacy.

In addition to avoiding legal battles between heirs and beneficiaries, trusts are also adept tools to initiate children into the family business. Depending on the nature of the trust, the timing and proportion of asset distribution and control can be decided. This ensures that the beneficiaries i.e. children of the family are trained and prepared to take over the business, and are not just handed hard-earned wealth to squander away. A family trust can thus play an important role in mentoring the next generation of a business family.

Although one can never truly be ready for unexpected and unfortunate circumstances, one must always plan ahead. A private family trust/ business trust can be extremely useful in cases of sudden death/incapacitation of a key family member or business leader; this is because trusts include plans for asset control, distribution of wealth and property and other instructions regarding nominees for successor etc.

Also, unlike a will, a private family trust can also be utilized to provide for the specific needs of a family. For example, proceeds from a private family trust can be directed towards health, education, and even travel expenses. A private family trust by its very nature is more accommodating and offers greater flexibility; it can hold, safeguard, multiply, and manage assets as per the will and needs of the settlor of the trust and beneficiaries.

Another unique benefit of a Trust as a structure option is its untouchability during a crisis. Once a trust is created, the settlor of the trust has little to no direct control over its assets. Hence, they are safeguarded from any action taken by creditors or banks in the event of, say, an insolvency crisis. Family trusts, therefore, protect a beneficiary’s future even in the event of legal action against the settlor and are thus a preferred method for many UHNW families.

Although trusts are unique tools that offer an array of benefits, one must always consider tax implications before setting up a private family trust. If the taxes are already paid at the trust level by the Trustees as the representative assesses, the beneficiaries receiving the corpus as well as the income of the trust, need not pay taxes; there is no double taxation incidence.

Apart from this skillful navigation of taxation laws, family trusts today are gaining increasing relevance and acceptance worldwide amongst HNW and UHNW families as savvy tools for succession planning. Family Trusts not only help to keep a predecessor’s vision of the family business intact but also help to reduce disputes among family members, thereby helping a business-owning family’s legacy to endure the test of time.

(By Rajmohan Krishnan, Principal Founder & MD, Entrust Family Office)

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