Amara Raja Energy & Mobility is the latest to opt for the increasingly popular family trust route to secure wealth for promoters. The company’s ageing patriarch, Ramachandra Naidu Galla, 86, farmed out the promoter entity’s 33% holding to four new family trusts, which, according to a filing to the stock exchanges last week, are aimed at a “structured and seamless intergenerational succession… so as to eradicate the possibility of future conflict”. Galla will be the controlling trustee which should help in consolidating and ring-fencing the ownership of family assets. The need for setting up the trusts was long overdue as the third generation of the family has joined the business and is part of the company’s board.

While Amara Raja has taken a familiar route, the jury is still out on whether a family trust model is a surefire route to ensure that the promoter family stays together to protect their ownership. To be sure, it has many advantages as family trusts help by providing a structured way to manage and distribute family wealth across generations, protecting assets from creditors, and ensuring that the assets are distributed according to the patriarch’s or matriarch’s wishes, all while potentially avoiding the lengthy probate after his/her death; essentially safeguarding the family’s financial future by allowing controlled access to assets for beneficiaries as needed. And unlike wills, trust details are generally not public record and therefore can be helpful in avoiding public glare.

Unfortunately, this is mostly in theory, as the disputes in many corporate families show. At least two of them are out in the open currently. Bharat Forge Ltd chief Baba Kalyani’s dispute with his siblings over assets estimated to be worth billions of dollars took a fresh turn after a court affidavit filed two years ago surfaced some months ago. The sister has made some serious allegations and the hearings are going on. The KK Modi family is currently locked in a dispute that began after the patriarch’s demise in 2019. The late Modi established a trust in 2014 to manage the inheritance of his wealth. But since his passing, the family has been locked in a dispute due to disagreements over the terms of that trust. There have been several other examples as well.

The reasons for these failures are many. Often, with family trusts, the trustees/beneficiaries who are family members do not comply with corporate governance: decisions and resolutions are not minuted, meetings are not held and if they are, they are held informally, and quorums are not present. These trusts are often operated as the alter ego of the family members concerned. This corporate governance failure allows one of the disenchanted family members the ability to attack the trust and the manner in which it was operated. There are other reasons, too. A Trilegal research study says many trust deeds exhibit a notable absence of provisions to facilitate amendments, whether by design or oversight. The result is an inability to adapt and respond to changing circumstances. Amendments might be crucial in situations like changes in circumstances or shifts in tax and regulatory regimes. However, when a trust deed lacks an amendment clause or contains an overly restrictive one, trustees might transgress their authority and engage in actions not specifically authorised by the deed, potentially leading to decisions being contested by beneficiaries. It’s obvious no trust deed can be cast in stone.