I have been in the field of tax and corporate law for two decades during which I have come across numerous clients expressing their concerns on succession of their businesses after their time.
I have been in the field of tax and corporate law for two decades during which I have come across numerous clients expressing their concerns on succession of their businesses after their time. Very rarely do family businesses travel beyond the second or third generation in our country. In my view, the reason lies with the lack of appropriate estate planning.
Estate planning refers to the process of arranging and planning a person’s succession and financial affairs. The idea is to ensure that one’s hard-earned money and assets go to people of their choice, efficient management and accumulation during and after one’s life-time.
Usually this is done either by writing a will or creation of a trust. However, a will becomes operational only after the death of the person. And litigation is common where the authenticity of a will and mental soundness of the person making the will are questioned. Further, to obtain a probate of a will would entail making the will public apart from the high costs involved. An alternative to the will is a trust created during the lifetime of the individual and this is emerging as a more viable solution to estate planning. By adopting the trust route, one can make a ring-fenced structure to ensure that their future generations are well protected through a personalised vehicle created as per the creator’s dictats.
It ensures smooth transition of wealth to progeny and management of all types of assets through expert advisors, pooling of assets for collective benefit and welfare of all family members, avoidance of family disputes leading to disintegration of family businesses and retaining confidentiality, as obtaining a probate is not necessary. A trust can be made operational during the lifetime and post death of the client.
Also, a trust is subject to a lower rate of tax compared with other holding vehicles, such as a company. From the perspective of the applicability of Minimum Alternate Tax and Dividend Distribution Tax, a trust structure offers substantial tax savings unlike other holding vehicles. The distribution of assets would not be taxable in the hands of the recipient. Further, trust deeds could be structured in a manner that income is distributed without distributing control/wealth.
(The author is Executive Director, Multi Family Office division with Moat Financial Services Pvt . Ltd, Kochi; email id: sherry@moatindia.com)
