SUCCESSION PLANNING

When you pass away, you leave behind an estate composed of your real property, personal property and other assets. Unless you leave instructions defining how these assets should be divided and amongst whom, the state decides which of your relatives will inherit your property. You probably don’t like the idea of leaving your estate up to chance, but choosing the right plan for your estate is confusing. Understanding the difference between a will and a living trust and comparing the benefits and drawbacks of both options can help you make a better, more informed decision and establish the estate plan that works best for your personal needs.

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WILL

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A?will?or?testament?is a legal document by which a person, the?testator, expresses their wishes as to how their property is to be distributed at death, and names one or more persons, the?executor, to manage the?estate?until its final distribution. For the devolution of property not disposed of by will, see?inheritance?and?intestacy.

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Though it has at times been thought that a "will" was historically limited to real property while "testament" applies only to dispositions of personal property (thus giving rise to the popular title of the document as "Last Will and Testament"), the historical records show that the terms have been used interchangeably.?Thus, the word "will" validly applies to both personal and real property.

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ADVANTAGES

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1.??????It avoids family dispute (though not a sure method)

2.??????Distribute assets according to your wish

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DISADVANTAGES

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1. Needs to be probated to avoid legal conflict. (Probate means copy of the Will certified under the seal of a court of a competent jurisdiction). Expensive process
2. Can be challenged in court
3. Only control assets that are in one’s name
4. Not helpful when one becomes incapacitated

5.??????In case of a minor children, need to depend on executor or court appointed guardian.

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Although a Will can be written for transferring the assets, it still has some limitations and cannot be the only mode of bequeathing one’s assets among the beneficiaries. Creating a Private Trust resolves most of the problems and can be beneficial in the management and distribution of assets.

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TRUSTS

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As per section 3 of Indian Trust Act 1882 “A Trust is an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner”

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When it comes to understanding trusts, knowing the difference between revocable and irrevocable trusts is crucial. If you ask for a revocable trust and get an irrevocable one, or vice versa, the legal ?consequences will be significant.

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WHAT IS A PRIVATE TRUST?

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A trust is called a Private Trust when it is constituted for the benefit of one or more individuals who are, or within a given time may be, definitely ascertained. Private Trusts are governed by the Indian Trusts Act 1882. A Private Trust may be created inter vivos or by will. If a trust in created by will it shall be subject to the provisions of Indian Succession Act, 1925.

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REQUISITES FOR CREATION OF A TRUST

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1. The existence of the author/settlor of the Trust or someone at whose instance the Trust comes into existence and the settlor to make an unequivocal declaration which is binding on him.
2. There must be a divesting of the ownership by the author of the trust in favour of the trustee for the beneficial enjoyment by the beneficiary.
3. A Trust property.
4. The objects of the trust must be precise and clearly specified.
5. The beneficiary who may be particular person or persons.

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Unless all the above requisites are fulfilled, a trust cannot be said to have come into existence.

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DO WE HAVE TO REGISTER THE TRUST?

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As per section 5 of the Indian Trusts Act, a private Trust in relation to an immovable property must be created by a non-testamentary instrument in writing, signed by the author of the trust or the trustee and registered(under Section 17 of Indian Registration Act) . Thus, registration of a trust is necessary when it is declared by a non-testamentary instrument. This registration would still be required, even if the instrument declaring the trust is exempt from registration under the Indian Registration Act.?In case of a Private Trust?declared by a will, registration will not be necessary, even if it involves an immovable property. Registration will not be required, of a trust in relation to movable property.?In case of Public Trust, whether in relation to movable property or an immovable property and whether created under a will or inter vivos, registration is optional but desirable.

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WHO BENEFITS FROM A TRUST?

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Creation of a Private Trust can be very helpful for different family situations and businesses:

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1.????????????Nuclear and joint families: For a nuclear family, separation, legal hurdles, old age medical care, child’s future and financial security are concerns around which the whole life revolves. Contrary to this in a joint family there have been instances of family litigations leading to business interruptions and assets getting locked in legal battles for years. Many of these issues can be addressed through a private trust.

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2.????????????Entrepreneur: An entrepreneur starts his business with a dream to grow big in the future. During the course he has to ensure his personal and business assets are clearly defined. Sometimes, a claim can arise from any of his client’s and the business gets disrupted if the solution is prolonged. By forming a trust the continuity of business and distinction between the assets can be taken care off.

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3.????????????Family of a special child: They are the biggest beneficiaries of creating a private trust. A special child needs are regular medical assistance, financial support when parents are not around, preservation of wealth. By creating a trust, parents can make sure that above requirements get fulfilled in a very efficient manner.

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4.????????????Muslims: Although Muslim laws are slightly different when formation of trust is concerned, the objective remains same for them.

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There can be many other situations where formation of a private trust can help in securing present and future of your loved ones according to your wishes.

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LIMITATIONS

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Although formation of a private trust can benefit a large number of families and in different situations, it has some limitations which should be taken into consideration while planning:

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1.????????????Cost: During transfer of immovable assets, stamp duty is paid as per the rate prevailing in the State. Due to this variation, cost of formation of a trust also varies across states.

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2.????????????Trustees: Efficiency of a trust is highly dependent on the selection of the trustees. The trustees are to be appointed by the settlor. A wrong selection can defeat the objective of forming a trust.

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3.????????????Trust deed: Drafting a trust deed is more difficult than a Will. If not drafted clearly, a trust deed is difficult to execute.

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REVOCABLE LIVING TRUSTS

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A?revocable living trust, also known as a?revocable trust,?living trust?or?inter vivos?trust, is simply a type of trust that can be changed at any time.

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In other words, if you have second thoughts about a provision in the trust or change your mind about who should be a beneficiary or trustee of the trust, then you can modify the terms of the trust through what is called a?trust amendment. Or, if you decide that you don't like anything about the trust at all, then you can either revoke the entire agreement or change the entire contents through a?trust amendment and restatement.

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Since revocable living trusts?are so flexible, why aren’t all trusts revocable? Because the downside to a revocable trust is that assets funded into the trust will still be considered your own personal assets for creditor and?estate tax purposes. This means that?a revocable trust offers no creditor protection?if you are sued, all?of the trust assets?will be considered yours for?Medicaid planning?purposes, and all assets held in the name of the trust at the time of your death will be subject to both?state estate taxes?and?federal estate taxes?and?state inheritance taxes.

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So why should you use a revocable living trust as part of your?estate plan? For three important reasons:

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1.?????????????To?plan for mental disability?- Assets held in the name of a Revocable Living Trust at the time a person becomes mentally incapacitated can be managed by their?disability trustee?instead of?by a court-supervised guardian?or conservator.

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2.?????????????To?avoid probate?- Assets held in the name of a Revocable Living Trust at the time of a person’s death will pass directly to the beneficiaries named in the trust agreement and outside?of the probate process.

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3.?????????????To?protect the privacy of your property and beneficiaries after you die?- By avoiding probate with a revocable living trust, your?trust agreement?will remain a private document and avoid becoming a public record for all the world to see and read. This will keep the details about your assets and who you have decided to leave your estate to a private family matter.?Contrast this with a last will and testament?that has been admitted to probate - it becomes a public court record that anyone can see and read.

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IRREVOCABLE TRUSTS

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An?irrevocable trust?is simply?a type of trust?that can't be changed after the agreement has been signed, or a?revocable trust?that by its design becomes irrevocable after the Settlor dies or after some other specific point in time.?However, refer to?Can an Irrevocable Trust Be Changed??

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With the typical revocable living trust, it will become irrevocable when the Settlor dies and can be designed to break?into separate irrevocable trusts?for the benefit of a surviving spouse, such as with the use of?AB Trusts?or?ABC Trusts, or into multiple?irrevocable lifetime trusts?for the benefit of children or other beneficiaries.

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Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals:

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1.?????????????Estate Tax Reduction

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Irrevocable trusts, such as?irrevocable life insurance trusts, are commonly used to remove the value of property from a person’s estate so that the property can't be taxed when the person dies. In other words, the person who transfers assets into an irrevocable trust is giving over those assets to the trustee and beneficiaries of the trust so that the person no longer owns the assets. Thus, if the person no longer owns the assets, then they can't be taxed when the person later dies.

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As mentioned above,?AB trusts?that are created for the benefit of a surviving spouse are irrevocable and, thus, can make full use of the deceased spouse's exemption?from estate taxes?through the funding of the?B trust?with property valued at or below the estate tax exemption. Then,?if the value of the deceased spouse's estate?exceeds?the estate tax exemption, the A Trust will be funded?for the benefit of the surviving spouse?and?payment of estate taxes?will be deferred until?after the surviving spouse?dies.

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ABC trusts?can be used?by married couples?who live in a state that collects?a state estate tax?and?the state estate tax exemption?is less?than the federal estate tax exemption. For example, in Massachusetts the state estate tax exemption is only $1 million, as compared with the current federal $5.34?million exemption, so in Massachusetts the first $1 million will go into the B Trust, then next $4.34?million will go into the C trust, and anything over $5.34?million will go into the A Trust.

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2.?????????????Asset Protection

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Another common use for an irrevocable trust is to provide?asset protection?for the Settlor and the Settlor's family. This works in the same way?that an irrevocable trust?can be used to reduce estate taxes - by placing?assets into an irrevocable trust, the Settlor is giving up complete control over, and access to, the trust assets and, therefore, the trust assets cannot be reached by a creditor of the Settlor or an available resource for Medicaid planning. However, the Settlor's family can be the?beneficiaries of the irrevocable trust, thereby still providing the family with financial support, but outside of the reach of creditors. There are also irrevocable trusts called?self-settled trusts?or?domestic asset protection trusts?that in some states, including Alaska, Delaware, Nevada, and Tennessee, offer creditor protection and allow the Settlor to be?a trust beneficiary.

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In addition, as mentioned above, the?various irrevocable trusts?that can be created for the benefit of the Settlor's surviving spouse or other beneficiaries after the Settlor of a?Revocable Living Trust?dies can be designed to offer?asset protection for the trust beneficiaries.

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3.????????Charitable Estate Planning

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Another?common use of an irrevocable trust?is to accomplish charitable estate planning, such as through a?charitable remainder trust?or a?charitable lead trust. If the Settlor makes the initial transfer?of assets into a charitable trustwhile still alive, then the Settlor will receive a charitable income tax deduction in the year of the transfer is made. Or, if the initial transfer of assets into a charitable trust doesn't occur until after the Settlor's death, then the Settlor’s estate will receive a charitable estate tax deduction.

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Types of Irrevocable trusts

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Irrevocable non-discretionary:?Assets cannot be withdrawn from here. The settlor has complete control of the trust norms. He/she decides which beneficiary receives which assets, and in what proportion. The settlor can be the beneficiary and after him/her, the child/children can be the beneficiary.

Irrevocable discretionary:?Here, the settlor lets the trustees decide which beneficiary gets which asset and in what proportion. The settlor only decides the beneficiaries.

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Trust vs. Will

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In many instances a written Will is insufficient to distribute your assets. The battle fought in courts in various cases has revealed that a Will has its own limitations. Below are some benefits which makes creating a private trust more beneficial than just writing a Will:

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1.?????????????Since a trust deed is never disclosed in media, it is more confidential than a will.

2.?????????????There is no probate when you create a trust.

3.?????????????When you want to make some changes in future a trust deed can be easily modified in comparison to a Will.

4.?????????????While planning for succession, especially during one’s lifetime, one would not want to lose control over the assets. This can be achieved efficiently through a private trust as a Will gets executed only after the death.

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Creating a private trust is more beneficial than just writing a Will, but it all depends on the amount of assets one has and how you want to bequeath your property. A Will gets effective only after your demise while a trust can still be run even when you are around. To ensure your trust runs efficiently do remember following points while creating it:

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1.????????????Lay down your long term objectives very clearly. It will help the trust to accommodate any changes later.

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2.????????????To make your trust more efficient, make sure the trustees you decide have the skill and experience necessary for their prescribed tasks.

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3.????????????Identify clearly who will be your beneficiaries to avoid any dissatisfaction later.

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4.????????????Identify the list of assets which you want to include during your lifetime and in future when you are not around. For formation of a trust you have to identify the assets which you will transfer while living and through will. Ideally you should avoid transferring immovable assets like property to the trust during your living. The primary reason is that you will lose the control of the asset once it is transferred and the cost of transferring such asset will be high. An irrevocable trust will be a good option considering your lifestage.

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5.????????????You need to identify the exact cost of forming your trust i.e. its funding source & expenses, the trustees who will manage it, the exact benefit that will go to the beneficiaries and in what manner i.e. will the trust pays to the beneficiaries directly. This is very important as you can clearly states in the trust deed the manner of payment to the beneficiaries. Also identify what will happen to the trust post your death i.e. will it get dissolve or who will be the trustees who will manage it. You should form a trust with minimum two trustees i.e. you along with one of the future trustee who will take care of the trust post your death, if the trust continues.

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6.????????????Lastly you can write a will stating the transfer of assets to the trust after your death. The will should state clearly the assets functioning as per trust deed as and when they get transferred.