Succession planning through trusts!

Do you know about Waltons who have run Walmart via private trusts. Why have they done this? This is due to the succession planning they wanted to do and protect their assets while maintaining unity in the family at the same time.

Succession planning is a commonly known mechanism used to amicably distribute family wealth among future generations. While it is imperative to consider the tax and regulatory impact on such transactions, emotional and commercial aspects largely govern the plan:)

One of the commonly used mechanism under succession planning is using the Trust structure. ?Normally, there are three parties in a private trust:

• Settlor – a person who settles the property in a Trust or a person who makes contribution to the Trust property;
• Trustee – a person who manages the Trust on behalf of the settlor and holds the assets for the beneficiary; and
• Beneficiary – a person who is entitled to the benefits from the Trust property.

Income-tax implications in a private trust meant for succession planning

One of the major concerns from the income-tax standpoint is whether such family settlements result in transfer of properties from one person to another and whether such transfer can be said to be without consideration. It is worthwhile to state the courts in India have mostly held that any property transferred under a family arrangement from one individual family member to another should not be subject to income-tax. However, based on divergent judicial precedents on this matter, transfer from a corporate structure to individuals under a family arrangement, may be subject to tax.

Given the specific relaxation for settlement of assets by a settlor in the Trust, formed for the benefit of the family members (as defined under the Indian Income-tax Act) of such settlor, there are no tax implications in the hands of a settlor and the Trust.

Implications under Foreign Exchange Control Regulations (FEMA)

It is very common for individuals/families to hold assets in India and outside. This aspect needs to be considered from a exchange control regulations perspective as well. There can be several permutations and combinations while dealing with complexities involved in a Trust structure under the FEMA, which may vary from

(i) residential status of trustee, beneficiary and settlor,

(ii) types of asset settled,

(iii) location of the asset and

(iv) distribution mechanism stated in trust deed etc.