Updated: December 6, 2021 12:31:03 am
Prominent business families that run empires such as the Reliance Industries Group and the Shriram Group have been in the news recently for their plans to set up trusts to ensure smooth transition of assets and control of the business to their heirs. This is primarily to avoid the messy legal battles and litigation seen among business groups in the past. According to the Knight Frank Attitudes Survey 2021, the Covid-19 pandemic has influenced 84% of ultra-wealthy Indians to reassess their attitude toward succession planning.
What is succession planning in family businesses, and how has it changed over the years?
Succession planning for a large or small family business entails transition of the management, the ownership and control of the business to the next generation of leaders, most often from within the family. Over the years, this process has changed from writing a will to setting up a management trust to manage the assets of the business and to ensure systematic decision-making and execution, helping the business become a wealth creator even after the demise of its founders.
A trust is a fiduciary relationship in which one party, called a trustor, transfers an asset/ property, to another party, called a trustee. The trustee then manages this asset for the benefit of a third party, called a beneficiary.
Why are big family businesses opting for the trust route for succession planning?
According to experts, most successful family businesses want a succession plan that maintains the integrity of the business and also meets the aspirations of each family member, especially when the family has more than one child, differently abled members, ancestral properties, and international assets.
Traditionally, what the general law provides is the will system. However, a will is not a permanent instrument. Even if it is registered when the person is living, it can be changed until the last minute. Apart from this, a will cannot be functional while the person is alive.
“A will takes effect only after the demise of someone. The will has no value till the time the person is alive, so the person who has created the asset has little way of seeing what is happening after the ownership changes. This is one of the key reasons why people look for succession planning using a trust structure. A trust structure can be given effect while you are living and you have a control over how circumstances pan out,” said Vishwas Panjiar, Partner at Nangia Anderson LLP.
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Also, unlike a will, which is frequently challenged in courts, trusts are effective tools to avoid legal battles between heirs and beneficiaries, say experts. Trusts can also be used to initiate the heirs into the family business as they can be used to control the timing and proportion of assets distribution. Moreover, once a trust is created, the trustor has little to no direct control over its assets. As a result of this, the assets are protected from any action taken by creditors or banks in the event of a default by the business.
What are the tax implications?
Trusts are tax-efficient . “While the reason for estate planning is not to reduce tax but obviously the structure has to be efficient. Very broadly, the transfer of assets to a trust in which your family members are the beneficiaries are not taxable at either end. It means neither the transferor nor the beneficiary will be taxed,” said Panjiar of Nangia Anderson.
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