Leading up to the Union Budget of 2013, there had been a lot of talk about estate duty and taxing the super rich – a topic of debate across India for a couple of months. While a surcharge has been imposed, the sword of estate duty has been left hanging, ready to fall when the Government wants to mobilise additional tax revenue sources in future.

In light of the above, high net worth individuals (HNIs) across the country are faced with the challenge of preventing the erosion of their wealth base. HNIs have to plan taxes in a better manner and simultaneously maintain the flow of income. Trusts are now being used for creating separate vehicles by such individuals.

A trust is not a legal person but merely a legal obligation. The assets are held in the name of the trustee for benefit of the beneficiary. A trust is a pass-through entity and its taxability is determined by the manner in which it is organised.

ease in distribution

This structure helps ensure ease in distribution of income without actually distributing assets or diluting control. There are no tax implications on such distribution. Though the income generated through the trust is taxable in the hands of the trustee, the burden of tax is effectively borne by the beneficiaries. A trust is not subject to MAT or DDT, there is minimum regulatory compliance and NBFC and CIC regulations do not apply to a trust.

A trust in its own capacity can borrow money, own and dispose assets and it can hold offshore assets. It can also be an effective tool for separation of economic and controlling interests.

In order to avoid disputes over property and achieve tax efficiency, conditions are attached to the assets, their distribution and utilisation by creating a trust. They are of various typesand can be chosen and executed depending upon the HNI’s objectives. Sometimes the choice of trust structure is also influenced by the regulations that govern the asset class being settled into a trust. These differ depending on whether the assets held by the trust include listed company shares or a private company, land and property, cash.

Trusts also provide an efficient method for bifurcation of assets among family members, thus proving to be effective for estate duty planning too.

The Foreign Exchange laws in India permit the creation of offshore trusts by Indian individual residents under the Liberalised Remittance Scheme. Offshore trust structures have become very popular with Indian residents for acquiring offshore real estate assets and insurance policies.

NRI ASSETS

NRIs can also settle their India-based assets, whether received as gift or as inheritance, into Indian trusts. With respect to repatriation from such trusts with NRI beneficiaries, please note that all current income being dividend, interest, rent and pension can be repatriated entirely (without any limit or any prior approval) to the offshore beneficiaries either in their offshore accounts directly or be credited to their non-resident accounts in India, subject to payment of applicable taxes.

Thus HNIs, NRIs, promoter families and businessmen in general are moving to the trust structure to safeguard themselves from the possible impact of estate duty as and when the same comes into force.

(The authors are with the Tax practice of KPMG in India. The views and opinions expressed are personal and do not necessarily represent the views of KPMG in India.)

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