Due Diligence: Trust and get cracking

You made all the money that you aspired for. And now you want to ensure that the wealth you built over the years — with all the sweat and tears — is securely passed on to your children.

So, you are thinking of creating a trust for your heirs, to which you will transfer all your assets.

But, you have a few worries. You are concerned whether the trust assets will be managed to best serve your children’s interests. You also wonder whether your children will use the wealth wisely or simply squander it away. While you cannot control anything once you’re no longer around, choosing the apt trusteeship structure and careful drafting (of the trust deed) could go a long way in allaying such fears. Here is a low-down on a few things you need to know, while bequeathing your wealth via a trust.

Once you set up a trust, as the settlor (creator) you will transfer your property to it, to be managed by the trustees for the benefit of the beneficiaries (your children and your spouse). While you can play an important role in the trust’s decision-making while you are alive, to ensure that the trust’s affairs are managed as you intended, even after you are gone, you must choose the right set of trustees. One option would be to have a mix of family members and a corporate trustee, the latter being a wealth management firm-backed trust company or the trust department of a bank.

As Gautami Gavankar, Principal Advisor, Kotak Mahindra Trusteeship Services, explains: “While an individual may die or become physically or mentally incapable of managing a trust, having a corporate trustee brings in some perpetuity in the trust structure. Family members who could be appointed as trustees may not always have the time and the skill to administer and manage the trust assets and may not be impartial towards the beneficiaries. But, at the same time, you may not want to rely completely on a corporate entity, in which case, depending upon the objective of the trust, you may consider having a combination of corporate trustee and family trustee.”

Having a corporate trustee can help ensure that the trust’s affairs are not solely in the hands of family members. Corporate trustees in India, while they are not regulated, unlike in the West, do have a fiduciary responsibility towards a trust and are legally bound to manage its affairs.

As one might imagine, there is a cost associated with such a service. Depending on the quantum of assets and the role expected of the corporate trustee, the annual fee could amount to a few lakh of rupees. Unless the trust’s assets run into a few hundred crores, having a corporate trustee may not make much sense. So, there is a need to balance the relative benefits of having professionals in charge of your assets and the cost. “The annual fee could be 0.1 -0.25 per cent of the asset value (typically includes only financial assets), subject to an upper limit,” says Rajesh Saluja, CEO, ASK Wealth Advisors, a wealth advisory firm.

As regards family members as trustees, you may choose to have your child or another family member as a trustee. You could also appoint a trusted family member or friend as a trust protector. This person’s role would be to act as a guiding force and to monitor the functioning of the trustees. While a protector is not in direct charge of a trust’s assets, he/she has a supervisory role to play and can even replace the trustees if they are not serving the interests of the beneficiaries. The powers of the protector can be specified in the trust deed.

While a trust deed cannot provide for all eventualities, a meticulous drafting can ensure that the trust’s assets are managed in a way that you desire, even after you are gone. “It would be important to do succession planning of the family trustees if one has appointed a combination of corporate trustee and family trustees. The decision making between the trustees could be appropriately provided for in the trust deed to capture the intention of the family. For instance, the trust deed can provide that either the decision making will be by unanimity or by majority or it could also provide for a veto in the hands of a certain family member in case of disagreement between the trustees,” says Gautami.

Apart from that, if you want to protect the trust assets from division on account of any marital discord between your children and their partners, the trust deed can specifically state that your children alone will be beneficiaries. According to Rajesh, in the absence of this, if something were to happen to your child, the surviving spouse can stake a claim to the trust’s assets.

While it’s important to ensure that the trustees function honestly, it’s equally important to ensure that your children don’t blow up their inheritance. So, carefully consider the payouts that they will receive as beneficiaries and the decision-making powers they will enjoy, once appointed as trustees beyond a certain age. According to Gautami, a trust, for the benefit of children, can be structured with distribution milestones — the payouts (from the trust income) can be made conditional on achieving certain milestones such as reaching a certain age or at specified periodic intervals such as entering college or getting married.

You can also provide for the transfer of a certain portion of the trust corpus itself (apart from paying out the income generated by the trust) to your children after they attain a certain age, when they might have the need for a larger sum of money.

Finally, worth considering while bequeathing your wealth is the creation of separate trusts for each of your children. While this will entail additional costs and may not make much of a difference to your immediate succeeding generation, it can help keep things simple once grandchildren and great grandchildren come along. In fact, you could begin with a single trust but specify in the trust deed that once your children reach a certain age, the trust should be revoked and the assets distributed in a certain proportion so as to carve out separate trusts.

So, better get cracking with that trust!