How Brothers, Sisters Can Form A Family Trust For Estate Planning

A family trust is a way to transfer wealth and estate to the next generation or other beneficiaries after the settlor’s death. While many people are familiar with Wills, awareness about family trusts is much lower.

A family trust is another mode of estate planning and succession following death. The purpose of establishing a family trust is to protect wealth and transfer assets and property according to the settlor’s wishes, or, plan for succession if there is a family business. Many people confuse estate planning with succession planning, but the two are different. Succession planning applies when there is a family business, while estate planning is used for all others. 

What is a Family Trust 

Trusts are flexible options for estate planning and provides settlors the choice to create their own conditions to ensure that the assets are used in accordance with their wish. Creating a trust minimises the chances of disputes among family members. 

Says Bijal Ajinkya, partner, Khaitan & Company: “It is important to note that while the term ‘family trust’ is used colloquially, the correct term to refer to trusts which are intended to benefit family members are called ‘private trusts’. A private trust and the legal nuances thereof are governed in India by the Indian Trusts Act, 1882 (Act).” 

Under the family trust arrangement, the settlor transfers assets to the trust, but still can retain control over the assets. The trustee manages the assets and is paid for it, whereas beneficiaries receive income from the assets so transferred in accordance with the settlor’s wishes. So, these trusts can be used not only to bequeath assets after death, but also for asset protection during a lifetime. 

Who Can Create It, And How Does It Work  

A person who is of sound mind and competent to enter into a contract can create a trust. One has to create a ‘Trust Deed’, outlining the conditions for managing the assets. The assets are transferred to the trust. However, the control over them remains with the settlor. This secures the settlor’s right over the assets. However, one should be careful when drafting the conditions in the ‘Trust Deed’. 

There are three parties in a trust. 

Settlor: Settlor is a person who creates the assets by transferring his/her assets to the trustees with the instructions that the assets should be used for the beneficiaries. Note that there can be more than one settlor in a ‘Family Trust’. 

Trustee: Trustee has the responsibility of managing the trust in the best interest of the beneficiaries. Trustee is responsible to oversee the funds and assets, and use it as per settlor’s instructions. 

Beneficiary: A beneficiary could be anybody whom the settlor wishes to be include to receive benefits from the trust. Notably, a settlor can also be the beneficiary. The names of the beneficiaries can be specifically mentioned in the ‘Trust Deed’ or they can simply to mentioned as children, parents, or so. 

Can Siblings Form A Family Trust 

There might be misconception among people that family trust, as an alternative to Will, is formed only by one person to hand down the assets to the next generation, but it is not so. 

Says Ajinkya: “A trust can have multiple settlors. If siblings co-own a property or even wish to settle their separately-owned property into the same trust, they may do so”. 

Siblings can form a family trust if they so desire and transfer their assets into one trust. There are cases when siblings want to support each other but are unable to find a way to do so. So, if one wants to establish a trust with his/her brothers or sisters together, it is very well permitted under the law. However, they need to be careful about the settlement of assets and their taxation. 

Settlement and Taxation for Beneficiaries of a Trust 

According to Ajinkya, for a settlement of assets in the trust to be exempt from tax, the beneficiaries of the trust must be relatives of the settlor as defined under the Income-tax Act, 1961. 

“The key to note here is that a niece/nephew (brother or sister’s children) does not qualify as relatives of their uncle/aunt as prescribed under the I-T Act, 1961 from the perspective of a trust. Hence, if a trust is being settled by brother (Mr A) and sister (Mrs B) for the benefit of their respective family branches (including the children of Mr A and Mrs B respectively), the settlement of assets would be subject to tax,” says Ajinkya. 

She adds: “However, the trust is a fairly flexible instrument. Hence, if the above objective is to be achieved where siblings wish to settle only one trust, it may be provided in the trust instrument that the assets settled by Mr A shall only benefit his family branch exclusively and that the assets being settled by Mrs B shall only benefit her family branch exclusively, thereby creating two pools of assets within the same trust.”

A Will or a Family Trust 

A Will is comparatively a better-known estate planning instrument than a trust, probably because it is simpler. However, understanding trusts is also simple, and rather beneficial considering the flexibility it can offer even during one’s lifetime. 

Says Ajinkya: “Under a Will, assets only pass to the intended beneficiaries after one’s lifetime. However, under a trust, benefits can be passed on to the intended beneficiaries during the settlor’s lifetime while retaining control over the assets. Once assets are settled into a trust, the trustee becomes the legal owner of the assets and holds the assets in a fiduciary capacity for the ultimate benefit of the beneficiaries.” 

Estate planning is an important exercise. While known to many, implementation is, however, still low. According to Grant Thornton Bharat, a business advisory company, around 80 per cent of businesses in India are family-owned. However, only 21 per cent of them have a succession plan. The data for individual estate planning is not available, but it is likely to be even much lower than this.