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Estate planning through living trust

Trust can be created by writing of trust deed. This requires person to specify the purpose of deed, its objective and how will it function. He needs to identify the trustees and give instruction of appointing successor trustees. He also needs to specify when trust has achieved its objective and how (& when) trust can be dissolved and assets liquidated. Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Settlor creates a revocable discretionary trust by writing trust deed which defines the distribution of income amongst future generation, earned by the trust by way of leasing out of the properties.

He also defines conditions under which trust can buy or sell or lease future properties. For management of the trust, he has appointed his long time chartered accountant and an advocate as trustees. He also has laid down procedure for appointment of future trustees when he (grantor) is not there. His mother wills the property, which are in her name to the trust. However for transferring the asset, he had to re-register the property in Trust name and pay the stamp duty. Now he purchases property in trust name.

Living trust a legal arrangement which allows someone to give their assets to someone else while they are alive but still keep control of them until they die: You can still control your assets if you put them into a living trust. Living trusts are in existence got over 100 years. Grantor creates the trust by writing trust deed and funds the trust by transferring the assets (movable as well as immovable). The trust deed specifies his instruction for distribution of wealth. While grantor is alive, he has full control over the activities as well as asset transferred. He writes mechanism of appointing successor trustees.

Trust can be created by writing of trust deed. This requires person to specify the purpose of deed, its objective and how will it function. He needs to identify the trustees and give instruction of appointing successor trustees. He also needs to specify when trust has achieved its objective and how (& when) trust can be dissolved and assets liquidated. Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Invariably it has been observed that upon death of the main member, the family disintegrates which leads to division of assets which have been acquired over years through laborious work. Lot of money is wasted in fighting legal battles to take control over the assets. Division of wealth weakens the family and hence overall they lose. Living Trust is a mechanism of preserving the asset acquired over years and the fruits are distributed as per the will of Creators and avoid disputes amongst family.

How to set up a Living Revocable Trust?

A living trust (sometimes called an "inter vivos" trust) is a written legal document through which your assets are placed into a trust for your benefit during your lifetime and then transferred to your designated beneficiaries at your death by your chosen representative, called a "successor trustee."

"Living Trusts," are an effective estate-planning tool for avoiding the costs and hassles of probate, preserving privacy and preparing your estate for ease of transition after you die.

Contrary to what you've probably heard, a will may not be the best plan for you and your family. That's primarily because a will might not avoid probate when you die. A will in some jurisdictions like Mumbai, Chennai, Kolkata etc. be validated by the probate court before it can be enforced.

Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So, the court could decide who will take control of your assets before you die.

Fortunately, there is a simple and proven alternative to a will -- the revocable living trust. It avoids probate, and lets you keep control of your assets while you are living -- even if you become incapacitated -- and after you die.

Advantages of Revocable trust:

Create a living trust and transfer assets to trust

Control is in hand of creator, Can change / revoke any time, Instruction are carried out when one is incapacitated or dies, Saves trouble of probation.

Make it easy for your heirs to inherit your assets. Unlike in a will, assets in a living trust will generally pass to heirs sooner.

Disadvantage

Its Costly affair as it involves Stamp Duty, Registration, Lawyer’s cost, Trust formation etc. Hence preferable only for large estate and for Estate Tax planning particularly where estates are in multiple jurisdictions like USA.

How Family Trust can avoid the proposed Inheritance Tax?

If you place assets within a trust they will not form part of your estate on death and avoid inheritance tax In India. Inheritance tax was abolished in 1985. But fearing its return, rich professionals and businessmen are flocking to set up trusts to avoid the tax. Inheritance tax is the tax levied on assets, including properties that are transferred to the legal heirs. The heirs have to pay the tax at the time of inheriting the assets. Inheritance tax or estate duty is levied in many developed countries, including the United States, with rates as high as 50-55 per cent. India also had an inheritance tax levied as per different tax slabs. The highest tax rate was as high as 85 per cent before it was abolished in 1985 due to low tax collections, but high administrative and procedural costs. One has to be careful about timing of creating the Trust as world over there is cooling off period of around 3 years before one gets the benefit of Trust. Most of these trusts are created by those with high net worth; even others with slightly lower net worth have taken a liking to the idea. Limit for Inheritance Tax in USA is $ 11 million. One educated guess is that India may look at exemption limit of one house plus Rs.5-10 crore.

Trust can be created by writing the trust deed. This requires person to specify the purpose of deed, its objective and how will it function. He needs to identify the trustees and give instruction of appointing successor trustees. He also needs to specify when trust has achieved its objective and how (& when) trust can be dissolved and assets liquidated. Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

In a trust, assets are transferred by one party (called settlor) held by another party (called trustee) for the benefit of a third party (called beneficiaries). The beneficiaries may be definite and ascertained individuals (in a private trust) or the unascertained individuals (in a public trust).

Importance of setting up a Family Trust:

Succession planning through private trusts, allows the settlor/ author to have complete control over the Trust and freedom to pass on the assets unto the beneficiaries, which can be set out in the Deed by the settlor.

There is greater flexibility for appointment of Trustee/(s) for managing, maintaining and holding the assets of the trust for the benefit of the beneficiaries. The trustee may be a beneficiary, family member, relative or even professional trustee. The author/ settlor can also be one of the trustees or the managing trustee of the trust.

Such a trust is effective not only for tax-planning, but also to safe-guard the interests of family members (who are the beneficiaries) by specifying the management, investments of monies in the trust/ dealing with assets, distribution of assets amongst the beneficiaries and minimising not just family disputes over the assets but also to safeguard the assets from the claims of various parties including the creditors.

Estate Planning through Private Trusts

Ø Individual transfers his personal Flat/shop/Land etc. to Private Trust for benefit of his children or any relatives {as per sec. 56(2) list } – Ratios amongst children/relatives can be decided – Shares determinate - The Settlor Individual is also one of the Trustee – No salary by him – Trust irrevocable – Status AOP – Trust deed registered with 6% SD under article 25 – No income u/s 56(2)(x) to the recipient trust – No consideration, no LTCG to Individual

Ø Settlor - Trust has rental income – Files AOP returns pays tax – if immovable property sold then 54EC benefit per year can be claimed – or if beneficiaries want the assets, it can be distributed amongst them - SD would be applicable - ? Article 59 – Transfer – of trust property from trustee to beneficiary - SD Rs. 500/- Maharashtra CHS laws – Sec 154B-I(20) - Private trusts can be members in CHS

Ø One can create such different Private Trusts for various properties and various purposes

Ø Tenancy rights can be created in names of Private trusts

Ø Abroad: private trusts are created in tax havens to avoid inheritance taxes - Besides the concept of Settlor, trustees and beneficiaries , the concept of Protector is found wherein some Banker is the protector having powers to manage the funds of the private trust and use for the beneficiaries.

Ø Investments or assets can be held in the name of the trustees , for and on behalf of the Trust – The benami law will not be applicable due to Sec 2(9)(A) exclusion because assets are held in name of the trustee in fiduciary capacity though using the Trusts funds for Beneficiaries. Agreement should be clear

Key Points:

• No requirement of Probate

• Control over assets during life time of Settlor because Settlor himself can be trustee

• Incapacity of Settlor – Trustees can step in

• No disputes unlike dispute in Will in probate process

• Possibility of protecting assets in case of liabilities

• BUT good honest trustees needed

• Cost of transfer to trust – Admin costs

• It’s a concept of separate entity, with separate PAN, even GST, for any asset or use but for specified beneficiaries

How discretionary trust works for estate duty

Settlor creates a revocable discretionary trust by writing trust deed which defines the distribution of income amongst future generation, earned by the trust by way of leasing out of the properties.

He also defines conditions under which trust can buy or sell or lease future properties. For management of the trust, he has appointed his long time chartered accountant and an advocate as trustees. He also has laid down procedure for appointment of future trustees when he (grantor) is not there. His mother wills the property, which are in her name to the trust. However for transferring the asset, he had to re-register the property in Trust name and pay the stamp duty. Now he purchases property in trust name.

Living trusts are in existence got over 100 years. Grantor creates the trust by writing trust deed and funds the trust by transferring the assets (movable as well as immovable). The trust deed specifies his instruction for distribution of wealth. While grantor is alive, he has full control over the activities as well as asset transferred. He writes mechanism of appointing successor trustees.

Trust can be created by writing of trust deed. This requires person to specify the purpose of deed, its objective and how will it function. He needs to identify the trustees and give instruction of appointing successor trustees. He also needs to specify when trust has achieved its objective and how (& when) trust can be dissolved and assets liquidated. Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Invariably it has been observed that upon death of the main member, the family disintegrates which leads to division of assets which have been acquired over years through laborious work. Lot of money is wasted in fighting legal battles to take control over the assets. Division of wealth weakens the family and hence overall they lose. Living Trust is a mechanism of preserving the asset acquired over years and the fruits are distributed as per the will of Creators and avoid disputes amongst family.

PRIVATE TRUSTS

Trust - is an obligation annexed to the ownership of property & arising out of a confidence reposed in & accepted by the owners, or declared or accepted by him, for the benefit of the another or/& the owner.

It`s a legal arrangement created by a Grantor (founder/settlor) in which his property or funds are entrusted to a third party (trustee) through a valid trust instrument to handle that property or funds on behalf of a beneficiary(ies).

Income Tax aspects to consider before settling a Family Trust:

Under the Income Tax regime, the taxability on income generated out of a private Family Trust depends upon the structure adopted for creation of the Family Trust. Similarly, the point of incidence of tax and responsibility of payment of tax will change depending upon the nature the trust, specific or discretionary trust i.e. tax may be levied in the hands of the author, the trustee or beneficiary, as under:

Specific Trust: The share of the beneficiary/ beneficiaries is specific, and therefore, all such income received will be taxable in the hands of the beneficiaries.

Discretionary Trust: The trustees have complete discretion to decide the proportion in which the income/ share in the trust property/ corpus is to be distributed to the beneficiaries from time to time and the extent of such distribution, and therefore, the income is taxed in the hands of the trustee in their representative capacity.

Revocable Trust: The author can at any time during the tenure of such trust, revoke the trust (on revocation, the trust property reverts to the author), and therefore, the income of the trust is taxed in the hands of the author.

Irrevocable Trust: This trust can only come to an end upon the object/ tenure of the trust being fulfilled or the death of the beneficiary, whichever is earlier (and in no other case), and therefore, the income is taxed in the hands of the trustee in their representative capacity.

Ø Sec. 56(2)(x) – Transfer of any money or property to any Private Trust , by an Individual , created solely for relatives {Relative as defined in Sec. 56(2)(vii) - Explanation} of the settlor/Individual is not hit with Income tax in hands of receiving trust. So any Money or immovable property transferred to Private Trust (like donation), is not treated as income in hands of trust. But yes Stamp duty is leviable 6%.

Ø U/s 62 read with section 61, if the immovable property is transferred ( by a settlor or someone else ) to a trust, such that the transfer is not revocable during the lifetime of the beneficiary & the Transferor derives no direct or indirect benefit ( like salary or interest etc. ) from such income, no clubbing takes place.

Ø However if the Trust deed contains any revocation clause by the Settlor then income from such a private trust is taxed in hands of the settlor

Ø Revocation means a provision in the trust deed for retransfer of assets/income directly or indirectly to the settlor or right to settlor to re-assume power over assets of Trust. Take care in drafting Trust Deed

Ø Dissolution by beneficiaries does not amount to revocation by Settlor – SD may be attracted

Ø Sec 54EC benefits Up to Rs.50 lakhs available to Private Trust

Conclusion: As a planning tool, Family Trust is very effective and efficient at allocating, maintaining and ensuring that the assets of the author are utilised for the benefit of the beneficiaries at the right time and in the right proportion, depending on the nature of the trust. And whatever may be the reason for setting up a trust, there is always an object or purpose that can be accomplished through the trust mechanism.


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