Keep Calm And Trust
Within the exercise of estate planning the most popular and widely used tool to give effect to all our estate planning endeavours is a legally enforceable will. But, the major drawback of a will is that it comes into effect only after the person who created the will has passed away. And there may be certain situations where we may wish to hand our assets down to our descendants or any other party of our choosing within our lifetimes. For such situations, a will is effectively of no use. For our estate plans to be effective they must enable the transmission of assets both during and after our lifetimes.
And trusts are an estate planning tool that provide adequate flexibility to meet both these needs. The use of trusts should therefore be given just as much importance and consideration as a will when developing an estate plan. And the various aspects associated with trusts is what I will be discussing today, so as to provide a detailed understanding of each of them. I will touch upon what a trust means, how assets are passed on under a trust, the kind of assets that are passed on under a trust, how trusts are registered before ending with the benefits and types of trusts available.
In the simplest of terms, a trust is a legal structure that is completely separate from an individual. Such a structure can then be used to hold the assets of the individual who creates the trust (known as the grantor) until the time comes to pass on the assets held under the trust to the intended beneficiaries under the trust. In most cases, the assets under a trust would vest in the hands of an individual known as a trustee. The basic structure of a trust is set out in the graphic that follows.
Trusts can be used to pass on almost every asset that may have been created or accumulated by an individual. But they are most commonly used to pass on assets such as businesses, real estate property and large sums of money meant to serve as endowments.
The process of employing a trust as a component of an estate plan begins with setting it up and getting it registered as per the applicable laws. Picking a suitable name for the trust is the first step to set it up. Once that is done the various parties to the trust (being grantors, trustees, assets under the trust and beneficiaries) must be clearly identified and defined. A Memorandum of Association must then be drafted to serve as basis for the creation of the trust deed. The trust deed would lay out the roles and powers of each party to the trust, the nuances of the structure of the trust, and give specific details of the assets under the trust.
Once the deed has been drafted, it must be submitted to the registrar for registration. If the trust deed has been appropriately drafted, the registrar would issue the certificate of registration of the trust. The trust can then apply for its own PAN (Personal Account Number), TAN (Tax Deduction And Collection Account Number) and bank accounts. At this point, the process of creating and registering the trust would be complete. The entire process has been summarised in the graphic that follows.
The most significant benefit of employing a trust as part of an estate plan is that the trust is a legal structure of its own. And because assets are passed on through a trust rather than through the grantor directly, the identity of the grantor stays hidden. Also, because wealth transmission through a trust does not have to be certified by a court. Therefore, the details of the trust and the assets vested under it would also enjoy greater privacy with a trust as compared to a will. A trust is taxed independently of both the grantor and the beneficiaries. This allows the grantor and beneficiaries to plan their taxes better, since they could enjoy a number of potential tax benefits based on the facts of each case.
While the basic way in which a trust passes on the assets that vest within it remain quite similar in all cases, there are a few nuances that would differ based on the type of trust created. On the basis of the degree of control that the grantor enjoys over the assets vested within the trust, they may be classified as revocable and irrevocable trusts. A revocable trust allows the grantor to retain control over the assets vested within the trust until the time the grantor willingly passes on the trust's assets to its intended beneficiaries, or until the death of the grantor, whichever is earlier. Revocable trusts also allow the grantor to make changes to the trust's assets or dissolve the trust at any point of time during their lifetimes.
Such trusts are most commonly set up when the grantor wishes to pass on the vested assets at a certain point of time in the future or on the fulfilment of one or more predefined conditions. Under an irrevocable trust on the other hand, the grantor has no control over the vested assets. This is because any assets vested within an irrevocable trust become the property of the beneficiaries the moment the assets are introduced into the trust. Such trusts are therefore commonly used when the grantor wishes to make an immediate transfer of some or all of their assets. The key features of revocable and irrevocable trusts are set out in the graphic below.
On the basis of the identity of the beneficiaries to a trust, trusts can be classified into private trusts and public trusts. Private trusts are those where there are a definite number of beneficiaries who are clearly identified individuals. Most trusts created by grantors for the benefit of their immediate family or any other individual are usually created in the nature of a private trust. Public trusts on the other hand are those where there are an indefinite number of beneficiaries who are not clearly identified. They are usually created by grantors in favour of charitable institutions, religious institutions or any other such cause for the greater good of society at large. They are a popular medium through which to give effect to any philanthropic aspirations that a grantor may have.
Though a legally enforceable will is an overwhelming favourite among individuals preparing an estate plan, they come with their set of inherent drawbacks that cannot be easily worked around. But trusts allow us to bypass most of the major shortcomings associated with wills. Any estate plan should therefore consider the kind of assets being passed on and the time at which the owner of the estate wishes to pass it on before making a decision on the kind of tools to be employed as part of the estate plan. Such an would help us realise that trusts are just as useful (maybe even more useful in some situations) as a wealth transmission tool as wills and so should receive just as much consideration when we put our estate plans in place.