Rahul has been running a business for the last ten years. He has two children – four and six years of age. Rahul has been worrying about – What will happen to them after him? How will I ensure that their expenses are met? Who will run my business after me? All these thoughts are bothering him while planning for his own future.
Situations like Rahul are common. In fact, most of us make the mistake by not taking proper steps in protecting our assets and transferring them to our children. The biggest problem comes when there is a premature death and children are not old enough to take care of themselves.
Although a Will can be written for transferring the assets, it still has some limitations and cannot be the only mode of bequeathing one’s assets among the beneficiaries, especially in cases like Rahul. Creating a Private Trust resolves most of the problems and can be beneficial in the management and distribution of assets.
What are Private Trusts?
The primary objective of any individual who wants to bequeath his assets during the lifetime or after death is to protect the interest of beneficiaries. The beneficiaries might include minors who are not old enough to protect their interests. A trust creation helps in meeting this objective. When there are one or more individuals like family members as beneficiaries, a private trust is formed. The trust can be created by any person who is a major and is capable of entering into a contract.
Why Private Trust?
While managing property during one’s lifetime, there are various risks which arise and need to be addressed. There may be old parents living separately far away from their children and the children are still minors while the parents have reached old age. During succession planning the concerns could be, care for the spouse and children and donation to charity etc. All these scenarios demand the formation of a Private Trust whose main objective is to manage property (movable and immovable) at present and in future when primary bread-earner is not around.
Who benefits from a Trust?
Creation of a Private Trust can be very helpful for different family situations and businesses:
- Nuclear and joint families: For a nuclear family, separation, legal hurdles, old age medical care, child’s future and financial security are concerns around which the whole life revolves. Contrary to this in a joint family there have been instances of family litigations leading to business interruptions and assets getting locked in legal battles for years. Many of these issues can be addressed through a private trust.
- Entrepreneur: An entrepreneur starts his business with a dream to grow big in the future. During the course he has to ensure his personal and business assets are clearly defined. Sometimes, a claim can arise from any of his client’s and the business gets disrupted if the solution is prolonged. By forming a trust the continuity of business and distinction between the assets can be taken care off.
- Family of a special child: They are the biggest beneficiaries of creating a private trust. A special child needs are regular medical assistance, financial support when parents are not around, preservation of wealth. By creating a trust, parents can make sure that above requirements get fulfilled in a very efficient manner.
- Muslims: Although Muslim laws are slightly different when formation of trust is concerned, the objective remains same for them.
There can be many other situations where formation of a private trust can help in securing present and future of your loved ones according to your wishes.
Although formation of a private trust can benefit a large number of families and in different situations, it has some limitations which should be taken into consideration while planning;
- Cost: During transfer of immovable assets, stamp duty is paid as per the rate prevailing in the State. Due to this variation, cost of formation of a trust also varies across states.
- Trustees: Efficiency of a trust is highly dependent on the selection of the trustees. The trustees are to be appointed by the settlor. A wrong selection can defeat the objective of forming a trust.
- Trust deed: Drafting a trust deed is more difficult than a Will. If not drafted clearly, a trust deed is difficult to execute.
Trust vs. Will
In many instances a written Will is insufficient to distribute your assets. The battle fought in courts in various cases has revealed that a Will has its own limitations. Below are some benefits which makes creating a private trust more beneficial than just writing a Will:
- Since a trust deed is never disclosed in media, it is more confidential than a will.
- There is no probate when you create a trust.
- When you want to make some changes in future a trust deed can be easily modified in comparison to a Will.
- While planning for succession, especially during one’s lifetime, one would not want to lose control over the assets. This can be achieved efficiently through a private trust as a Will gets executed only after the death.
Creating a private trust is more beneficial than just writing a Will, but it all depends on the amount of assets one has and how you want to bequeath your property. A Will gets effective only after your demise while a trust can still be run even when you are around. To ensure your trust runs efficiently do remember following points while creating it:
- Lay down your long term objectives very clearly. It will help the trust to accommodate any changes later.
- To make your trust more efficient, make sure the trustees you decide have the skill and experience necessary for their prescribed tasks.
- Identify clearly who will be your beneficiaries to avoid any dissatisfaction later.
- Identify the list of assets which you want to include during your lifetime and in future when you are not around.