The concept of a holding vehicle for housing family wealth and assets is gaining more and more popularity because of the innate desire of Indian promoters to pass on wealth over generations and to continue and maintain family business and legacy. While such holding vehicle can be structured in varied ways, a private family trust is more prominent considering the flexibility and ease it offers for the desired objective of effective control and management and smooth succession of wealth over generations. This article deals with the tax and regulatory aspects with respect to a private family trust.

Tax considerations

A trust is not a separate legal entity unlike a company, and the Indian tax laws do not expressly recognise trusts as separate taxable unit. However, there are specific provisions dealing with taxability of income of trust. A private trust is usually formed through contribution of funds or property by one of the family members for the benefit of the larger family. A private trust does not require registration unless it is formed through settlement of immovable property. The person settling the trust is called as settlor while the person nominated to control and manage the affairs of the trust is called the trustee. The family members for whose benefit the trust is settled are called the beneficiaries. Thus, where a settlor, being a family member, make any irrevocable settlement to the trust, no tax implications arise for any of the trust parties. In fact, it has been now clarified that any contribution made by a family member to a trust created for the benefit of his relatives shall not attract any tax implications. The income earned by the trust however gets taxed and assessed depending on whether the trust is a specific or a discretionary trust. In case of a specific trust, where the share of each beneficiary is fixed and known, in absence of any business income, the tax liability is in like manner and to the same extent as tax would have been leviable upon and recoverable from the beneficiaries individually. Such income can be assessed either in the hands of the trustee or in the hands of individual beneficiaries. In case of discretionary trust, where the shares of each beneficiaries are not determinate, the income of the trust is taxed at the maximum marginal rate, subject to any lower special rates of tax, like in case of capital gains. However, post discharge of tax liability, the distribution to members are tax free. Thus, there is no double taxation under a trust structure.

One also needs consideration of tax cost on migration of assets to the trust. Any contribution of property by a family member to a trust created for the benefit of his relatives is generally tax exempt. Further, any distribution of assets or income from the trust to its beneficiaries under a private family trust would generally not attract any tax liability - either interim or at the time of dissolution of trust. However, it is pertinent that the structure of the trust and the draft of the deed is robust so that such exemptions are not challenged.

Regulatory nuances

In addition to tax considerations, regulatory implications also become pertinent. For instance, where the assets to be housed under the private trust are shares of a listed company, provisions of Sebi Takeover Code become imperative. Further, transfer of immovable properties to a trust may also attract stamp duty as per applicable state laws and thus considering the cost a decision needs to be taken if the same may be transferred through a will to the desired trust. Such as, in case where any family member is a non-resident, exchange control regulations also need to be considered. Where it is proposed to have non-residents as beneficiaries, prior approval of RBI is recommended in absence of any specific permission or restriction under Indian exchange control regulations. Also, any distribution of funds by trust to non-resident beneficiaries needs compliance with exchange control regulations or in certain cases an express approval from RBI. Further, where non-resident individual becomes a trustee of a trust, regulatory adherence as well as considerations with respect to tax residency of trust need a more profound analysis.

Thus, while trust structure extends significant benefits and is favoured for smooth succession planning and potential estate tax protection, due considerations should be given to tax and regulatory nuances while conceptualising a private trust structure for its efficient and effective functioning.

Vishal Gada is partner and Zeel Jambuwala is principal at Dhruva Advisors LLP. The views expressed here are personal.

First Published:May 7, 2019 6:00 AM IST