The word trust signifies a level of faith on another’s promise. A legal trust set up to preserve, distribute and protect the family business and income generated from that does the same. The transferor or originator of the trust usually has the objective of ensuring that wealth is passed on to beneficiaries within the family or outside in a specified manner. The beneficiaries in turn have faith that the provisions of a trust will get upheld.
Reasons for creating a trust.
1. Cementing beneficiaries share
In an irrevocable trust structure, once wealth has been transferred to the trust, it cannot be taken back. This prevents any impact from emotional disputes or personal liability of the transferor on the wealth of the beneficiary. Imagine if the parents of 5 children originate a trust and name all their children, their spouses and grand children as beneficiaries.
In the course of things, if say two sections of this family have an irreparable falling out and the parents have to take sides, it creates an emotional divide. In the absence of a trust, such an event can lead to a financial set back for one of the sections, while the other benefits. Setting up a trust prevents these kinds of emotional decisions around what is essentially considered as family wealth to be shared by all.
Also, if the family business suffers a loss, the wealth in the trust and beneficiaries thereof need not be worried.
2. Equitable distribution
The transferor can decide how the wealth of the family gets distributed. There may be family members with disabilities who require a greater monetary contribution or there may be others who are frivolous with wealth plus do not contribute to the business who may not get as much.
Issues also arise when there is ancestral or business-related property, the division of such assets often creates disputes which, can be suitably addressed via a pre conceived trust.
3. Succession planning
Even if there are no disputes within the family and all beneficiaries have equal ability, all of them can’t lead the business or be responsible for the family wealth when the transferor dies. The trust can convey this distribution of wealth and responsibility in a manner that seamlessly identifies the successor in a family business.
A trust structure is not going to help in managing taxes. It can be decided who pays the tax on income – the trust itself, the transferor or the beneficiary – depending on the structure of the trust. However, tax rates are more or less on the same level.
Reasons not to create a trust
1. Tax planning
A trust structure is not going to help in managing taxes. It can be decided who pays the tax on income – the trust itself, the transferor or the beneficiary – depending on the structure of the trust. However, tax rates are more or less on the same level. Hence, you will not be able to save taxes by getting into a trust structure.
2. To manage investments
Making investments is a part of the many things that a trust does, it’s not the purpose of creating a trust. Neither does a trust structure have any advantages in being able to execute investments.
Trusts essentially help in better transference and succession where it comes to family wealth, required to be shared by many members. It helps in minimising chaos at the time of succession.
You must keep in mind though that provisions around creating a trust are plenty, there is a need for legal understanding, for paying stamp duty and appointing a trustee. Hence, it always better to get a specialised professional to help in this matter.