Skip to main content
Scripbox Logo

When does creating a Trust make sense?

Among other reasons is the ability of a trust structure to address the complexities of inter-personal relationships which get mingled with family business equations in an emotion free format, yet within the boundaries of the family’s value system.

Let’s begin this discussion by stating it right upfront that forming a family trust is not about saving tax or making tax efficient investments. Then why do families opt for it?

Among other reasons is the ability of a trust structure to address the complexities of inter-personal relationships which get mingled with family business equations in an emotion free format, yet within the boundaries of the family’s value system.

Trust and family values

As families expand and generations get added, expectations, desires and contributions to the family business begin to get altered. Not only that, expenses also expand with an expanding family. 

Moreover, with every successive generation comes a desire to do things differently or simply do different things rather than the family business. That is why the process of setting up a family trust begins with the Trust Deed. This is not always a legal document, but it is critical to have it in writing. At the outset it details the family’s generational values, socio-economic and behavioural expectations from the members. Within this framework, the wealth and business of the family is then managed. 

It is possible that while the patriarch/matriarch and elder members of the family may seek greater love, trust and a culture of togetherness from the younger generations, the grand children who come from different branches of the family may not trust each other at all. 

We have seen brothers fighting and families getting divided in great angst even for large sized industrial families, let alone small businesses. As the family and the business expands, different members will have varying levels of responsibility towards the earning business(es) and also varying levels of spending.

Family sub units are formed and not all of them will be of a similar size. For larger sized family sub units, expenses are likely to be greater, but what if their contribution and responsibilities towards the family business is lower? What happens in the event of a disabled member and their needs?

All these factors, expectations and requirements can be written down in the family trust deed within the limits defined by the governing family values. Once, written and understood a rational resolution, distribution of assets and succession of business responsibilities can be arrived that. This then becomes the binding trust document for the family and is a way to avoid conflict.

What if your next generation doesn’t want to be part of the business and would rather invest in their own separate business which is unconnected? The funds needed for such a move will have to come from the family business, but other members may not be agreeable. In such matters too, a clearly worded trust on sharing of wealth and distribution can help.

Unforeseen events

Other than interpersonal equations, there can also be conflict if say the patriarch of the family has an untimely death or gets incapacitated mentally or physically. Such sudden succession can bring about disputes in the next generation when there is no clarity of responsibilities and of wealth sharing. Forming a trust helps take care of such situations. 

What if your next generation doesn’t want to be part of the business and would rather invest in their own separate business which is unconnected? The funds needed for such a move will have to come from the family business, but other members may not be agreeable. In such matters too, a clearly worded trust on sharing of wealth and distribution can help.

A well-formed family trust can actually help keep the family together without letting wealth and assets become a bone of contention within relationships. Often the trustee for such structures is someone outside the family but known and trusted by all, or it can be a professional too. A trustee is required to ensure that the duties and demands of the trust are followed through, plus also for executing transactions like investments on behalf of the trust. 

It is not an easy task to formulate a family trust and can take many months in some cases, however, as generations get added relationships and expectations get more complex, it helps to plan succession through a reliable trust.

 

Our Most Popular Categories

Achieve all your financial goals with Scripbox. Start Now