The Need and Framework of Estate & Succession Planning

Vivek Gupta

In the Indian context, the idiom Estate Planning and Succession Planning are often used interchangeably as the wealth and control of business are often transferred by Indian entrepreneurs to their next generations either during or after their lifetime. While the succession planning exercise focuses on smooth transition of control of business and management to the next generation, Estate Planning ensures tax and regulatory efficient generational transfer of ownership of business and wealth.

Indian families, since time immemorial have relied upon established tools such as Gifts and Wills for Estate Planning. Many families have resorted to setting up Private Trusts as well for varying reasons.

Need for Private Trusts

Typically, Indian promoters settle Private Trust to achieve one or more of the following objectives:

  • Streamlining the economic interest of family members in succeeding generations
  • Protecting the family business from family feuds
  • Protection of Estate from beneficiary’s personal legal issues
  • Documenting the family code and protocols for future generation
  • Fear of reintroduction of Estate Duty

Wills Vs Trusts

A Will is a legal document, wherein an individual details out the manner in which his estate should be distributed to his loved ones upon his demise and also seeks to appoint an executor of the same, who is responsible to get the Will validated by the Court through a legal process (typically referred as ‘probate’) post the demise of such Individual. Probate process is inherently subject to litigation risk, given that any aggrieved party may object and challenge the validity of a Will and such litigation can stretch for decades.

Estate planning through settlement of a Private Trust is relatively, a feasible alternative to address the shortcomings of a Will. Trust structure enables a gradual transition of assets for intended beneficiaries with adequate checks and balances. Further, for legal validity, the said Trust is typically registered with Registrar and Assurance Department of State. Unlike a Will, Trust registration does not require a probate process, thereby leaves no room for dispute with any aggrieved party. However, creation of Trust under current scenario needs careful evaluation to avoid unintended tax and regulatory implications.

While settlement of the Trust reduces potential litigation on claim of wealth, the choice between documenting a Will or settling a Trust is typically driven by factors such as size of the family, complexity of relationships, readiness to part with control and ownership, etc.

Tax and regulatory issues concerning Private Trust

Issue 1 – Status of Private Trust under Income-tax Act, 1961 (ITA)

Taxation regime in India varies with the status of the taxable person under the ITA. Categories of person are enumerated under section 2(31) of ITA viz. individual, company, Hindu Undivided Family (HUF), Firm, Association of Persons (AOP), Body of Individuals (BOI), etc.

A Private Trust, is a contract amongst the Settlor and Trustee, does not have a legal existence of its own and it does not specifically fall in either of the categories specified above. Therefore, it is pertinent to understand the legal characteristics of the Private Trust (whether settled as a specific or discretionary trust) and its beneficiaries, to determine the status of a Private Trust under the ITA.

Trustees of the Private Trust are taxed under section 160-166 of the ITA as Representative Assessee on behalf of the beneficiaries of the Trust and the Apex Court in the case of Trustees of Nizam’s Family Trust (1977) 108 ITR 555 (SC) has held that assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. Accordingly, it is reasonable to conclude that status of Trust is derived from status of the beneficiary. However, the complexity starts where there are multiple beneficiaries (say multiple individuals or combination of individual or HUFs, or sometimes individuals and sub-trusts, etc.) and share of each such beneficiary is not clearly defined. In such cases of Discretionary Private Trust, the taxation is at maximum marginal rate in the hands of Trustees of the Trust as per section 164 of ITA. while the status of the Trust is indeterminable. Ideally Trust is not a taxable ‘’person’’ at all and should be construed as a pass through entitiy. Judicial precedents and multiple interpretations over the years has complicated this subject. In fact, the income-tax department issues PAN to a Trust and utilities/ forms consider private trusts as AOP. There is also literature to suggest that the Trust needs to be assessed as an Individual.  Accordingly, the Initial assessment of the Private Trust is crucial to establish the status of Trust based on facts of each case.

Issue 2 – Applicability of section 56 of ITA to Private Trusts

As discussed above, a Private Trust does not have its own legal existence and thus not capable of holding/ receiving property. The Trustee on behalf of the Beneficiaries hold the properties in Trust. Section 56 of ITA can be tested twice in cases of Private Trust, once at the time of settlement of property into the Trust (legally held/ received by Trustee for benefit of beneficiaries) and second at the time of distribution of assets from the Trust to the intended beneficiaries.

On Settlement of property into the Trust

Ideally the provisions of section 56 of ITA should not be applicable on Trust as a Private Trust can neither receive nor hold any property on its own. Trust has the concept of dual ownership, while Trustees are legal owner of the trust property, the beneficiaries are beneficial owners.

The property of Trust is in fact received and held by Trustees of the Trust and accordingly a prevalent view is that the applicability of section 56 of ITA, if at all, should be tested from Trustee standpoint. On the other hand the carve-outs provided in Section 56 of ITA suggest that applicability is to be tested from the beneficiary standpoint. Considering the fact that legally the beneficiary does not receive any property at the time of settlement, the carve-out creates confusion on applicability of section 56 of ITA.

Furthermore, the carve out provided in section 56 of ITA for Private Trust requisites definition of relative to be tested from Donor’s perspective, whereas, normally the relative definition is tested from recipient standpoint. This potentially complicates the exempted relationships and can yield exemptions that are normally not available on direct transfers under section 56 of ITA.

On Distribution of property by Private Trust

In case the assessment of Trust has been concluded as AOP, there would be potential risk of 45(4) and 56(2)(x) on distribution of Trust Property on Dissolution of Trust as the same is not covered under any specific exemption. Accordingly, it is quintessential to ensure the status of Trust is that of its beneficiaries to demonstrate non applicability of Section 56(2)(x) of ITA on the ground beneficiaries have antecedent rights in property held by Trustee in Trust and the receipt of such Trust property by beneficiary cannot be said to be without consideration as it is realization of rights in the Trust property[1].

Issue 3 – Whether Private Trust can become partner in LLP?

As per section 5 of Limited Liability Partnership Act, 2008 only an individual or body corporate can become partner in LLP. Given the fact that Trust is neither an individual or body corporate, it cannot become partner in LLP. However, the Trustees of such Trust being individual or body corporate may become partners in LLP on behalf of Trust without addition of statement that it is a Trustee. MCA vide general circular no 37/2014 dated 14 October 2014 has clarified this position for trusts registered with SEBI (thereby allowing such Trusts to invest in LLP’s).

Practically, we have come across situations where Registrar of Companies refused to admit Trustee as Partner to the LLP on the ground that the clarification is only applicable to SEBI registered Trusts and does not apply to other Private Trusts. However, legally both SEBI Registered Trusts and Private Family Trusts are on similar footing and position may be taken accordingly.

Concluding Thoughts

Private Trust is a contract governed by Indian Trust Act, 1882. However, some regulations treat Private Trust as a separate entity and others treat it as pass through entity. Despite some ambiguities, Private Trusts structures can yield multiple benefits from tax and regulatory perspective especially in cases of estate protection and planning for individuals.


[1] Reliance can be placed on Mumbai Tribunal ruling in case of Ashok C. Pratap vs ACIT [2012] 23 taxmann.com 347, wherein similar view has been upheld.