Why estate planning in India through irrevocable trusts is gaining ground
By Girish Kaushik, JAA & Associates
Increasing personal wealth, potential inheritance tax levies, and complex family situations have put the spotlight on estate planning. Estate planning mechanisms need to have tax and legal certainty, and should be easy to administer and manage.
Historically, estate planning was managed through wills and civil law – Hindu Undivided Families (HUF) or Sharia, or through familyowned companies or partnerships.
While wills are well-recognised instruments for estate planning, they are open to disputes that arise after the settlor’s death. They are also not immune to future levies of estate taxes.
In India, HUF law has historically been used in estate planning and estate preservation for Hindu families; similarly, Sharia law for Muslims.
However, due to rapidly changing culture, practices and demography, and lack of international recognition or understanding, these long-standing laws are subject to pervasive reforms. For example, a Uniform Civil Code or abolition of HUF as a tax entity may impact prior structures.
Given these factors, irrevocable trusts under the Indian Trusts Act, 1882, which is rooted in Common Law, have become popular for orderly succession and estate planning. A trust has its own taxability, and can maintain bank and securities accounts into which a donor can transfer assets irrevocably.
These assets are then managed by designated trustees, in trust, for the benefit of the beneficiaries. Further, a well-drafted trust deed, along with a panel of trustees, administers and manages the trust. Irrevocable trusts created for the benefit of family estate planning are not taxable at the time of creation, and taxes on the income of trusts are well codified.
A trust, subject to a thorough cost vs. benefit analysis, established during the lifetime of the settlor, establishes intent and provides a harmonious roadmap for estate planning. These advantages have spurred renewed activity in creating private trusts for estate planning in India.
Girish KaushikGGI member firm
JAA & Associates
Advisory, Auditing & Accounting, Corporate Finance, Fiduciary & Estate Planning, Tax
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JAA & Associates is a full service audit & advisory firm, providing contextual, globally relevant, and comprehensive services. With a legacy of over 40 years, the firm prides itself on its width and depth across practice lines, and is guided by the principles of stay agile, stay relevant and stay client focused.
Girish Kaushik, FCA, CPA is a Founder Partner. He leads the startup desk, consulting and transaction advisory practice of the firm. Twenty years of experience spanning advisory and corporate finance roles helps him deliver comprehensive advice. He is a marathoner and a passionate student of Indian history.
Published: Trust & Estate Planning Newsletter, No. 09, Spring 2022 l Photo: ttinu - stock.adobe.com