Family Trusts – A tool to ensure business succession and asset protection within business families.

As per various sources, including CII, the family businesses’ contribution to India’s GDP is almost 70% and simultaneously they generate sizeable employment as well. However, studies show that just 13% of the family businesses survive till the third generation because as new generations join the business, it becomes challenging to keep the family and business together.

Those family businesses that believe in the concept of continuity across generations have gone ahead and are setting up family trusts as a part of a succession strategy. A family trust is an independent legal entity created to insulate the business from the promoter family owning/ controlling it, thereby ensuring there is no adverse impact on the business due to family feuds or related factors. 

Broadly speaking, the need for setting up a private family trust is felt because of the following reasons:

1) Business succession

Succession planning is done to ensure business continuity. The contours of a succession plan deal with the objective of settling the issues of who will inherit the company shares, defines and safeguards the interests of working and non-working family members/ retired members/ minor and special members/ married daughters, etc. It can be done by making a Will or by setting up a Trust. A trust set up for succession planning allows complete control, while at the same time helping overcome the shortcomings of a Will.

2) Asset protection

In addition to serving as a tool for succession planning, a trust helps safeguard the personal assets of the family as well. It helps insulate the family from external claims arising due to a variety of reasons like adverse business cycles, disputes within the family, matrimonial claims under a divorce, legal actions from within and outside the family, amongst others. Such an arrangement done, ahead of time, ensures minimal friction within the family members, on professional and personal issues, to begin with, acting as a deterrent.

3) Passing on wealth under inheritance

Lastly, a trust could also be used as a vehicle to pass on the family assets under inheritance. Trusts allow ample flexibility to ensure proper inheritance tax planning, by helping minimise ta outgo during inheritance-led asset transfers. It is especially beneficial for families whose members may be spread across the world or those having NRI children, located in jurisdictions where estate duty is considerably high.

Family Trust, if used proactively, can help ensure business continuity by keeping the family together and by bringing about adherence to the ‘code of conduct’ put in place, for the family at large. The disruption caused by the pandemic has brought to the fore the criticality to plan the succession of a business family’s personal and business assets methodically. Moreover, with the elusive economic growth reviving post-pandemic, the present decade is likely to see sustained economic growth. Also, as the new generations join such succession planning helps overcome the challenges faced in keeping the business and family together