Ring-fence your wealth from creditors by setting up wills and trusts

It is a versatile instrument suited for the wealthy, but it must be drafted carefully

According to media reports, the late billionaire investor Rakesh Jhunjhunwala set up separate trusts for his three children and appointed his spouse, a few close relatives, and a couple of his long-term associates as trustees. Wills and trusts are two instruments which ensure that assets are passed down to a person’s heirs according to  their wishes.
 

Key differences

A will is a document that directs the distribution of assets of the testator (the person making the will) after his death. It requires appointing an executor.
 

Maneet Pal Singh, partner, I.P. Pasricha & Co says, “A will is implemented by following a legal process. It is a public document available in the records of the court. The court supervises its execution.”

Trusts are legal arrangements that provide for the transfer of assets from their owner, called the grantor or the trustor, to trustees.

Tushar Agarwal, a Supreme Court advocate, says, “The grantor sets the terms for the trustee’s management of assets, for distributions to one or more designated beneficiaries, and for the ultimate disposition of assets.”
 

Types of trust

A variety of trusts can be set up in India. A living trust is created while the grantor is alive by transferring his assets. Agarwal says, “Unlike a will, which takes effect upon death, a trust becomes effective upon the transfer of assets to it. A ‘living trust’ can be created during a grantor’s lifetime. A ‘testamentary trust’ can, on the other hand, be created after the grantor’s death by following the directives in his will.”
 

A revocable trust is one whose terms can be revoked or amended at any time by the grantor during his lifetime.   
 

Another option is to set up an irrevocable trust. Singh says, “Here, the grantor can’t make any changes in the agreement of the trust, or terminate it. He is no longer the owner of assets once they are transferred to such a trust.”
 

A person can choose to create a non-discretionary trust in which he (the settlor) has control over trust norms and can determine the distribution of assets among beneficiaries. Amay Jain, senior associate, Victoriam Legalis – Advocates & Solicitors, says, “On the other hand, a trust in which the trustee decides which beneficiary gets which assets, and in what proportion, depending upon the degree of flexibility imparted to the trustee, is a discretionary trust.”
 

Include these clauses in a trust’s deed
 

• Cessation or termination of trusteeship: This will determine the circumstances in which the selected trustees’ roles come to an end
• Power of trustees: This will ensure that the trustees don’t act in a way that goes beyond the powers conferred upon them by the trust deed
• Accounts and audit: The trust must maintain proper books of account and get them audited as and when required for smooth functioning and to prevent interference from governmental agencies
• Amendments to rules and regulations: This clause mentions who can, and how they can, amend the rules and regulations of the trust
   

Will or Trust?

A will is expedient for families with limited assets, where undergoing the process of probate may not be difficult, and the settlor’s sole intent is to distribute the property to individuals related to him.

Nikhil Varma, managing partner, Miglani Varma & Co–Advocates, Solicitors and Consultants says, “High net worth individuals (HNIs) and wealthy business people should opt for a trust rather than a will.” Experts advise such people to set up a trust even though doing so is more expensive than writing a will. A trust will allow them to distribute assets the way they want to, and take care of their succession issues better. Varma adds, “The flexibility offered by trusts in terms of allocating money across a host of different purposes, as opposed to merely passing it on to individuals, makes it a more attractive option for the rich.”
 

Devil lies in the details

The key to a successful and long-lasting family trust is to set up a detailed mechanism in the trust deed that ensures the trust’s objectives are achieved. Pranav Bhaskar, partner, SKV Law Offices, says, “The trust deed must address key aspects such as the appointment and removal of trustees; clear guidelines for the management and investment of trust property; mediation, dispute resolution, and voting mechanism in the event of disagreements.”
 

A well-drafted trust deed can also ensure that the current generation of beneficiaries doesn’t squander the trust property. Varma says, “For business owners, an additional benefit is that lenders and creditors can’t ask a court to liquidate the assets of a trust in the event of business failure, provided the trust was not formed with the goal of defaulting on a loan.”