Understanding Succession Planning: Key Insights and Strategies for Wealth Protection

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India is experiencing a significant surge in wealth, with the Hurun India Rich List 2024 reporting a total of 1,539 Ultra High Net-Worth Individuals (UHNWI), a substantial increase from 140 in 2013. The country’s billionaire count has also reached a record 334, marking a 29 percent increase from the previous year, with a new billionaire emerging every five days in 2024. This growth isn’t limited to established tycoons; a new generation of wealth creators, including Harshil Mathur & Shashank Kumar (Razorpay) and Kaivalya Vohra (Zepto), are also contributing to this rise. Alongside this, the HNI (High Net-Worth Individual) population, defined as individuals with investable assets exceeding $1 million, saw a 4.5% year-on-year growth in 2022. This era of burgeoning wealth underscores the critical importance of robust succession planning.

At Treelife, we have developed an in-depth guide to help UHNWIs and families understand the need for succession planning and how it can be used to secure and transfer wealth efficiently.

What is Succession Planning?

Succession planning is the strategic process of managing and distributing your assets both during your lifetime and after your passing. Its primary objective is to ensure a smooth transfer of business ownership, leadership, and family wealth, while proactively maintaining harmony and preventing disputes among beneficiaries.

Key Goals of Succession Planning

1. Protect Assets: Safeguard your wealth from potential risks.
2. Provide for Loved Ones: Ensure financial security for your family.
3. Safeguard Against Estate Duty Levy: Reduce the impact of potential estate taxes and other associated costs, ensuring your wealth isn’t eroded unnecessarily.
4. Fulfill Personal Wishes: Ensure that your assets are distributed according to your desires, maintaining control over how your wealth is shared.
5. Ringfencing: Protect personal assets from business liabilities, ensuring they are kept separate and safe.
6. Ensure Seamless Wealth Transfer: Facilitate intergenerational asset migration with minimal administrative hurdles.

Why is Succession Planning Necessary?

With an increasing number of High Net-Worth Individuals (HNIs) and families in India, succession planning has never been more crucial. Below are the reasons why it is needed:

• Protecting Family Assets: Succession planning safeguards family assets from external risks, including creditors and legal challenges.
• Preventing Family Disputes: It helps ensure that there are clear guidelines in place to prevent conflicts over inheritance.
• Establishing Governance Structures: Clear succession and governance structures define roles and responsibilities for family members and ensure the long-term management of family wealth.
• Tax Efficiency: Succession planning ensures that wealth transfer is managed in a tax-efficient manner, optimizing the potential tax benefits for heirs.
• Shielding Wealth from Inheritance Tax: A well-structured succession plan can help minimize inheritance tax and other potential levies.
  

Typical Modes of Succession Planning: Will vs. Trust

When it comes to succession planning, two common legal instruments are used: Wills and Trusts.

Will

A Will is a legal document that dictates how assets are to be distributed after death. It offers straightforward benefits for individuals with simple estates or those who wish to maintain control of their assets posthumously.

Who it works for: Individuals with straightforward estates and clear heirs, and those who desire immediate, direct legal control over their estate after death.

Process Flow:

1. Drafting of the will.
2. Executing and notarizing the will.
3. Appointment of an executor.
4. Probate of the will (if required) upon demise.
5. Distribution of assets by the executor.

Important Note: If a person dies without a will, their wealth is distributed to legal heirs as per the applicable succession law based on their faith.

Trust

A Trust, on the other hand, is a legal arrangement where assets are transferred to a trustee for the benefit of designated beneficiaries. Trusts are effective in maintaining privacy, protecting assets from creditors, and ensuring long-term control.

Typical Structure:

• Settlor/Contributor: The person who initially contributes money or assets to the Trust. The settlor may also be a trustee or beneficiary, and once the trust is established, any subsequent contributors are considered contributors.
• Trustee(s): Individuals entrusted with managing the trust’s assets and exercising rights and powers for wealth distribution. A trustee can be a family member, an external advisor, or a professional trustee company.
• Beneficiary: The individuals for whose benefit the trust has been settled.
• Investments & Assets: The wealth held within the trust.
• Income & Distribution: The flow of income and assets from the trust to the beneficiaries.
  

Types of Trusts

• Discretionary Trust: The trustee has the discretion to determine the distribution amount for each beneficiary. This is preferred when the share of beneficiaries is not decided upfront.
• Specific Trust: The list of beneficiaries and their beneficial interests are clearly defined in the trust deed. This is preferred when the share of beneficiaries is decided upfront.
• Revocable Trust: The settlor retains the right to cancel or revoke the transfer of assets or property to the trust during their lifetime. This is used when the settlor wishes to retain control and the option to reclaim ownership.
• Irrevocable Trust: Once assets are transferred, the transfer cannot be altered, amended, or revoked. This is useful when the settlor desires to permanently transfer ownership and control of assets to the trust.

Pros and Cons of Trusts

Pros of a Trust:

• Hassle-free wealth transition to future generations.
• Opportunity to document family philosophy, guiding future generations.
• Segregation of ownership and control.
• Planning for proposed estate duty taxes.

Cons of a Trust:

• Families may not be familiar with the concept.
• Possibility of the trust’s validity being challenged by a dissenting family member.
• Difficult to manage if a professional trustee company is desired.
• Generally, no upfront wealth distribution is done.
• Stamp duty implications need to be evaluated for real estate transfers to the trust.
• Practical difficulties may arise in transferring mutual fund units with lock-in from individuals to a trust.
  

Taxation of Trusts

Understanding how trusts are taxed is essential for effective succession planning. The type of trust and its setup can significantly affect the tax liabilities of the trust and its beneficiaries.

• Discretionary Trust: Income is taxable at the Trust level, subject to the maximum marginal tax (MMR) rate of approximately 39% (assuming the Trust opts for section 115BAC). Specific income heads like capital gains and dividends may still be taxed at concessional rates. Any income distributed to beneficiaries is generally not subject to additional taxation.
• Specific Trust: Akin to a pass-through status as beneficiaries’ shares are known. Generally, the proportionate share of beneficiaries is taxed in their respective hands as per Section 161 of the Income-tax Act, 1961.

Proper tax planning ensures that the trust’s assets are maximized and wealth is protected for future generations.

Treelife Insights: Practical Considerations for Succession Planning

• Stamp Duty on Real Estate: When transferring real estate to a trust, stamp duty implications must be considered, as they can be significant.
• Handling Lock-In Periods: Transferring mutual funds with lock-in periods to a trust can be complex. Understanding these nuances is key to ensuring smooth wealth transfer.

Practical Insights:
Succession planning isn’t just about creating legal documents—it’s about understanding how your family and business will function in the future. The right strategy balances the ownership and management of wealth, ensuring that both are protected.

Will vs. Trust: A Comparison

Key Parameters	Will	Trust
Meaning	Provides for asset disposition upon death	Created by a settlor contributing wealth
Modification	Can be amended unlimited times; the latest will is valid	Terms can be modified based on trust deed provisions
Execution Timing	Becomes operational after the transferor’s death	Can be operational during the settlor’s lifetime or after death
Process of Disposition	Assets pass through the probate process	Assets are transferred based on predefined trust conditions
Court Involvement	Probate is required in most Indian states	Generally, no court involvement unless contested
Beneficiaries	Named in the will and receive assets post-probate	Defined in the trust deed
Conditions for Distribution	Specified in the will	Conditions can be set by the Trustee
Management	Executor is appointed to carry out the will	Trustees are appointed for ongoing management
Asset Protection	Limited protection, as assets remain in individual ownership	Provides protection from creditors and legal claims
Control & Governance	No control after death	Ensures long-term control and governance
Cost	The cost of preparing a will is minimal	Cost of setting up and upkeep for trust structure is high compared to a will

Conclusion

With the increase in wealth across India, succession planning has become more than just an option; it’s a necessity for those looking to protect their legacy. By establishing clear governance, selecting the right tools (Will or Trust), and planning for potential tax implications, individuals can ensure that their wealth is preserved, protected, and efficiently passed down.

Get In Touch to Plan and Protect Your Legacy

At Treelife, we specialize in succession planning to help you safeguard your wealth, protect your family’s interests, and ensure the smooth transition of your assets. Let’s work together to secure your legacy for future generations.

Contact us today to get started on your succession planning journey:

📧 support@treelife.in
📞 +91 99301 56000 | +91 22 6852 5768
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