CA Pankaj Shah discusses the importance of estate planning and the use of private trusts to ensure a smooth transmission of assets. He explores different options such as issuing equity shares and investing in private trusts.

Estate Planning through Private Trusts and Taxation Implications

The story of a husband and wife who started a successful business together but eventually divorced. They wanted to ensure that their children would still benefit from the family business, leading them to consider using a private trust.

The Story of a Husband and Wife's Business and Divorce

The husband and wife explore different options for setting up a private trust to protect their children's interests in the family business. They consider issuing equity shares, preference shares, and investing in a private trust.

Options for Private Trusts and Settling Shares

CA Pankaj Shah explains the concept and structure of private trusts, emphasizing the importance of understanding the journey and laws surrounding private trusts. He discusses the role of the settlor, trustee, beneficiary, protector, and transferor in a trust.

The Concept and Structure of Private Trusts

CA Pankaj Shah categorizes trusts based on tax criteria, including specific trusts, discretionary trusts, revocable trusts, irrevocable trusts, and testamentary trusts. He also mentions other types of trusts such as generation-skipping trusts, grantor trusts, dynasty trusts, asset protection trusts, living trusts, and Krami trusts. He explains the taxation provisions applicable to each type of trust.

Types of Trusts Based on Tax Criteria

This chapter introduces the concept of different types of trusts, including PF trust, charitable trust, and specific trust with identified beneficiaries and shares.

Introduction to Different Types of Trusts

This chapter discusses the taxation of specific trusts, where the tax is co-extensive with the beneficiary and collected by the trustee. It also explains how beneficiaries pay tax on the trust's income.

Taxation of Specific Trusts

This chapter explores the taxation of discretionary trusts, where the trustee has discretion over the distribution of income. It covers the exceptions and implications for taxation in discretionary trusts.

Taxation of Discretionary Trusts

This chapter focuses on the taxation of business trusts, including testamentary trusts and normal trusts. It discusses the different tax rates and assessments for business trusts.

Taxation of Business Trusts

This chapter delves into the exceptions and case laws related to the taxation of discretionary trusts. It covers the taxation of long-term capital gains and the implications for beneficiaries and trustees.

Taxation of Discretionary Trusts - Exceptions and Case Laws

This chapter discusses the taxation of discretionary trusts as Association of Persons (AOP) and the options for return filing. It also highlights the considerations for manual return filing in certain cases.

Taxation of Discretionary Trusts - AOP and Return Filing

This chapter explains the taxation of deemed revocable trusts, where the income is taxed in the hands of the transferor rather than the trust. It discusses the implications for different types of trusts.

Taxation of Deemed Revocable Trusts

This chapter explores tax planning strategies and trust structures for family businesses, including nuclear families, industrialist families, and corporate families. It covers various types of trusts and their implications.

Tax Planning and Trust Structures for Family Businesses

This chapter discusses migration strategies for transferring assets to trusts and the role of professional trustees. It highlights the importance of flexibility and the cost implications of establishing and maintaining trusts.

Migration Strategies and Professional Trustees

This final chapter covers the requirements for stamp duty and registration of trusts, including the threshold for immovable property contributions and the legal aspects of trust formation.

Stamp Duty and Registration of Trusts

In this chapter, the speaker discusses the scenario where both children have pre-diseases and explains the case of Mehra and Alabaaz High Court's decision. It is concluded that this is an invalid trust, but section 77 of the Indian Trust Act states that the property will return to the settlor.

Invalid Trust and Section 77

The speaker explains that section 77 of the Indian Trust Act provides guidance on how to end a trust. If the purpose of the unlawful trust is fulfilled, the trust will be completed and the property will be distributed among the beneficiaries.

Completing an Unlawful Trust

The speaker reflects on the complexities of estate planning and references the film "Anand" to emphasize the uncertainty of life. The importance of considering different situations and purposes when forming trusts is highlighted.

Planning in Different Situations

The speaker concludes by stating that trust formation depends on the specific case and purpose. They mention upcoming topics such as estate planning, succession planning, taxation implications, and other aspects to be covered in future discussions.

Conclusion and Future Topics

- The video discusses estate planning through private trusts and their taxation implications.
- Private trusts were discouraged in the past but have gained popularity again for succession planning.
- Private trusts involve settling assets in a trust for the benefit of children to avoid loss in case of divorce or remarriage.
- Other options for succession planning include issuing non-voting shares or preference shares.
- Private trusts became unpopular due to increased tax rates and litigations, but interest has revived due to the possibility of inheritance tax.
- The structure of a basic trust includes a settlor, trustee, and beneficiaries.
- A protector may also be appointed to oversee the actions of professional trustees.

- The concept of a protector is used to keep an eye on professional trustees appointed by a settlor.
- A trust is formed by combining five people: settlor, trustee, beneficiary, protector, and transferor/donor.
- A trust cannot exist without a beneficiary.
- A settlor can be a trustee or a beneficiary, but not all three.
- The trust deed should include information about the parties involved, the rights and duties of the trustees and beneficiaries, procedures for amending the trust, and provisions for dispute resolution.
- Trusts can be classified as specific trusts (with identified beneficiaries), discretionary trusts (where trustees decide how much each beneficiary receives), revocable trusts (where the settlor can take back the property), irrevocable trusts (where the property cannot be taken back), and testamentary trusts (created through a will).
- Deemed revocable trusts involve the transferor being the income recipient.

- The video discusses different types of trusts, including revocable trusts, generation-skipping trusts, grantor trusts, dynasty trusts, asset protection trusts, living trusts, and Krami trusts.
- Specific trusts are taxed based on the same manner and extent as the beneficiaries, while discretionary trusts are taxed at the maximum marginal rate.
- Section 166 allows for the option of taxing direct beneficiaries instead of the trust.
- Revocable trusts result in the income being clubbed in the hands of the transferor.
- The taxation of trusts depends on various governing provisions outlined in the Income Tax Act.

- The video discusses beneficiary family trusts and how beneficiaries can include individuals and charitable trusts.
- Taxation of specific trusts is based on the status of the beneficiaries, with individuals being taxed as individuals and different entities being taxed separately.
- In specific trusts, beneficiaries pay tax on the trust's income and the trust files a NIL return.
- Discretionary trusts have no right to income and are taxed at the maximum marginal rate (MMR) unless income has already been distributed to beneficiaries.
- Exceptions to MMR taxation in discretionary trusts include cases where beneficiaries have no taxable income, the trust is the only one settled in a will, or the trust is a PF or gratuity fund.
- A discretionary trust receiving long-term capital gains is taxed at a lower MMR rate.
- Once tax is paid by either the beneficiary or the trust, it is not taxed again.
- Return filing for specific trusts is based on individual status, while discretionary trusts may require ITR 5 filing.
- Deemed revocable trusts are taxed in the hands of the beneficiary rather than the trust.

- The video discusses the taxation of deemed revocable trusts and pass-through vehicles.
- It mentions specific trusts such as ILFS, IDFC trusts, and REIT trusts.
- The status of a trust can determine how it is taxed, with individual beneficiaries being taxed differently than non-individual beneficiaries.
- The video also covers the taxation of capital gains and the implications of section 56-2.
- It warns against creating trusts without any property and highlights the importance of considering estate planning in aggressive tax planning.
- Different types of trusts are mentioned for nuclear families and industrialist families with non-resident children.

- The video discusses different types of trusts, including discretionary trusts, corporate trusts, and master trusts.
- It explains how to structure trusts for family businesses and different types of assets.
- The video also covers migration strategies for transferring assets to trusts and the implications of other laws.
- It mentions the concept of professional trustees and the importance of proper management.
- Stamp duty and registration requirements for trusts are also discussed.

- Alternate beneficiaries are often defined in estate planning
- If one child has a pre-disease, the other child becomes the beneficiary
- If both children have pre-diseases, the trust may be considered invalid
- However, Section 77 of the Indian Trust Act states that the property will return to the settlor in such cases
- Section 77 outlines how to end a trust
- Planning depends on individual situations and purposes
- The speaker will cover more topics in estate planning and succession planning in the future.

The video discusses estate planning through private trusts and their taxation implications. Private trusts have gained popularity again for succession planning and involve settling assets in a trust for the benefit of children. Other options for succession planning include issuing non-voting shares or preference shares. Private trusts became unpopular but interest has revived due to the possibility of inheritance tax. The structure of a basic trust includes a settlor, trustee, and beneficiaries, with the possibility of appointing a protector. Trusts can be classified into specific trusts, discretionary trusts, revocable trusts, irrevocable trusts, and testamentary trusts. The taxation of trusts depends on various governing provisions outlined in the Income Tax Act. The video also covers different types of trusts, migration strategies for transferring assets, and the importance of proper management. Stamp duty and registration requirements for trusts are discussed, as well as the concept of alternate beneficiaries. The speaker plans to cover more topics in estate planning and succession planning in the future.

Estate and Succession planning through Private Trusts by CA Pankaj Shah from Indore

Namaskar Friends, I am CA Pankaj Shah Today I will discuss Estate Planning through Private Trusts and their Taxation Implications Friends, it is said that only 2 things are certain in this world Death and Taxes As far as debt is concerned, we ensure that there is a seamless succession planning and there is a smooth transmission of all the assets for the ligators.

It is a little complex because trust, private trust, is rarely resorted.

Especially, there was a period in our country where it was discouraged.

Before that, the world's largest private trusts had been established in our country.

A husband and wife both were very good businessmen.

When that business grew a lot, both husband and wife started to have a rift.

They started to fight and even got divorced.

But both of them loved their children a lot.

So both thought that we will run the business, but our children should get the benefits.

Both thought that if my spouse or my life partner gets remarried or divorced, then our children should not suffer any loss.

They wanted the family business to be under their control, but their children should get the benefits.

The first option is to keep equity shares with voting rights and issue equity shares of non-voting rights to the children.

the dividend on non-voting shares and The husband and wife will get the dividend and control the voting rights.

The second option is to issue equity and preference shares.

Equity shares will be controlled by the husband and wife.

The preference shares will be given to the husband and wife.

The third option is also used for private trusts.

If the husband and wife get a dividend, the children will get it.

The third option, which we are going to focus on today, can also be used

The husband and wife invest their company's shares in the private trust.

The beneficiaries of the private trust become their children.

So that the children will get the dividends.

These 2 husband and wife have settled their shares in their lives and gifted the trust.

So now they have no right to reverse this.

Later, if the husband and wife are separated, then those assets have now irrevocably gone to that trust.

So friends, with this we saw how planning can be done through family trust.

Now we will start looking at these provisions in detail.

The example I gave is a classical example of a private trust.

Parents make a trust, settle their property in that trust, and then the same parents become the trustee of that trust and control it.

Many times we want to do it through the will, but the problem with the will is that the will can be revised as many times as needed, the will can be challenged.

So when we have to avoid all these things, we try to do succession planning through private trust.

But private trust is a complex subject in itself.

That's why many people are hesitant about it.

But after today's presentation, I am sure that we can attempt tax planning and succession planning through private trusts.

We need to understand the journey of private trusts.

about the 1980s, the world's largest trusts were formed in our country.

Tata's Tata Sons company has Tata Trusts in different places.

We have the largest trust of Pilani Investments in Birlas.

Through this trust, they have controlled their family-run business.

We have seen many times in family businesses, that uncle and uncle, many relatives together, set up a brand.

And How to do succession planning Through trust, they used to do family business in India in big business houses After 1980s till 2000 These trusts were used for tax evasion or for any other reason To discourage this Government increased their tax rate a lot And these trust Litigations also increased Because of which they became unpopular.

That's why people's interest in these trusts started to decrease.

But After 2000, especially when big corporate litigations started happening through wills, we saw the case of famous Lodha and Priyamvida Birla, the case of Singhania, the litigation of Mafatlal, after all these big litigations, again people started planning tax through private trusts.

But the biggest trigger is the return of inheritance tax.

In the 1990s, it was said that the inheritance tax could be reimbursed.

In addition, the budget of 2013 also stipulated the reimbursement of the inheritance tax.

So when these proposals started coming, and the biggest logic behind it was that when the inheritance tax is in place in America, England and all the advanced countries have this inheritance tax, then why shouldn't India have this tax?

More so, the government is justifying this tax because it is applicable to rich and super rich people.

So, such taxes should be there in the progressive economy.

When this kind of thing came up, the super-rich category or the reasonably wealthy families thought that their succession should be through minimum tax, and not through inheritance tax.

That's why they thought of planning the tax through succession planning through private trust.

So we will see how inheritance tax can be controlled through private trust.

How can we try to save it if inheritance tax comes.

Apart from inheritance tax, we discussed many other purposes like control perspective.

Trust can be used for control perspective as well.

In the next slide, we will see how a basic trust is structured.

The first person in this trust is the settlor.

Settlor means the person who wants to settle his assets in a trust.

The trust that will be created will be a trust.

The trust in which the settlor will keep his assets, will be called a trust.

To manage this trust, he will The legal ownership of the assets to be controlled by the trustee.

The trustee is a person who will exercise control.

He will see that the assets are being properly managed, our wealth is being properly managed.

And the purpose for which it has been given in the trust is the same purpose for which it is being used.

Now for whom are these assets being used?

Section 3 of Indian Trust Act also says that if beneficiaries are not defined, if there are no certain beneficiaries in any trust then there is no trust a valid trust prerequisites having of a beneficiary so there will be some beneficiaries like family trust in that our children, grand children can be the beneficiaries This trust can be used for PF, Provident Fund, other statutes.

So the employees in the Provident Fund, they will be the beneficiaries.

So Beneficiaries can be individuals or a class of persons.

Which will be managed by the trustees for the benefit of the beneficiaries.

So this is the basic structure of a trust.

We saw the set law, trustee, beneficiary.

Apart from this, there is a concept of a protector.

Sometimes, it happens that the trustee, not keeping any individual, this concept is more prevalent abroad, that we make a trustee of a bank or a wealth management company who manages wealth.

But sometimes it happens, I heard an example from Mr.

Dilip Choksi who is a renowned chatted accountant He gave an example of a gentleman who met him, his great grandfather had settled 35 lakhs in a private trust and appointed a professional trustee When that person met him, he said that your great-grandfather settled 35 lakhs in that trust, so you must be a multi-millionaire.

He said, no sir, I have only got 80,000 rupees from that trust.

He said, in the administration of all the other trusts, they took the professional trustee.

The professional trustees who are doing their work properly or not, To keep a vigil on them, because the settlor has lost all his rights, the settlor appoints a protector to keep an eye on a professional trustee.

When he contributes, a person other than settlor who is contributing to the assets of the company, to the property of the trust, he is called contributor or transferor or donor.

So, this concept of trust is formed by combining 5 people.

Settlor, Trustee, Beneficiary, Protector, and Transferor or Contributor.

Here, please keep in mind that there can't be any trust without a beneficiary.

If there is no beneficiary, then that trust will not sustain.

Now let's talk about a settlor, trustee, and beneficiary.

No, not 1 person can be all 3, but there is a thumb rule which is 2 out of 3.

I have made a trust for my children and I want to keep control of that trust in my hands.

So a person can be settlor as well as trustee.

Another example is a settlor and beneficiary.

If these 2 are 1 person, it is called a revocable trust.

There are many trusts in foreign which are also called grantor trusts.

In which I am settling property in the trust for my own benefit.

Here, a third party will do the wealth management professionally, who will be the trustee, who can manage the assets well.

So, this is a type of concept where the settlor and beneficiaries are the same.

Third concept, trustee as well as beneficiary should be same this concept is not seen normally because if they can do it then why not direct them to the west so this concept of 2 out of 3 prevails here how to make trust?

To make trust, trust deed is required what will be there in trust deed?

So in this trust deed There will be some basic components in a trust deed, as we will see in our slide.

First of all, there should be information about the parties in a trust deed.

This is the basic information about the trust.

Then, what will be the rights of the trustees of this trust?

Then, beneficiaries, who will be the beneficiaries, what will be their rights, what will be their duties, how new beneficiaries can be included, how old beneficiaries can be excluded, all these rights, powers, all these should be clearly defined in the trust deed.

What are the conditions and procedures to extinguish the trust?

This should be clearly defined in the trust deed.

If there is a dispute, then avoid going through courts.

There should be a provision in the trust deed for arbitration mechanism that is alternate dispute resolution.

Apart from this, how to amend the trust deed, its process and procedures should be defined in the trust deed.

Then only there will be a smooth trust settlement.

First, we will classify the trust based on the relevant tax criteria.

The first type of trust is a specific trust.

When the trust is made, the settlor has identified the beneficiaries.

That I am the Settlor, I have made my children A and B beneficiaries and their share will be 50% 50% This specific trust is not used to avoid estate duty.

Estate duty avoid or rather plan word I use because this is not avoidance it was used for avoidance which is its basic nature if I have made a specific trust and my beneficiaries are known A and B, then in that case when I am settling property in the trust and after the demise of the settlor, when my beneficiaries are identified, then those beneficiaries will be the owner.

In such cases, the beneficiaries had to give estate duty.

Since there is no estate duty in India, we are discussing this for an academic purpose.

If both are share defined, then we know how much property has been wasted from whom.

So, 50% tax can be taken from both the properties.

Apart from this, the second trust is discretionary trust.

This is an important trust because in discretionary trust, it is up to the trustees which beneficiary to give how much.

Beneficiary is defined, but which beneficiary will get how much, will get or not get, when will get, this will be decided by the trustees.

So all the beneficiaries are at the mercy of the trustees.

So here there is no right of beneficiaries.

As we saw in the specific trust, this beneficiary trust, this discretionary trust because there is no right of beneficiaries until the trustees give them something.

That's why this discretionary trust was used many times for estate duty planning then these are beneficiaries identified and unidentified specific as well as discretionary trust apart from this, there is a trust called revocable versus irrevocable trust I have a property and I want to give it to the trust but when I want it back, even if I take it back from the trust then it is called revocable trust that The transfer to the trust is revocable.

Once I contribute some property to the trust, I have no right over it and I cannot take it back.

This irrevocable transfer is done in trust.

Because unlike will, if I can change it again and again and if I want to, I can transmit it through will.

But if I want to put the property in it once, then I can't take it back, this benefit should pass on to my successors.

So that's why it's good to transfer irrevocably.

Sometimes it happens that a person thinks that he may get divorced and in divorce cases, 50% property and maintenance is given in alimony.

So, if I transfer that asset irrevocably before the divorce, then I will not have any right on it.

Apart from this, an asset protection trust is also made, which is discretionary, irrevocable.

How will this asset protection or irrevocable trust be?

It is used for asset protection and many other purposes.

Irrevocable trust can be used if I feel that my creators will claim on my personal properties.

My personal liabilities can be charged on Insolvency Bankruptcy Court.

So, I can irrevocably settle my assets in a trust for my beneficiaries.

In such cases, the advantage would be that if I irrevocably settle the assets in a trust, then the trust and assets would be protected.

No 1 can claim on them because I have no right on them.

In old laws, there was a period that if you had put something in the trust before a year or 2 years or when I got a liability, that will not be considered as irrevocable transfer.

But for the time being, because there is no such law, let's assume that if we have irrevocably settled an asset in a trust, that will be protected from divorce, creditors, claims, insolvency cases.

The last type of trust is a testamentary trust.

make a trust through will, property should be vested in that trust through will, that is a testamentary trust.

This is also an interesting type of trust.

So, for taxation purpose, specific trust, discretionary trust, irrevocable trust, deemed revocable trust.

Deemed revocable trust is an irrevocable trust in which I am transferring an asset.

Settler has vested an asset but I am its beneficiary and I am transferring some assets to it myself so that I get it.

So such a trust is called deemed revocable trust.

In such a revocable trust, in deemed revocable trust, the transferor in the trust will be the income of the transferor.

This trust will become a pass-through status.

I am contributing property in the trust, but the income will be clubbed in the hands of the transferor.

So this is 1 type of trust according to taxation.

Some other types of trust, which are less prevalent in India but are internationally prevalent, like if we talk about the US, there is a generation-skipping trust.

What happens in this trust is that if I am my son, If I give my property to my son, then 50% of inheritance tax will be lost.

If he gives property to his son, then 50% will be lost.

So if I give some property to my grandson, then only 50% will be lost.

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Estate and Succession planning through Private Trusts