PRIVATE TRUSTS & ESTATE PLANNING
The process of personal financial planning conducted professionally, cannot ignore the major aspect of estate planning. Estate planning is being gaining the popularity with more professionals entering the business. What used to be a process followed by only the super-rich, through their attorneys, is now being implemented in the financial advisory processes of individuals who have amassed a measurable size of wealth also, through their financial advisors. Specialised institutional setups with legal, taxation and financial planning experts are set up to deliver these services. In this article, I am trying to give a brief overview of estate planning and the kind of trusts one can create for different kinds of purposes.
Estate planning is a process of anticipating and arranging an individual’s assets so that they can be distributed according to their wishes and tax efficiently, either during their lifetime and/or following their death. When should one start thinking of estate planning? As soon as he or she considers that she has accumulated a measurable size of wealth. Also, one should note that estate planning is a continuous process, and should be worked out in tandem with changing asset structures, family composition, income stability, sometimes economic condition and age. An inadequate or lack of estate planning can result in unwarranted disputes among the next generation and loss of peace of mind.
What are the different tasks under estate planning? It may include:
1) Creating a last will and sometimes a living will
3) Establishing a trust & nominating trust beneficiaries
Why is estate planning an important function of financial planning? Presence of an estate plan, keeps things peaceful for the estate owner, during his/her non-working phase of life. Sometimes, when the assets are owned with complicated ownership structures – like, joint ownership, contingent ownership and ownership subject to multiple country tax regulations, pose additional challenges of resolving the issues before planning succession of said assets. Estate planning can also help in changing the ownership structures, if required to avoid any conflicts in terms of succession as well as issues like double taxation and the likes, during the life of the owner of the estate.
Who has to do the estate planning? Should it be a legal expert, or a taxation expert, or should it be a financial planner? Estate planning, as a matter of fact, is a specialised function altogether, which needs experts who can accumulate knowledge of regulations, taxation as well as financial planning. Sometimes, estate planning firms are established, which will have a team of professionals from different areas coming together. A financial advisor is supposed to be developing a comprehensive financial planning, covering, education funding, insurance needs, retirement corpus planning and legacy planning, whereas a legal advisor should be involved in developing the tools of estate planning like, the will, living will, living trust, power of attorney, regulatory immunities like Married Woman Properties Act etc., Therefore, it is important all the three angles need to be consumed in developing a comprehensive estate plan.
What is Dying Intestate? Dying without a will is known as Dying Intestate. In such cases, laws of the state will come into effect and they will administer the asset distribution. This simply makes the assets be distributed without considering the owner’s wishes. Plus it may also attract unnecessary tax burdens. Will is a document that specifies how the estates need to be distributed amongst the designated beneficiaries.
Critical Considerations While Writing A Will:
1. Superannuation – Generally this item will not be part of will. By default, if one has created a will, with a private trust, the designated trustee will get the right to distribute the superannuation received on the demise of the owner. A binding clause in the trust deed to specify, irrespective of the amount of superannuation received, a pre-designated beneficiary needs to receive the same, can be made. Sometimes, the superseding of nominee given in the superannuation account may also need to be checked into.
2. Death Benefit – As above, even this case also gives a default right to the trustee. Alternatively, one can create a lapsing death benefit nomination can be made, specifying the designated person to receive the said corpus. this needs to be revived at regular pre-specified intervals. Sometimes, a non-binding death benefit nomination can also be made, which gives the trustee a right to first consider the nominee and yet decide on its own. A non-lapsing death benefit nomination, will not lapse until the death or revocation by the writer himself.
3. Testamentary Trusts – It’s a trust created in pursuant to the will. Such trust will nominate a trustee who will have the discretion to allocate income and capital among any of the beneficiaries, power to invest the inheritance, and power to wind up the trust anytime. The major purpose of establishing the trust is to provide asset protection for beneficiaries of the estate who may face legal claims of their assets.
4. Power of Attorney – One has to decide whether a PoA is given full grant to act on all assets, or limited powers to undertake actions.
5. Medical treatment and lifestyle decisions – This will be an important consideration in case the person becomes mentally incapacitated. A Special PoA (Medical treatment) can be nominated. An Enduring Guardian can be designated. Some cases also specify the Advance Health Directive, a document through which the owner expresses his wishes about medical treatment and how he or she would like his body to be dealt with.
Understanding Private Trusts:
Trusts are either public or private. A public trust is normally made for charitable or religious purposes. A private trust or family trust, is intended to provide for relatives, friends and other persons through transfer of some property to the trustees for the immediate or ultimate benefit and use of the beneficiary or beneficiaries for whom the trust is made. A private trust serves many social purposes. In the case of emergencies, hardships and other unforeseen difficulties in a family, a trust serves very useful social purpose and takes care of the beneficiaries to the extent of the trust fund and the income arising therefrom provided for their benefit. Besides, private trusts have been increasingly used for legitimate tax saving through various tax planning devices. A trust can be specific or discretionary or can be of any of the below types:
– A specific trust is one which provides for a specific beneficiary whose share is naturally specified in the trust deed.
– A discretionary trust on the other hand, is a trust where the beneficiaries even though specific and ascertained, do not have specified shares in the income or property of the trust. The trustees here have full discretion in the matter of application of the trust funds for the benefit of beneficiaries.
– A private trust in which there is only one living beneficiary who is entitled to entire property and income of the trust is popularly known as a 100% specific beneficiary trust.
– A person can create a separate fund to be enjoyed by his personal deity or god, in such a manner that the personal deity or god is assessable separately like an individual
– Where the testator, i.e., the creator or author of the trust, verbally conveys some properties on trust to the trustees for the benefit of certain beneficiaries, an oral trust can be said to have been created.
– A private business trust can be set up in certain situations, particularly in the case of partnership firm where the maximum rate of income tax applicable to the partnership firma nd partners is higher than the rate of income tax applicable to the income of a private trust carrying on business.
– A living trust is a method of systematic succession planning by a person of his or her movable and immovable assets. Through a living trust, the assets are transferred much before death of one’s chosen legal heirs either in their individual names, or in the names of certain trusts for their families. This avoids any legal complications of challenging the Will, pose decease of the creator or Will.
In a nutshell, estate planning is a process that needs a thorough understanding of legal, tax and financial aspects and is an involved process. An expert professional’s advice sought can be of greater benefit. With the increasing population of high net worth individuals in the country, the profession is also expected to emerge one of the serious and rewarding ones. Financial planning firms have already begun the drive to permeate estate planning in their bouquet of offerings.
1. Succession and Tax Planning through Trusts and Wills by R N Lakhotia, Vision books
2. Formation and Management of Trusts Along with Tax Planning by Nabhi Publications
4. International Estate Planning Handbook, (Ebook), www.psp.eu
5. Financial Planning Vs Estate Planning, Matthew Karr Esq, The Heritage Law Center
6. Financial Planning Journal, COFP, India