A private trust may sound to be as structurally complicated but it’s a very practically beneficial tool. If created lawfully and in the right way it efficiently helps in protecting, managing, and distributing one’s estate. (Also Read: All you wanted to know about estate planning basics)
Private trust in some cases also help in doing some tax planning too but this should not be the only criteria to accept or reject a structure which generally some professionals do.
Let’s try to understand the concept first.
What is a Private trust?
Trust is a vehicle created with an intention to provide for beneficiaries by transferring some property to the trustees. This transfer is for the immediate or ultimate benefit of beneficiaries for whom the trust is made. Trustees are responsible for managing the property as per the trust deed.
Sachin transfers Rs 10 lakh to a private trust formed for the benefit of his Family. He appoints himself as a trustee to manage things in his lifetime and his brother as an alternate trustee, who will manage the trust property as per the trust deed if something happens to Sachin. The creation of private trust gives a legal shape to this transaction and ensures him that money will be used for the benefit of his family only and in the way he wants it to be managed.
When the trust is created for the family members, relatives, friends etc. the trust is called as Private Trust. And where the trust is created for the charitable or religious purpose where the general public is the beneficiary, that trust is called as Public Trust.
Formation of private trust ensures the usage and distribution of trust funds in the way you want.
Private trust helps in Protection of assets
Assets lying in a private trust structure cannot be attached by creditors. Private trust comes as a very handy tool for business persons and industrialist. The business which generally operates on loan from banks and personal guarantees has their personal assets at stake.
All assets owned by them could be at risk due to the bank and other loans. Now, if the assets were under a “Private trust ownership” then the creditors cannot make claim on those. But do note that if Trust is formed only with the purpose of dodging the creditors than in those cases court may order the attachment of assets lying in Trust.
Same way if someone wants to protect the interest of his wife and children from the claims of creditors, he may buy an insurance policy under MWPA(Married women property act). The policy purchased under this act will become a kind of private Trust created for spouse and Kids.
Then neither he nor any creditor can make any claim on the surrender value/maturity proceeds or sum assured of that insurance policy. It will be held by an insurance company as a trust where the spouse and kids will be the only beneficiaries. (Read : do it for family)
Private Trust helps in Managing of assets
Formation of private trust requires appointment of Trustees and trustees are required to manage estate as per the trust deed. There can be one trustee or multiple trustees.
Many professional companies, banks, corporates etc. offers trusteeship services. When the question is of managing estate, then a professional trustee can be appointed to take care of operations and management of the private trust. Where you don’t want to lose control over the assets then you may appoint yourself or any other family member as a co-trustee.
This Private trust structure helps when there’s worry on the management of assets due to increasing age, deteriorating health, in case of special beneficiaries etc. This way you can be ensured that things will work and managed the same way as you are managing even if tomorrow you are not there.
Formation of private trust will help you in creation of a legal structure which will ensure that things will work the way you want them to be, even if you are there or not.
Private trust helps in distribution of estate
Private trust cannot be used as alternate to a WILL, but if properly drafted and used, it will do more than half of your WILL’s Job.
By transferring assets to a living trust with clearly defined objectives beneficiaries and the way assets will be distributed among the beneficiaries and when on one side you are not losing your control over the assets and on the other you are making sure that assets will get transferred to the beneficiaries the way you want to bequeath them. This will also help in avoiding unnecessary court cases and problem of getting probate and thus leads to cost savings too.
You may also form a trust through your WILL which gets effective after your demise. This is generally done to create different tax files from tax planning of view.It also helps in ensuring that assets will get used efficiently. (Read: How to write a Will)
Though it looks beneficial, it may not make sense for everyone to opt for Private Trust. Especially the high costs involved in formation and management of trust could be a big deterrent.
Costs like lawyers’ fees, professional trustees charges, Auditing charges, management expenses, stamp duty (if immovable property is transferred) etc. may prove to be a burden on overall objective. So before going in for a private trust, one should do a thorough cost-benefit analysis and suitability of forming a private trust in his particular case.