Gopal Chopra and Associates, Chartered Accountants



SUCCESSION PLANNING THROUGH CREATION OF A TRUST39243076835Gopal Chopra & AssociatesChartered Accountants gca-BackgroundYou owe it to yourself and your family to plan ahead now for the distribution of your assets upon your death. With good estate planning, you can minimize the costs and expenses, including taxes, which often occur with the distribution of an estate.Succession through a Private Trust mechanism is a common mode of transition of assets as the Trust provides better legal protection, certainty and flexibility. A trust can be set up during one’s lifetime or upon one’s demise. Similarly, the assets can be gifted to the trust during or after the lifetime. And depending on the desired control, the gifts can be revocable or irrevocable.The person setting up such a trust is known as a Settlor and he/she defines the beneficiaries to these assets, the age at which an asset will be transferred to them or any other condition for a transfer. The settlor appoints the trustees to manage the assets who are responsible to distribute them to the defined beneficiaries. A transfer of assets to the beneficiaries is relatively seamless and dispute free process in case of a trust. But the success of a trust depends on the trustees and clauses defined in the trust deed.Over the passage of time, India has become a popular location for U.S. & overseas nationals to hold property as the real estate sector is one of the significantly growing sectors in India. India does not tax inheritances at the time when such inheritance is received. Tax is levied only on the income generated by the receiver from the inheritance. So in case of financial assets, only interest, dividend or capital gains arising on sale of the assets are taxed in the hands of the receiver and not when the inheritance is received. In case of property, only rental income or capital gains from the sale are taxed in the hands of the receiver.Transferring the assets in India to a trust before selling them can be tax savvy option for NRIs in the USA etc as the Indian Income-tax Act contains certain specific provisions for trusts. In a trust, assets are transferred by one party (called settlor) held by another party (called trustee) for the benefit of a third party (called beneficiaries). Tax may not be levied on beneficiaries if appropriate structuring is done in India.Transferring assets through Wills to future generations have traditionally been the most commonly used method to distribute family wealth. However, the creation of a private trust structure is becoming integral to wealth management and succession planning nowadays. Unlike Wills which are often challenged before the court after the death of the testator, Trusts may be executed during the lifetime of the individual. This unique characteristic not only helps to reduce contentious litigation amongst family members but also allows the individual some control over the family’s assets while still safeguarding family wealth against possible parison of the use of Private Trust vis-a-vis Other Structures for Estate PlanningParticulars Trust Company LLPSituation-1: Transfer of assets in the lifetime of the TestatorTax implicationsNo tax implication in the hands of the transferor as the transfer of property through gift/will/irrevocable trust is exemptNo tax implication in the hands of the transfereeAppropriate tax is levied only on the income generated from properties if any in India at the prescribed rates.No tax implication in the hands of transferor on the transfer of property.No tax implication on the transfer of agricultural land as it is not a capital asset.For remaining property, if any taxableTaxable in the hands of transferee company at the prescribed rates as Income from other sourcesAppropriate tax is levied only on the income generated from properties if any in India at the prescribed rates for companies.No tax implication in the hands of transferor on the transfer of agricultural land as it is not a capital assetFor remaining property -taxable Taxable in the hands of transferee LLP at the prescribed rates as Income from other sources.Appropriate tax is levied only on the income generated from properties if any in India at the prescribed rates for LLP.FEMA implicationsRBI approval required*As the FEMA is silent on the residential status of a trust it is suggested that approval be taken from RBI.RBI approval not required*As per FEMA an NRI can transfer any immovable property to a Person resident in India. Person resident in India inter alia includes a Company incorporated in IndiaRBI approval not required*As per FEMA an NRI can transfer any immovable property to a Person resident in India. Person resident in India includes a LLP registered in IndiaSituation-2: Transfer on death through a willParticulars Trust Company LLPTax implicationsNo tax implication on transferAppropriate tax is levied only on the income generated from properties if any in India at the prescribed ratesNo tax implication if we transfer property in the name of the company today and transfer the “Shares in the company” to beneficiaries through a will.Appropriate tax is levied only on the income generated from properties, if any in India at the prescribed ratesNo tax implication if we transfer property in the name of the LLP today and transfer the “Share in the profits of LLP” to beneficiaries through a will provided the partnership deed specifically allow the transfer of share in the LLP through will.Appropriate tax is levied only on the income generated from properties, if any in India at the prescribed ratesFEMA implicationsRBI approval not required*RBI approval not required*RBI approval not required**As per FEMA an NRI can acquire any immovable property in India by way of inheritance from a person resident outside India(father) who had acquired the property in accordance with the FEMA. However, in order to repatriate the income generated from the property or sale proceeds of the property, approvals may be required depending upon the relevant FEMA regulations. As per Foreign Exchange Management (Remittance of Assets) Regulations, 2016, a NRI or PIO may remit the sale proceeds of assets acquired by him through inheritance up to $1 million per financial year.Types of Trusts:-Determinate (Specific) Trust: - In this type of Trust the entitlement of Beneficiaries is fixed by a settler at the time settlement or by way of formulae. The trustee has little or no discretion in such type of trusts.Discretionary Trusts: - In this type of Trusts the Trustee decides the entitlement of beneficiaries.Revocable trusts: - It is a Trust which can be canceled at any time by Settlor during his life.Irrevocable Trusts: - This type of Trust only comes to an end of completion of tenure or the purpose it was formed.Tax Implications of different types of TrustTypes of a Private TrustDiscretionary TrustSpecific TrustSpecific TrustSpecific trust is a trust in which the share of beneficiaries is known/determinate. The share falling to each of the beneficiaries are liable to be assessed in the hands of the trustee(s) as a representative assessee. Such an assessment is made at the rate applicable to the total income of each beneficiary. However, the Income-tax department has the option to make an assessment either in the hands of the trustee or directly in the hands if the beneficiary entitled to the income. The above provision is applicable only if the beneficiary and their shares are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be.As in this Trusts the Beneficiaries are identifiable and their share is fixed, the Trustee can be assessed as a representative assessee and tax is collected from the Trustee or alternatively, the income tax department may collect tax from beneficiaries directly.Such an assessment is made at the rate applicable to the total income of each beneficiary. However, the Income-tax department has the option to make an assessment either in the hands of the trustee or directly in the hands if the beneficiary entitled to the income.Note: If the income of the trust includes business income then Trust will be liable to pay tax at the rate of 30% (exclusive of an education cess of 4% & Surcharge of 15%) [Section 161(1A) of the IT Act]. This provisions shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.In other cases, i.e. where income does not include profits and gains of business – income is taxable at the slab rates applicable for an individual.Discretionary TrustIn case of Onshore trusts with both resident and non-residents beneficiaries, the Trustee can be assessed as a representative assessee and subject to tax at a maximum marginal rate of 30% (exclusive of an education cess of 4% & Surcharge of 15%).In the case of Offshore trusts with both resident and non-residents beneficiaries, the trustee shall not be subject to Indian taxes. However, if all the beneficiaries are residents of India then, the Trustee can be assessed as a representative assessee and subject to tax at the maximum marginal rate of i.e. 30% (exclusive of an education cess of 4% & Surcharge of 15%).However, the maximum marginal rate is not applicable and income will be chargeable to tax as if it were the income of an association of person in the following case: -where none of the beneficiaries has any other income chargeable under this Act or is a beneficiary under any other trust; or where the relevant income or part thereof is receivable under a trust declared by any person by Will and such trust is the only trust so declared by him. Recent Developments on Trust Creation India had inheritance tax from 1953 and discontinued it in 1986.?There has been talk of introduction of Inheritance Tax on high net worth individuals if the NDA government comes to power. They may reintroduce Estate Duty (inheritance tax) and therefore trust structures will be required for succession planning to save taxes. If estate duty is reintroduced, then it should provide exemptions for financial assets. However, If shares/ financial assets are included within the meaning of estate duty, then it will disturb the shareholding structures and will affect the running of the business. The rate at which estate duty is applicable should also be reasonable. The new legislation should aim to integrate estate duty, gift tax and the concept of the exit tax. The Government should also carefully consider the time when estate duty should be re-introduced.Non-Resident Tax Planning through Creation of Private Trust We have illustrated a tax efficient structure below for a resident who wishes to bequeath his wealth to his Non-resident children who are resident of geographies where inheritance tax is leviable.Gift/WillFATHER(Settlor/Author of the Trust)TRUSTIncome from other sources [Section 56(2)(x)]- Not Applicable to any property receivedfrom an individual by a trust created or established solely for the benefit of relative of the individualNo income from other sources in the hands of TrustAgricultural land- Not a capital assetOther properties- Not a transfer as per Section 47No Capital GainsIndian TrusteeBENEFICIARY(Son/Grandson)U.S.A. Conclusion Trust is a robust structure to transfer the wealth of a high net worth individual in the lifetime of the owner to his heir. It is a tax efficient way for nonresidents of India who are resident of the countries having inheritance tax having a property in India to do succession planning. It is also a right time for the high net worth Indian residents to create a Trust before the imposition of any Inheritance Tax in India. ................
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