Family Businesses Must Think and Act Like the Boy Scouts

A couple of weeks ago, India’s first Chief of Defense Staff, Gen. Rawat, his wife Mrs. Madhulika Rawat and a dozen other army/air force officers and personnel died in a helicopter crash near Coonoor. The loss of any life is sad, but this tragedy was of much greater proportions because Gen. Rawat had only begun the critical task of rearchitecting India’s defense forces in ways that enable greater integration. In a few weeks, our government will assign someone else the responsibility for leading the transformative process that Gen. Rawat had begun; after all, institutions like nations, their armed forces and even corporates are larger than individuals.

But what this tragic incident has painfully reinforced for many of us is the unpredictability of life. And if it hasn’t, it should. There are striking parallels that can be drawn between the outcomes of this helicopter crash and what happens when the head of a family business suddenly dies or becomes incapable of running the company. Both are sudden and cause large voids that can be hard to fill because the next generation family members are young and inexperienced or perhaps not interested in the traditional business.

This is why succession plans must not only cover people in leadership roles but also entire businesses. Maybe a strategic sale should be triggered or perhaps several group companies that already share synergies should be merged and after a few years, the entity could go public. The specific strategy is not the point of this article; rather, the key point I wish to make is that family businesses in particular should be ready with this kind of thinking. Not just a slide deck with the future strategy and trigger events, but at a much more granular level so that implementation becomes easier for those who will become responsible for it.

By the way, the sudden death of founders and leaders is by no means the only uncertainty that family businesses need to be prepared for. Many family businesses have complex holding structures that involve the formation of trusts registered in India and elsewhere. But the world is witnessing a new wave of concerted actions that are aimed at shoring up tax revenues by plugging various loopholes and tax planning avenues that have existed for years. As a result, tax laws can change quite drastically in various jurisdictions. And as geopolitical realignments occur and new regional partnerships are forged, regulatory changes may impact more than just one country. Family businesses that either does not plan for such risks or are not agile enough to respond quickly might find themselves seriously disadvantaged.

Plans are ultimately plans, and any plan can go wrong. Who, for example, could have forecast the Covid pandemic or that it would stretch for 2+ years (and God knows how much longer)? But that does not mean that there is no merit in planning. What is vital is to plan for various scenarios and figure out a solution that works best under a majority of situations. This needs expert advice and more important, perspectives and business savvy. The role of business advisors needs to change; they must acquire and hone their ability to transcend silos or be a part of the right ecosystem so that they are able to orchestrate the best advice for their clients and thereafter, help them execute the strategies and plans.

If you’re still wondering about the reference to the Boy Scouts in the title, I just wanted to tell family businesses to “Be Prepared”.

PS: Being slow to adopt cutting edge technological capabilities and putting them to use to capture insights that help drive strategies is another form of risk – but one that applies to more than just family businesses.

Image Credits:  Photo by Pixabay from Pexels

Many family businesses have complex holding structures that involve the formation of trusts registered in India and elsewhere. But the world is witnessing a new wave of concerted actions that are aimed at shoring up tax revenues by plugging various loopholes and tax planning avenues that have existed for years


Tools for Effective Succession Planning for Family Businesses

The pandemic has hurt many families. There is no solace or succor for the lost loved ones. Yet as harsh as it may sound, life has to go on, for the rest of the family. This feeling of vulnerability has to be channelized to ensure that every entrepreneur, business owner, and head of business family think of securing themselves legally to ensure succession & estate planning.

It is way past the days when parampara (tradition) and prathistha (prestige) and prashasan (administration) were sufficient for a family to run its business. Since change is the only constant, the pandemic has forced many family businesses to re-consider and re-structure their succession and legacy planning as it has drastically increased the probability of unforeseeable deaths and long-term health complications of the family members. Demise of the family’s patriarch in the absence of a legitimate will, post-covid health complications rendering everyday functions and business operations redundant are some of the scenarios which are impairing the families resulting in stress, loss of business liquidity, and business opportunities.

Despite the abovementioned challenges and economic uncertainty statistics reveal a strong resilience for recovery. In the current financial year. 51% of family businesses are eyeing opportunities for growth in the domestic market, 22% shall be focusing on diversification, while 10% are contemplating entering the international markets[1]. However, it has also paved the way for drastic changes in the ways a family business shall operate.

Two areas that will be witnessing restructuring in the family business operations are; legacy planning and digitization. According to PWC’s 10th Global Family Business Survey, 2021[2] over 87% of family-run businesses have identified digital innovation and technology as the focal point of priority over the next two years. Succession planning is one of the most sensitive issues in family-run businesses. However, Covid 19 appears to have concentrated minds in this area. The survey confirmed that 20% of business families have incorporated a formal succession plan, while 7% of such families have revised their legacy plans in light of the pandemic.  

This piece intends to explore various tactics, legal resources, and preventive measures that are currently available at the disposal of family businesses to adopt a viable succession plan and lay down a comprehensive list of suggestions and actions that can be immediately incorporated and undertaken by such entities to this effect.

Dos and Don’ts of Succession Planning


While undertaking measures to establish a legacy plan, family harmony and communication are the two keys, which are imperative to be kept at the forefront. It is pertinent to ensure that succession planning does not prove to be detrimental to a family’s peace and unity.

The following two approaches should be incorporated while formulating a succession plan for a family business, in favor of the family’s interest:  

  • Family Harmony Comes First: Successful family business owners have believed that selflessly putting the family first is key to the survival of their business. Decisions that keep the family together should be given priority even if they could potentially cause short-term losses. Dynasties crumble due to family feuds and individual egos overpowering affection and mutual respect.
  • Communication is the Key: There needs to be clarity amongst all the family members, especially the next generation about their future roles. The older generation needs to have an open discussion with the young beneficiaries, about their exit and the subsequent taking over of the business after them. Similarly, the younger generation needs to communicate their plans for the future and expectations in advance so that a succession plan can be tailored in line with their mutual terms of agreements and prospects. It is advisable to engage an external facilitator who can assist the concerned parties to convert their aspirations, interests, and competencies and formulate a plan in the larger interest of the business. If the younger generation wants no part in the family business, then their decision should be respected otherwise a forced responsibility in the family business either through a Will or otherwise will only lead to resentment and strife in the family; and be violative of industry’s regulatory clauses depending upon the nature of business.

Planning for Protection of Assets in the Event of Succession


Most Indian family-owned businesses managed their assets and wealth themselves. Therefore, succession was either governed by will or personal laws. However, since succession and property laws are unique to every religion, the process became complex.

The indifference and ignorance of senior members of the family towards these issues is the primary cause for extensive litigation cases, mainly pertaining to title disputes. The following succession planning tools are recommended to sidestep from such scenarios:

  1. Will: Leaving behind a validly executed Will is the most uncomplicated mode through which a property can be passed down to the next owner. There is no fixed format for a Will under the law. The only requirements for a valid Will according to the Indian Succession Act, 1925 are; it should be made by a sound adult, signed by them, and attested by two witnesses. It is recommended that an Executor be appointed in the Will to reduce hassles. It is not compulsory to register a Will. Probate is also required only if the Will is made in Bengal, Bihar, Orissa, and Assam and within the local limits of the ordinary original civil jurisdiction of the High Courts of Madras and Bombay or where the property of the deceased is situated in these areas.

There are two scenarios that are to be considered while determining the ownership of a share in the family business after the death of a person:

  • In case a person dies leaving a Will: A person can make a bequest of his share in the family business by a Will according to the constitution of the family business:
    1. Corporate Structure: Large family businesses often operate through a private company structure in which the shares are issued to family members and the management positions are held by family members. Shares held by an individual family member can be willed by that person. A family company continues to operate after one’s death as it is a separate legal entity. The assets in the company belong to the Company alone and cannot form part of the estate and therefore cannot be transferred by a Will.
    2. Partnerships: Most small-scale family businesses in India work through the partnership model. The Partnership Deed between the family members as partners should ideally have a clause that provides for the procedure to be followed on the death of a partner. A family business owner can make a bequest of his share in the partnership in the Will, but the beneficiary does not become a partner to the firm unless all the partners of the firm consent to it.
    3. HUF: Many traditional family businesses do not have a formal document in place but may operate through a Hindu Undivided Family (HUF). According to Section 30 of the Hindu Succession Act, 1956, a person can make a testamentary disposition of his share in a co-parcenary property i.e he may dispose of his share in the assets of the family business (HUF) through a Will.
  • In case a person dies without leaving a Will: The ownership of the stake in the family business will be determined by intestate succession i.e succession according to the personal law of the deceased individual. The heirs will be determined in accordance with the religion of the intestate for example Hindus, Buddhists, Sikhs, and Jains will be governed by the Hindu Succession Act, 1956, Muslims will be governed by the Mohammedan Law and all others will be determined by the Indian Succession Act, 1925.
  1. Trusts: The Indian Trusts Act, 1882 governs the creation of a Private Trust. A trust may be created during the lifetime of a person, referred to as the author / s It may be created with a written legal document through which the assets of the settlor are placed into a trust and trustees are appointed therein who manage these assets for the benefit of the settlor and the beneficiaries named in the Trust Deed. The biggest advantage of Trust is that it operates both during and after a person’s life.
    • A written Trust Deed is signed by the Settlor, requires a minimum of two trustees and two witnesses. The trust may or not be registered; registration is required only if an immovable property is transferred to the trust.
    • Family wealth can be secured with the help of trusts. The manner of conducting business, areas of responsibility, and pre-empting scenarios can also form part of the trust constitution.
    • Another benefit of Trust as a planning option is its dependability during a crisis. It helps in ringfencing the assets from any action taken by creditors or banks in the event of a financial crisis.
    • When a settlor dies, the trustee pays the debts, files the tax returns, and distributes the assets of a deceased. Trusts are an effective estate-planning tool if one wants to avoid the costs and hassles involved in obtaining probate. It is a quick and quiet procedure, preserving one’s privacy and done without any court interference.
  1. Family Constitution/ Charter/ Framework: Business assets such as securities can be accounted for in a Will or a Trust, however, it is also necessary for a family business to plan for succession of management of the business. These are often covered in Family Constitutions or any other business manifests. It clearly lays out the interaction between the family and the business. It is a document that can be used for governing the administration of the family business. Apart from detailing the values and ethos of the family business, it may also specify rules like the incoming generation would need to get a master’s degree and, work outside to ensure they are well equipped when they join the business. It may also make provisions for events like death, marriage and divorce in the family. However, for any family members to succeed onto the Board of Directors or any other Key Managerial Position, resolutions by the existing Board of Directors and/or shareholders would be required. It is recommended that the younger generation (if adults) should be made aware of the Family Charter, allowed to participate and their opinions should be given due consideration so that the document is in line with the thoughts of the incoming members of the business. This helps in maintaining a balance between the old and the new.
  1. Family Arrangements: Family arrangement resolves present or possible future disputes among family members ensuring equitable distribution of property among the family members. In a Family arrangement, a member gives up all claims in respect of all the properties in dispute other than the ones falling to their share. The rights of all the others are recognized. Therefore, under a Family arrangement, members of a family may decide amongst themselves about the distribution of the property of the deceased. A Family arrangement would have to be appropriately stamped and registered. However, even oral arrangements are valid in the eyes of law.
  1. Clear Retirement Policies: While making a succession plan, there should be a provision for a clear retirement policy that includes defining the benefits and shareholding of the outgoing generation post-retirement.
  1. Guardianship: Where minor children are involved, it is very important to make provisions either in a Will or by Trust, for appointing a guardian for minor children in the event of a parent’s death. If one parent dies, then the other living parent likely becomes the guardian subject to personal laws. If both parents die, then it is needed to mention who will be accorded guardianship. Failure to do so will involve the intervention of courts and various applicable laws given India’s pluralistic society. The need for an appropriate guardian is not only to provide for personal needs but to also ensure that the share of minors in family businesses are protected during the period of minority.
  1. Conflict Resolution Forums: Family disputes are often dragged to courts and fought in public. Creating conflict resolution forums in the family constitution is recommended where family members can discuss their differences and resolve disputes amicably. These forums may consist of trusted family members or outsiders like family friends who can fairly resolve the dispute. In case the dispute continues, family members may resort to mediation or arbitration. Litigation should be used only as a last resort. To maintain peace in the family, a well-drawn-out conflict resolution forum is necessary. Resorting to legal recourse at the first opportunity creates hostility and breaks down family relations.
  1. Setting up of Family Offices: Keeping track of investments and family wealth as it grows can become an extremely cumbersome task. Family Offices rescue family businesses and high net worth individuals from such burdens along with managing the administrative issues that crop up daily. Family Offices handle investment portfolios, taxes, provide legal support, maintain documentation, and manage shared assets of the family businesses.
  1. Choosing a Successor: The family business will flourish only if a family member has the passion to take on the responsibilities to run the day-to-day business. It is, therefore, important to identify a successor who not only has the skill sets to be the leader but also has the drive and excitement to take the business forward. Forcing the responsibility of running the family business onto uninterested family members would be detrimental to the business as the stakes are high for all stakeholders. When deciding between family and non-family members to run the business, the family should objectively identify and evaluate a variety of candidates early on. Whether family or non-family, they should be given the requisite training and opportunities to grow, and the best candidate often emerges over time. If no family member is qualified and/or willing to take the position, then the current leader must make the tough decision to appoint an external candidate or professional for the role.
  1. Mentoring the Next Generation: An important factor for successful business transfer is mentoring of the next generation of leaders before and after they take over the family business. It would be fruitful to train and groom them so that they learn and understand the culture and values on which the business was built. Often, business owners are afraid to give up their central roles in the system and hand over the reins of the business to newcomers even if they are family members. Successful family business leaders have kept aside their egos and objectively help build the mindset of the prospective leaders. One way to groom the next generation is to give them challenging tasks and the autonomy to make their own decisions. The current generation can also create a management training program for the next generation joining the business, in consultation with key senior personnel. This gives them a flavour of various aspects and functions of the business.
  1. Tackling Issues of Nepotism: One of the biggest challenges in any family business is tackling nepotism allegations, especially by the younger generation. Nepotism is inevitably a part of the package deal that cannot be avoided. If an undeserving family member is given a senior position in the business, it may result in low morale amongst the employees. What can be done is, minimalize its effect on the non-family employees. A good way to tackle nepotism is to set out clear employment policies. What qualifications would be required for a certain position in the business and what is expected from a family member if they do take up that role? Giving them compensation based on their performance instead of their relationship within the family, preparing them thoroughly for a position, and giving them jobs that fit their skill sets are some of the best practices which can be adopted by family-run businesses.

Since change is the only constant, the pandemic has forced many family businesses to re-consider and re-structure their succession and legacy planning, as it has drastically increased the probability of unforeseeable deaths and long-term health complications. Demise of the family’s patriarch in the absence of a legitimate will, post-covid health complications rendering everyday functions and business operations redundant are some of the scenarios which are impairing the families resulting in stress, loss of business liquidity, and business opportunities. 


Succession Planning: Private Family Trust

With around 65% of GDP in the organized sector coming from family businesses[1], their status as the ‘engines’ of India’s ever-growing economy cannot be underscored. Globally, 35% of Fortune 500 companies are family owned businesses[2]. However, it is startling to note that 70% of the family businesses globally are sold before the second generation gets a chance to take over while only 10% of family businesses are able to survive till the third generation.[3] Further, a study by BAF consultants reveals that 97% of family-run businesses in India don’t have succession plan documents.[4]

An effective family business succession planning not only establishes a smooth transition of leadership in the business between generations, but it also ensures that the control over the business is retained in the family. In addition, adequate wealth planning could also help prevent unwarranted long and expensive legal disputes between heirs in multiple jurisdictions.

Family business succession planning can be achieved through various structures depending upon parameters like the degree of control over the purpose for which the wealth can be used, the manner in which it may be used and the like. One of the most common structures to manage family wealth is “Private Family Trust”.

The fact that a private trust offers numerous advantages, (safeguarding against possible losses due to family-related liabilities which may arise from unforeseen events divorce, death, re-introduction of estate duty in India, etc. to mention a few ) and the ease and flexibility of formulating the mechanics to ensure that the needs, requirements and the objective of the entire family are met, makes it a popular arrangement while planning the transition of family business.

Structuring a Private Family Trust – Key Considerations


A trust may be created through a non-testamentary or by way of a testamentary document (like will)[5]. Pursuant to the Indian Trust Act, 1882, (“Trust Act”) there are four important components of a valid trust one should consider while structuring a family trust for business succession:

  1. The person who creates a trust (settlor/author) should make an unequivocal declaration of an intention on his part which must be manifested through an external expression of it (by written or spoken words or by conduct) as opposed to an undisclosed intention.
  1. The settlor must clearly define and specify the objects. Since the purpose has to be accomplished by a trustee (person/entity on whom trust is reposed), who may not always be the author/ settlor himself, it is necessary that the purpose is clearly declared so that the trustee can faithfully accomplish the author’s purpose, for which the author has reposed confidence in the trustee.
  1. The settlor must specify the beneficiaries. Where there is no transfer of ownership, there is no trust[6]. The settlor gives up the ownership of the property thus resulting in transfer of legal ownership of the property to the trustee and transfer of beneficial ownership to the beneficiaries of the trust.
  1. The settlor must transfer an identifiable property under an irrevocable arrangement and totally divest himself of the ownership and the beneficial enjoyment of the income from the property.

Once the nature and type of private family trust (i.e. discretionary/determinate, revocable/irrevocable) is finalized, amongst others, following key considerations with respect to the structuring of the trust should be kept in mind:

  • Registration and Stamp Duties


A trust deed may be created in a detailed manner, stating the above, preferably with the help of a legal practitioner. The deed should be registered if the transfer of immovable property is involved. However, no formal deed is necessary for recognition of trust created by a will.

Stamp duty would be levied on any such settlement of immovable property to a trust. Although in a few states the stamp duty on gifts to specified relatives is minimal, the same does not apply to trusts and for this reason, transfer through a will is preferred. To minimize the amount of stamp duty, properties are often held through entities, the ownership of which is then transferred to the trust.


  • Appointment of Trustee


A trustee has a fiduciary obligation under law to hold the trust property for the sake of the beneficiaries and is empowered to manage the affairs of the trust. Accordingly, it becomes important to choose the most suitable type of trustee (i.e. a trustee may be an individual, either a trusted family advisor or a member of the family itself). The Settlor or one of the beneficiaries may act as the trustee so long as they operate in that capacity.

Alternatively, the services of an institutional trustee may be employed, especially in instances where neutral decision-making is a primary concern. The family may also consider setting up a Private Trust Company (“PTC”) with family members appointed as directors of the PTC to make decisions with respect to the trust.

While the choice of trustee depends upon the commercial requirements of the family business, a few important parameters listed below need to be considered while making the decision: 

  1. the level of control the family would like to maintain in day to day operations;
  2. neutrality of the trustee;
  3. objective and term of trust;
  4. expertise with respect to the discharge of various fiduciary duties;
  5. annual costs.
  • Powers of a Trustee


The powers of the trustees are defined in the trust deed and the same vary depending upon the structure of the trust and the requirements of the family business. Generally, a trustee has wide-ranging powers that allow him to manage the daily operations of the trust and make distributions to beneficiaries. In order to balance the powers of the trustee, the trust deed may provide for the appointment of a Protector. The role of the Trust Protector is advisory in nature, however, making a provision in the Trust Deed that the trustee must consult the Protector before making key decisions would help to ensure that the decisions by the Trustee are made in the best interest of the family.  

  • Dispute Resolution


The Supreme Court (“SC”) of India in the case of Vimal Shah & Ors. vs Jayesh Shah & Ors.[7] has held that:

“…all disputes arising out of a trust deed and the Trusts Act are not arbitrable in India.”

This has put an end to arbitration as a form of dispute resolution for trusts. The SC analysed the scheme of the trust act finding that it comprehensively and adequately covers each subject pertaining to trust law, right from the creation of the trust and extending to the management of the trust as well as provisions relating to beneficiaries and trustees, including remedies available to get grievances settled. Specifically, on the point of legal remedies, the SC observed that the trust act provides specifically for the resolution of various disputes and confers jurisdiction for the same on Civil Courts. The SC referred to the principle of interpretation that where a specific remedy is prescribed by statute, the person facing such a grievance is denied of any other remedy. Therefore, the SC concluded that the presence of provisions in the trust act specifically dealing with the forum for dispute resolution reflects the intention of the legislature to impliedly bar arbitration of such disputes. That being said, provisions for alternative dispute resolutions mechanisms like conciliation as governed by the Arbitration Act or mediation may still be provided for under the trust deed subject to legal advice.

It was further held in the said case that:

as beneficiaries are not signatories to a trust deed containing an arbitration clause, any disputes arising between beneficiaries or trustees of a trust cannot be referred to arbitration as such arbitration clause is not an “arbitration agreement” between the trustees inter se, between the beneficiaries inter se or between the trustees and the beneficiaries for the purposes of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”).”

Furthermore, the SC clarified that even if the beneficiaries are considered to have accepted the trust deed vis-à-vis the settlor by accepting the benefits thereunder, such acceptance does not imply that an arbitration agreement exists for the resolution of disputes among beneficiaries, among trustees, or among trustees and beneficiaries.

  • Cross border Trust structure


With the number of high net worth families having members residing in various countries, the probability that a trust structure will have cross-border elements is increasing. Given that the Reserve Bank of India (RBI) has strict rules with respect to foreign exchange and the cross-border transfer of funds / immovable property, it becomes pertinent to consider the residency status of the settlor, trustee and beneficiaries of a trust.

For example, an Indian resident settlor may set up a trust outside of India (“Offshore Trust”). In fact, the Foreign Exchange Management Act, 1999 (“FEMA”) of India has granted general permission to a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such ‘Foreign Currency Assets’ have been acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Such a person may set up a trust in such jurisdiction or any other jurisdiction to which he could contribute the Foreign Currency Assets. Families generally prefer to have an offshore trust set up in a tax-haven or asset safe jurisdiction as apart from deriving the jurisdictional benefit, it ensures confidentiality and buffers assets from business uncertainties.

However, remitting Indian funds to such Offshore Trust should be subject to India’s Liberalised Remittance Scheme (“LRS”), under which resident individuals are allowed to transfer up to USD 250,000 per person per financial year for permitted current and capital account transactions without prior RBI approval. These transactions include the acquisition of immovable property shares or any other assets outside of India. Funds transferred through LRS may even be used to set up a foreign company[8].

Further, while the Trusts Act does not preclude a non-resident from acting as a trustee to an Indian Trust, it does require that where a trustee is absent from India for a continuous period of six months or leaves India with the intention of residing abroad, then a new trustee may be appointed in his place[9].

Considering that Indian foreign exchange laws do not permit non-residents to directly hold immovable property, the trustee of a trust having immovable property would not be legally capable of holding such property on behalf of the trust and would therefore not be competent to act as trustee. Moreover, in the event that a trustee is non-resident, the trust should not be engaged in activities prohibited for non-residents under India’s foreign exchange regulations.

Taxation of Private Trust

Taxation of private trust in India is governed by the provisions of Income Tax Act, 1961 (“ITA”) which stipulates the provisions with respect to the determination of residence, chargeability to tax, computation of income, etc.

For the purposes of Indian Income Tax, a Private Trust is not treated as a separate taxable unit.  However, under the ITA, the trustee acquires the status of that of a beneficiary and is taxed as a representative of the beneficiaries (“Representative Assesee[10]”). The provisions dealing with the taxation of a Private Trust is stipulated under section 161 to 164 of the ITA and the same is discussed below:

  • Irrevocable Determinate Trust

Given that in such Trust, the beneficiaries are identifiable and the beneficial interest of such beneficiaries have already been determined, the income of the trust can be taxed at the hands of the trustees as  Representative Assesees or the beneficiaries depending on the extent of their interest in the trust, however, in no event there would be double taxation for the same income.

Further, under the provisions of ITA[11], any transfer of a capital asset under a gift or will or an irrevocable trust is exempt from any capital gains taxation as no gains are made by the author of the trust who transfers the property. Similarly, the property received by a trust created or established solely for the benefit of ‘relatives’ (as defined) of the individual is exempt from the purview of tax. Moreover, trusts receiving dividend income will be exempt from the additional 10% tax on dividend income exceeding Rs 10 lakh.

Another issue for consideration with regard to the taxation of a trust is the application of Section 56 of the ITA on a settlement. Section 56(2) of the ITA provides for the taxation of any sum of money and specified properties (value of which exceeds fifty thousand rupees) received without consideration or for inadequate consideration as ‘income from other sources.’ However, the said section does not apply to any sum of money/property received, inter alia, from relatives as defined in the ITA.

Therefore, where money or any property is received without consideration or for inadequate consideration, other than being from a relative, the income would be taxable in the hands of the trustee/beneficiary at the progressive slab rates, the maximum rate being 30% plus applicable surcharge and education cess.

  • Irrevocable Discretionary Trust

As stated earlier, a Discretionary Trust is one which gives the Trustee, the powers to decide which beneficiary receives the fund and to what extent.

In case of a Discretionary Trust, the taxability of the trust in India would depend on whether the income of the trust is the income of the beneficiaries. No income would accrue or arise in the hands of its beneficiaries till such time that the trustee makes a decision regarding the allocation of the trust property or income to one or more of the beneficiaries and the beneficiaries become eligible to receive the property or income. In such a situation, one also needs to consider whether the trustee or the trust could be taxed under the residual category as ‘artificial juridical person’. An artificial juridical person would be subject to tax in India if it is resident in India or it receives income in India, or any income accrues or arises to it in India. Residential status of an artificial juridical person is determined on the basis of the situs of its control and management. If control and management is situated wholly outside India in the relevant year, the artificial juridical person would be treated as a non-resident for the purpose of Indian taxation.

Thus, as long as the trust’s administration and decision making are not exercised by anyone in India even for a part of the year, an offshore trust should not be regarded as resident in India and such a trust should not be taxed in India.

In case of an onshore (in India) discretionary trust having resident and non-resident beneficiaries, a trustee will be regarded as the representative assessee of the beneficiaries and shall subject to tax at the maximum marginal rate.

  • Revocable Trust

Under the ITA, a transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor or it in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. Thus, where a settlement is made in a manner that a settlor is empowered to reassume possession over the assets of the trust or entitled to recover the contributions over a specified period, and is entitled to the income from the contributions, the trust is disregarded for the purposes of tax, and the income thereof is taxed as though it had directly arisen to the settlor. If there are joint settlors to a revocable trust, the income of the trust will be taxed in the hands of each settlor to the extent of assets settled by them in the trust.


Succession planning, although has been around for a long time, the changing legal and business environment has made it multifaceted and therefore complex. With rumors of a reintroduction of estate duty/ inheritance tax doing the rounds and the Bankruptcy Law being active since 2016, it is better succession planning is done well in advance to meet future ambiguities. High net-worth individuals and families need to adequately plan the future of their wealth to avoid family conflicts and weaklings being deprived of affluence they inherited.  Therefore, the creation of a private trust would provide desired flexibility and ensure ease of operation as well as the possibility of correction within the lifetime of the settlor.


[1] Based on an article published by ValuEndow

[2] Study by Conway Center for family business

[3] Data as available on

[4] The Economic Times, August 3, 2018

[5] A Trust intending to hold an immoveable property must be established by a duly registered trust deed.

[6] Refer Section 5 of the Trust Act

[7] Supreme Court of India – Vimal Kishor Shah & Ors vs Jayesh Dinesh Shah & Ors on 17 August, 2016, Bench: J. Chelameswar, Abhay Manohar Sapre

[8] Refer Master Direction – Liberalised Remittance Scheme (LRS) by RBI

[9] Refer section 73 of the Trust Act.


[10] For the purposes of Income Tax Act, the term Representative Assessee shall mean

  • respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163;
  • in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot;
  • in respect of income which the Court of Wards, the Administrator- General, the Official Trustee or any receiver or manager (including any person, whatever his designation, who in fact manages property on behalf of another) appointed by or under any order of a court, receives or is entitled to receive, on behalf or for the benefit of any person, such Court of Wards, Administrator-General, Official Trustee, receiver or manager;
  • in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf50deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees;

[11] Refer to section 47 of the ITA



Image Credits: Photo by John Schnobrich on Unsplash

Succession planning, although has been around for a long time, the changing legal and business environment has made it multifaceted and therefore complex. With rumors of a reintroduction of estate duty/ inheritance tax doing the rounds and the Bankruptcy Law being active since 2016, it is better succession planning is done well in advance to meet future ambiguities. High net-worth individuals and families need to adequately plan the future of their wealth to avoid family conflicts and weaklings being deprived of the affluence they inherited.