Benefits of Creating a Trust in Estate Planning

1. Core Benefits of Creating a Trust in India

Protection Against Legal Claims

Once assets are transferred to a trust, they are generally no longer treated as personal assets of the settlor. If the settlor later faces litigation, business creditor claims, or insolvency proceedings, the trust assets are ring-fenced — provided the transfer was not made with intent to defraud creditors. Irrevocable trusts offer the strongest protection in this regard.

Protection from Beneficiary-Level Risks

A trust structure can help ring-fence assets from certain personal risks at the beneficiary level, including marital disputes or legal claims. Since assets are held within the trust and not directly owned by the beneficiary, distributions can be structured in a way that limits unintended exposure, subject to applicable laws and trust design.

Maintaining Privacy

Unlike a will, which enters public record when probated, a trust deed is a private document. The details of your estate, the names of your beneficiaries, and the nature and quantum of assets transferred need never enter the public domain. For prominent business families and senior executives, this privacy benefit alone is often decisive.

Estate Tax and Succession Planning Efficiency

While India currently does not levy an inheritance or estate tax, the legislative environment may change. A well-structured family trust can help mitigate potential future exposure to such taxes. Trusts also facilitate orderly intergenerational transfer without the asset fragmentation that intestate succession or unplanned gifting can cause.

Continuity and Structured Transfer

A trust can provide a structured mechanism for transferring assets over time, based on defined conditions rather than immediate distribution. This can help avoid fragmentation of assets and enable more controlled succession planning, depending on the family’s objectives and structure.

2. Types of Trusts in India

Not all trusts serve the same purpose. Here are the principal categories relevant to HNI estate planning:

Revocable Trust

The Settlor retains the right to revoke the assets of the Trust at any point in time, thereby maintaining full ownership over the trust assets. While this structure offers flexibility, it does not provide ring-fencing or asset protection. Since the Settlor retains effective control, creditors can generally access the trust assets, and such assets may be treated as part of the Settlor’s personal estate. Upon the demise of the Settlor, the Trust generally becomes irrevocable.

Irrevocable Trust

This kind of Trust helps preserve and protect assets against personal and professional liabilities. The Settlor permanently relinquishes ownership over the transferred assets, which are then held and managed by the Trustees for the benefit of the beneficiary. Given the separation of ownership, such trusts generally offer stronger ring-fencing and creditor protection, subject to applicable laws. They may also assist in mitigating potential future estate duty exposure.

Additionally, irrevocable trusts can enable structured succession planning and continuity in asset management across generations.

Non-Discretionary vs. Discretionary Trust

In a non-discretionary trust, each beneficiary's share is defined and income is taxed at the individual beneficiary's applicable rate. In a discretionary trust, the trustee decides distributions and the trust is taxed at the maximum marginal rate. Structuring choices have major tax implications and should be evaluated carefully with a qualified tax advisor.

Public Trusts

Public trusts (charitable and religious) operate under different legislation, typically the relevant state's Public Trusts Act, and are governed by separate income tax provisions under Sections 11 and 12 of the Income Tax Act. They fall outside the scope of private wealth planning and are not covered here.

3. Trust vs. Will — Key Differences

Both instruments serve estate planning objectives, but they operate very differently:

When is a Trust Clearly Better than a Will?

A trust is generally a better option when you need immediate asset protection, have minor or vulnerable beneficiaries, manage assets across multiple geographies, or want to ensure continuity of a family business. A will remains a valuable complement, covering assets left outside the trust and expressing personal wishes.

4. Tax Implications Under the Income Tax Act 2025

Tax treatment is the most technically complex dimension of trust planning in India, and errors here can be costly. Here are the key principles:

Income Taxation

Under Section 304 of the Income Tax Act 2025, a trustee is taxable as a representative assessee. For a specific trust (where beneficiary shares are defined), income is taxed at the rate applicable to each beneficiary as if they had earned it directly. For a discretionary trust, income is taxed at the maximum marginal rate (currently 30%, plus surcharges), regardless of the beneficiaries' individual tax rates.

Capital Gains on Transfer of Assets into the Trust

Transferring assets to an irrevocable trust is not treated as a transfer as per Section 70 of the Income Tax Act 2025 and is not taxable in the hands of the settlor. Revocable transfers are also not treated as a transfer for capital gains purposes. However, on the sale of such assets, the income continues to be clubbed with the settlor's income under Section 97.

Stamp Duty and Registration

The trust deed attracts stamp duty, which varies by state. In Maharashtra, stamp duty on a trust deed can be significant if immovable property is involved. Registration of the deed is not mandatory but is recommended for maintaining authenticity and evidentiary value.

Surcharge and Effective Rate

For discretionary trusts with income above ₹5 crore, the surcharge of 25% on the base income tax rate pushes the all-in rate to 39%. Careful consideration of which assets to hold within the trust — and structuring beneficiary-specific distributions where possible — can materially reduce this burden.

5. How to Set Up a Private Family Trust — Step by Step

Step 1 — Define Objectives and Beneficiaries

Clarity on what the trust is meant to achieve — asset protection, succession, tax planning, or all three — shapes every subsequent decision. Identify the settlor, trustees (individuals or a trust company), and beneficiary class precisely.

Step 2 — Draft the Trust Deed

Engage a qualified lawyer with estate planning expertise. The deed must specify: trust name, objectives, settlor details, trustee powers and duties, beneficiary schedules, distribution conditions, trustee succession mechanism, and duration.

Step 3 — Execute on Stamp Paper and Register

The deed must be executed on non-judicial stamp paper of the appropriate denomination (state-specific), or stamp duty can be paid online. Registration of the trust deed with the sub-registrar is not mandatory under the Registration Act, 1908, but it is recommended from an authenticity standpoint.

Step 4 — Obtain a PAN for the Trust

The trust is a separate tax entity and requires its own Permanent Account Number (PAN) from the Income Tax Department. This PAN is used for all subsequent income tax filings, investment accounts, and bank accounts.

Step 5 — Open a Bank / Demat Account in the Trust's Name

Financial institutions will require a copy of the registered trust deed, PAN, KYC documents for the trustee, and SEBI-mandated documentation for investment accounts.

Step 6 — Transfer Assets to the Trust

This is the operative step — where assets in the form of money, equity shares, mutual fund units, and other investments are transferred to the trust's bank account or investment accounts.

Step 7 — Annual Compliance and Review

The trust must file an annual income tax return. The trust deed should be reviewed periodically — especially following significant life events, changes in tax law, or shifts in family structure.

6. Case Illustration: Preserving Wealth Across Generations

The section below is a hypothetical scenario constructed for educational purposes. It does not represent any real client, family, or engagement at Anand Rathi Wealth Limited.

HYPOTHETICAL SCENARIO · NOT A REAL CLIENT CASE · FOR EDUCATIONAL PURPOSES ONLY

An Illustrative HNI Family Scenario

A second-generation business owner — net worth approximately ₹85 crore, comprising a listed stake, commercial real estate, and an equity mutual fund portfolio — had structured his estate entirely through a will. Two adult children were active in the family business; a third child was a minor requiring long-term financial care.

On review, three planning gaps emerged: (1) probate on the property stake would be a lengthy, public process, (2) the minor child's inheritance would require a guardian with no flexibility, and (3) personal assets carried potential exposure to liability from an unrelated business subsidiary.

A private irrevocable family trust was structured to hold the mutual fund portfolio. A separate family private trust was created for the minor child, with distributions tied to defined medical and educational milestones.

Illustrative Outcome: In a scenario such as this, a family could expect to achieve ring-fencing of a significant portion of assets from business risk, a clear succession mechanism without court involvement, a structured and private distribution framework for the minor child, and a more efficient estate-level tax position — all while retaining investment flexibility within the trust.

7. Common Mistakes HNI Families Make in Trust Formation

✗ Drafting the deed without specialist legal counsel

Templated or lightly adapted trust deeds frequently omit critical provisions — trustee succession, dispute resolution, or specific beneficiary schedules — that cause problems decades later, often in court.

✗ Ignoring capital gains tax consequences at the point of redemption

A common misconception is that transferring assets into a trust triggers an immediate capital gains liability; it does not. The transfer itself is not a taxable event. However, when the trust later redeems investments such as equity mutual fund units, capital gains tax is applicable at that point.

Families often overlook this downstream tax consequence when planning distributions or rebalancing within the trust. Understanding the timing of gains is essential to structuring withdrawals efficiently.

✗ Naming only one trustee with no succession plan

If a trustee passes away without a named successor, the trust’s assets can be frozen until a new trustee is appointed — as a minimum of two trustees are generally required to ensure continuity. This is exactly the kind of disruption the trust was meant to prevent.

✗ Creating a revocable trust and expecting creditor protection

A revocable trust does not protect assets from the settlor’s creditors. Only an irrevocable, properly structured trust provides meaningful creditor protection.

✗ Not updating the trust when circumstances change

Birth of new grandchildren, divorce within the family, sale of a business, or acquisition of NRI status can all render existing trust provisions obsolete. Trusts should be reviewed at least every three to five years.

✗ Conflating a holding company structure with a trust

Both are valid wealth structuring vehicles, but they serve different purposes and have different tax profiles. Using one where the other is more appropriate can result in significant inefficiency.

FAQs