Estate and succession planning is becoming a priority for many families, not just the elite. More families are creating structures to ensure their children avoid issues after they’re gone.
Swati Saxena, Founder & CEO of 4 Thoughts Finance, noted that many people are turning to estate planning as they accumulate wealth early in life. “If you have young kids, it’s hard to think about future scenarios involving your family. A planned structure, like a Will or Family Trust, can help manage and transfer the estate smoothly,” she said.
A key aspect of estate planning is ring-fencing, which protects wealth from various threats, ensuring a smooth transfer to the next generation.
“Ring-fencing specific assets can mitigate potential threats and preserve your legacy as intended. It’s crucial for individuals with complex finances or those wanting to safeguard assets for future generations,” said Yogesh Kshirsagar, Senior Director at Pentagraph.
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Chaital Vas, Partner at Nakshatra Legal LLP, explained that ring-fenced assets can be protected from creditors, legal judgments, divorce settlements, business liabilities, bankruptcy claims, and fraudulent claims. It can also extend to medical or long-term care costs if structured correctly.
Several methods can be used for estate planning, including basic nomination, wills, family charters, trusts, Hindu Undivided Family (HUF), Limited Liability Partnerships (LLP), and the Married Women Property Act (MWPA). Trusts are particularly popular because they protect assets from liabilities by placing them under the control of trustees rather than the individual.
“Trusts differentiate economic interests from management. They can include conditions for scenarios like remarriage, making them a good vehicle for ring-fencing assets. However, trusts should be set up as a precaution, like insurance, and not to defraud creditors,” said Alok Saigal, President and Head of Nuvama Private.
Insolvency
When it comes to insolvency, assets can be protected from creditors by transferring them to family members, controlled entities, irrevocable trusts, or through certain insurance policies.
Zarir Bharucha, Partner at ZBA, stated that India’s current insolvency process is limited to corporations and personal guarantors. Assets immune to insolvency include insurance policies, pension funds, unencumbered homes, personal ornaments, vehicles, and assets held in trust. Transferring assets to a private trust before insolvency can also protect them, provided it’s done well in advance to avoid clawback claims.
Jahnavi Kohli, Partner at ANB Legal, added that transfers to genuine separate legal entities can shield assets from creditors if they’re not fraudulent.
Divorce Cases
In divorce cases, ring-fencing can prevent assets from being claimed by in-laws.
Nishant Datta, Advocate at the Delhi High Court, mentioned that wives in India cannot claim ownership of their husband’s property. To protect assets, families should clearly define ownership in joint assets, income shares, and consider using HUF or private family trusts.
Dependent Children
Parents with dependent children, whether due to mental, physical, or substance abuse issues, may find private family trusts effective for holding and controlling assets. This setup prevents individual family members from mismanaging their share of the property.
In conclusion, ring-fencing through trusts, wills, and other methods can protect assets and ensure a proper structure for succession planning. From a taxation perspective, it can reduce estate and inheritance taxes, though it might involve gift taxes and ongoing income taxes on trust earnings. Proper structuring is essential for optimizing tax benefits and ensuring compliance with tax regulations.
