A 360 degree view on employing Trust as a succession planning tool – Part 2
Uday Ved (Chartered Accountant)
In Part 1 of this two article series, the author has outlined broad steps involved in implementing a private trust by providing a pictorial representation of a trust structure.
STAMP DUTY
Stamp duty is levied under Indian Stamp Act, 1899 (Central Stamp Act). Power to levy stamp duty is divided between central and state government. States do have the right to adopt Central Stamp Act with or without modifications.
Stamp duty is levied on the instrument of transfer and hence, location or state of transfer assumes importance.
Relevant articles for Trust in Central Stamp Act (Schedule I) are as below.
- Article 58 - Settlement
- Article 64 - Trust
As per these entries, stamp duty on instrument of transfer (i.e. Trust deed) attracts a stamp duty of 2-3% of value of assets transferred under the Trust deed. However, the State Stamp Act will be the final authority to decide actual levy of stamp duty. Generally, the duty is levied on transfer deed and there should be no further duty on distribution of assets to beneficiaries in future.
It is to be noted that gift of assets to relative (defined) attracts a very nominal stamp duty irrespective of value of assets transferred e.g. Stamp duty on immovable property being transferred in State of Maharashtra is 5% of value of the property. However, if the same property is gifted to a relative, the stamp duty is Rs.200. Similarly, in State of Karnataka, the stamp duty is approx. Rs.1,000. There is a possible view/argument that the same should apply to assets transferred under Trust deed where the trust is formed for the benefit of relatives. This has to be examined for the respective states before a call is taken to form a Trust.
SEBI TAKEOVER CODE REGULATION
- SEBI has prescribed rules on substantial acquisition of shares beyond 25% of share capital and same need to be adhered by Promoters of shares in a listed company. The acquirer needs to make an open offer to existing shareholders of at least 26% of shares at a price determined based on a formula.
- The Takeover Code provides exemption from open offer in certain situations including \'inter se transfers between promoters\'. Also Promoters can approach SEBI for Takeover Code exemption (i.e. open offer) by making a specific application. The relevant rules are Rule 10 (prescribing exemptions) and Rule 11 (making specific application for exemption). It is understood that SEBI also provides informal guidance on this matter.
Considering that the matter is complex in case of transfer of assets (assuming these include substantial shares of listed company held as a promoter group/family), it would be advisable to seek a specific exemption under Rule 11 from making an open offer (rather than seeking recourse to Rule 10 and claim exemption) or in the alternate, seek an informal guidance before the transfer is effected under Trust deed.
- SEBI has also prescribed rules on Insider trading regulations which need to be strictly adhered while the transfer of shares is effected under the Trust deed.
FOREIGN EXCHANGE REGULATIONS
- Provisions of Foreign Exchange Management Act (\'FEMA\'), 1999 are relevant for creation of trust by a settlor.
- A trust outside India (i.e. overseas trust) can be created by a resident owning a foreign asset for the benefit of beneficiaries whether resident or non-resident. The overseas trust can be specific or discretionary trust.
- Similarly, a trust in India can be created by a resident owning assets in India including a non-resident beneficiary.
- There are no specific regulations under FEMA governing trusts. However, it appears that the transfer of assets under Trust should be a \'capital account transaction\' under Section 2(e) of FEMA.
- Interestingly, Master Direction on \"remittance of assets\" does make some reference as below.
- In case settlement is done without retaining any life interest in the property i.e. during life time of the owner/parent, it would tantamount to regular transfer by way of gift (emphasis supplied).
- Thus one argue that settlement of property under trust is akin to gift and provisions dealing with gift under FEMA may be applied (which in most situations are freely permitted).
- Having said that there is no absolute clarity on the subject and a specific clarification from RBI would be desirable.
- Also in the context of a resident being a beneficiary in an overseas trust with overseas assets, the long standing question is whether RBI approval is required when the beneficiary may not be aware if he/she is the beneficiary in the trust (....if done without his/her knowledge by the settlor) and certainty there is no identification of share of income. Under Black Money law, such questions were raised and Tax authorities\' view was that such beneficial interest in discretionary trust should be disclosed by the resident in the Return of income.
ESTATE DUTY/INHERITANCE TAX
- India had estate duty on transfer of assets on death of an individual but the same was abolished in 1985. Since then, there is no estate duty or inheritance tax. Also currently, there is no wealth tax since last few years.
- There were talks of re-introduction of estate duty or inheritance tax in India 5-6 years back but in the recent past, the same have died down.
- Having said that there is estate duty in developed countries like USA and U.K. It is also possible that the same may be re-introduced in future in India considering socio-economic objectives and balancing wealth and removing inequalities. These are all hypotheses which may or may not happen and difficult to predict future outcomes.
- Succession Planning through Trust was one of the important mechanisms to protect wealth being subject to estate duty during estate duty days.
- Also under erstwhile Estate Duty Act (Section 6), gift done within 2 years of death of an individual was ignored and was subject to estate duty. These aspects may be considered while doing potential planning for estate duty or inheritance tax for future. Therefore, transition of assets as early as possible could protect the same from estate duty assuming similar provisions come into effect as and when the law is re-introduced. On a parallel situation, it is understood that protection under Insolvency and Bankruptcy Code, 2016 is not available for assets gifts during last 2 years. Thus legislature considers 2 year window as reasonable time frame.
- If a settlor has set up a revocable trust or is one of the beneficiaries in the trust, the estate duty protection may not be available as per erstwhile Estate Duty Act.
- Setting up a discretionary trust without a settlor being a beneficiary would be ideal.
In summary, succession planning is a process and should be planned in an organized manner. Planned succession can help in protection and smooth transition of wealth whereas an unplanned succession can lead to erosion of family wealth and could create bitterness and feuds in family. Finally, Trust is an established mechanism of succession planning tool and provides protection, flexibility and transition of assets to next generation.
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CAVEATS: Views expressed are personal. It is possible that Regulators may take an adverse view on any issue and there is no guarantee or assurance on this count. Author does not undertake any responsibility for any decision taken based on contents of this article. This is a complex subject and suitable professional help may be taken before any decision is taken.