You have worked hard, and built your wealth. Now, it becomes your most important responsibility to ensure that it is distributed properly amongst your inheritors after your death.Hence you should ensure you make arrangements to distribute it amongst your descendants after your death, in order to prevent further complications.
There are two ways of taking care of this problem. One is making the will and the other is to create a private trust. Here, we take a look at private trust, why go for it, its drawbacks and how to create one.
Welcome to private trust. A private trust is a system where you create a trust and nominate yourself as the authorised owner of all the assets.
You are called as the settlor and can specify the names of those who will benefit from these assets. The persons receiving these assets will get these assets after your death and are known as beneficiaries.
Benefits of a private trust
Creating a trust has various benefits. They include:
As private trust is private, it is not open to public scrutiny. On the contrary, a will is a public document and can be inspected by parties involved if there is a dispute. You must appoint an executor, who is a reliable person, in order to divide your assets according to your will.
You can set it up for a specific purpose and lay down the time frame, after which the trust is declared as null and void. For e.g. if your kids are young, you can develop a trust and give it a time frame till they reach adulthood, after which the kids can look after the inherited wealth.
As trust pays taxes on the income earned, the beneficiaries do not have to pay any taxes on the income they get, provided the trust is non-discretionary. But in case of discretionary trusts, they must pay tax.
Unlike a will, contesting a trust is difficult as the trust is properly defined. There is no need for any legal action to get it executed. The role of the trustee is to just divide the assets according to the instructions laid down by you. In most cases, creating a trust is a very efficient method of distribution of wealth.
Drawbacks of a trust
However the trust has many drawbacks. Here are some of the disadvantages of creating a trust.
- Once you have established the number of beneficiaries while creating a trust, you cannot include more beneficiaries.
- Trustees are in absolute control of the operations of the trust, making them very powerful.
- As most commercial organisations do not have much knowledge about the trusts, you might experience many problems at the time of operation of the trust.
Creating a trust
Creating a private trust is very easy. Follow these 4 simple steps to create a private trust.
Implement a trust deed
In order to create a trust, you need to implement a trust deed. The formats for preparing a deed can be found online or a lawyer can give it to you. Prepare the deed on a stamp paper of Rs 100. It is a legal document, assigning rights to the person.
The trustees are the people who are appointed to look after the trust and its operations. You can also become one of the trustees. Note down the names of the trustees on the deed.
Determine the kind of trust
Decide how would your assets to be divided amongst each of your beneficiaries. This should be given in terms of amount as well as percentage.
If there is fixed amount of distribution, the trust is a non-discretionary, implying the trustees must adhere to the prescribed guidelines. If the trustees are given the powers to fix the method and amount of distribution, the trust is said to be a discretionary trust.
Hand over the assets
After the trust has been created, it is time to start handing over the money and assets to the trust gradually. This should be done over a period of time. Ultimately, these holdings are then transferred to the beneficiaries.
There are two methods of passing down your wealth to the descendants. One is through a will and the other is through a private trust. Establishing a trust has various advantages, but there are few drawbacks as well.
It is essential to weigh the pros and cons of establishing a trust before going ahead with setting it up.