Succession Planning from a Separation Perspective The Role of Family Trusts

Family trusts are gaining traction as a powerful solution for succession planning and divorce financial planning.

Why do people set up family trusts?

The profile of individuals establishing family trusts often includes families with (₹15-₹20 crores and above). However, the purpose goes beyond wealth:

• Immediate asset access: Unlike a will, assets in a trust bypass the probate process, ensuring quick and hassle-free access for beneficiaries.
• Protection against liabilities: Trusts serve as a financial shield, safeguarding assets from business risks, lawsuits and even divorce settlements.
• Incapacity planning: They provide a framework to manage assets if the settlor becomes incapacitated due to illness or injury.
• Support for minors and special needs: Trusts allow staggered distribution, ensuring minors or vulnerable family members are financially secure without risk of misuse.

What are the different types of family trusts?

• Revocable 
• Irrevocable
• Discretionary and
• Non-discretionary subsets. 

Revocable trusts allow flexibility and control, which is ideal for succession and incapacity planning. Irrevocable trusts protect assets from liabilities by relinquishing control. Discretionary trusts offer flexible distribution, while non-discretionary trusts have fixed allocations, each serving specific financial goals.

An irrevocable-discretionary trust works best for asset protection or estate duty planning, whereas succession planning or incapacity `planning objectives can opt for other options.

Can Family Trusts Protect Assets in Divorce Settlements?

Before divorce: Assets placed in an irrevocable trust are shielded from claims, protecting wealth.

After divorce filing: Transferring assets to a trust post-filing may be seen as an attempt to evade legal obligations, raising red flags.

Courts aim to maintain the standard of living for the affected party during divorce proceedings.

What are the common pitfalls in setting up family trusts? And how can you avoid them?

a. Poor timing of trust creation
Creating a trust after filing for divorce can seem like an attempt to evade legal obligations. Set up trusts well in advance to avoid scrutiny.

b. Weak trust structure
A trust’s effectiveness depends on separating the roles of settlor, trustee and beneficiary. Overlapping roles can weaken its ability to protect assets.

c. Prenuptial agreements are not legally binding
In India, prenuptial agreements hold no legal weight. Families must explore alternative asset protection strategies.

d. Overlooking asset protection options
Consider specific asset-based trusts or keep high-value assets in parents’ names to mitigate risks, especially in second marriages.

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