Are you a business owner or an HNI? Have you ever thought about what would happen to your business if something unexpected were to happen to you? The sudden demise of business giants like Rakesh Jhunjhunwala or even Cyrus Mistry should serve as a wake-up call for all business owners to start thinking seriously about succession planning.
Succession planning is not just about passing the baton to the next generation; it’s also about ensuring that your business continues to thrive even after you’re no longer at the helm. Without a strong succession plan, your company may be vulnerable to legal disputes, internal strife, and even the loss of significant partnerships. This could cause chaos within your company and, eventually, in your home.
We’ll explore succession planning in this blog, particularly in the context of India, where joint family structures and cultural complexities frequently make it even more complicated. We’ll also explore why some business owners may choose to defer succession planning and the consequences of doing so.
Acknowledging the significance of succession planning is essential for any business to maintain consistent growth. Effective succession planning is critical for preserving family wealth and ensuring business continuity. Contrarily, family business owners frequently avoid addressing this problem for two likely reasons:
1. Choosing a suitable successor can often be a challenging task.
2. They believe they have ample time to make this decision.
Regrettably, most proprietors only take measures in response to a critical occurrence, such as sickness or demise, when it is too late to enjoy the benefits of a seamless succession planning process. As a result, the passing of wealth from one generation to the next is frequently hurried and seen as unfair, which fosters conflict and rivalry between family members. In relation to succession planning, there are some common myths.
- Myth: Equal distribution of wealth is the fairest way to divide assets
Reality: The “equal is fair” conundrum can result in the fragmentation of the family. Additional benefits for family members who are employed as opposed to those who are not must be considered.
- Myth: Ownership succession is equivalent to management succession
Reality: Economic ownership and management must be separated to allow the family to leverage professional expertise and grow the business. Family trusts and constitutions can help achieve this.
- Myth: A degree from a business school will prepare the next generation to take over the family business.
Reality: Technical proficiency alone is insufficient. To make wise decisions and care for the family business as owners, the next generation must comprehend the family values that guide it.
Fortunately, a powerful tool families can use to protect their assets and ensure their wishes are carried out is the ‘private trust.’ There has been a growing trend in India in recent years toward using trusts for succession planning. Here are some reasons for this trend:
- Estate planning has become more difficult as a result of the complexity of family structures and assets.
- A desire to reduce tax obligations and increase asset protection.
- The necessity to maintain asset control and ensure business continuity.
- The Insolvency and Bankruptcy Code (IBC) of 2016 permits long-standing businesses to enter insolvency proceedings due to a brief period of financial stress. It does so without protecting the promoters’ personal and family assets through the use of personal guarantor clauses.
Overall, the use of trusts for succession planning in India is on the rise as more and more individuals and families recognize the benefits that trusts can provide in terms of asset protection, tax planning, and business continuity.
What is a Private Trust?
A private trust is a legal arrangement that allows a person (the settlor) to transfer assets to a trustee, who then manages those assets to benefit designated beneficiaries. The trust is established through a written trust deed, which sets out the terms and conditions of the trust, including who the beneficiaries are, what assets are to be held in the trust, and how the assets are to be managed and distributed.
Benefits of a Private Trust Option
There are several benefits to using a private trust for succession planning.
First, it offers greater flexibility in estate planning. Unlike a will, which only takes effect upon death, a trust can be set up during the settlor’s lifetime, which means that the settlor can retain control over the assets while still alive. This can be particularly useful for business owners, who can use the trust to gradually transfer ownership of the business to the next generation.
Second, a private trust offers significant asset protection. By transferring assets to a trust, they become legally separate from the settlor’s personal assets, which means they are protected from creditors and lawsuits. This can be particularly important for high-net-worth individuals (HNIs), who may be at greater risk of legal action.
Finally, a private trust offers greater privacy than other forms of estate planning. Unlike a will, which becomes a matter of public record, a trust is a private arrangement between the settlor, trustee, and beneficiaries. This means that the details of the settlor’s estate are not publicly disclosed, which can help to prevent disputes and protect the family’s privacy.
In conclusion, succession planning is critical for preserving family wealth and ensuring business continuity. Establishing a private trust can provide significant legal benefits to both the settlor and beneficiaries. By offering greater flexibility in estate planning, asset protection, and privacy, a private trust can help safeguard your legacy for future generations. It is always best to consult with an experienced estate planning attorney to discuss your options and determine if a private trust is right for you.
We are conducting a webinar “Succession Planning through Trust Formation” by Rahul Hingmire – Managing partner at Vis Legis Law Practice, Advocates who will explain and explore the advantages of using a private trust for succession planning and how it can help safeguard your legacy for future generations.
Date: 17-Mar-2023 (Friday)
Time: 5:00 PM
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