Succession has always been a matter of contention, from the era of the Ramayana to the Mahabharata, to the corporate world today. It is a difficult conversation, which is normally delayed and deferred until it becomes inevitable, leaving little time to plan it appropriately. In family businesses, delayed succession could have disastrous consequences, not only for the family but for the business as well. There are umpteen examples that substantiate this. Therefore, succession planning is not only important for the harmony of the family but also for continuity and longevity of the business.
In the last couple of years, succession planning is receiving due attention from promoters/ families who are making conscious efforts to discuss and plan succession timely and not wait for an eventuality, to ensure smooth transition of their businesses to the next generation.
With time, various means to ensure smooth succession have evolved. Traditionally, and even today, a “will” is the most commonly used method for passing on the reins of the family business/ wealth to the next generation. However, a “will” suffers from some inherent limitations, the most important being that it is enforceable after the lifetime of its author, and therefore, can be a subject matter of dispute.
Alternatively, the Private Family Trust (PFT) has emerged as a preferred mode of succession planning and is now actively used by promoters to pass on control, management of business and wealth to their next generations. The key benefit of a PFT is that it comes into operation during the lifetime of the author and provides upfront transparency and clarity to family members, thereby, minimising the possibilities of disputes in future.
A well-written Private family Trust Deed not only provides for the vision of the family but also mechanism to handle various aspects of ownership, control and management of business, entitlements, rights and obligations in family business/ wealth. In addition, a PFT also helps promoters in protecting their family wealth against business risks.
A PFT is governed by the Indian Trusts Act, 1882 and has four key components viz. a Settlor, Trustees, Beneficiary(s) and trust property. A settlor or author is a person who is generally the patriarch of the family or other senior member who settles and contributes his/her properties into the PFT to be held by the trustees for the benefit of the beneficiaries. Generally, both the trustees and the beneficiaries are the members of the family.
A PFT is not a separate legal entity in the eyes of law but an obligation reposed on the trustees to hold, maintain and apply the properties and income arising therefrom in the best interest of the beneficiaries. There is no tax incidence on the settlement of property by the settlor in the trust where beneficiary(s) are relative of the settlor and the income of the PFT is taxed only once in the hands of the trustees or the beneficiaries as the case may be. There is no additional tax on the distribution of the income by the trust in the hands of beneficiaries, which have already suffered tax. In addition, the Finance Act, 2017 has made an amendment to bring clarity on taxation on transfer/ settlement of property into a PFT (where the beneficiaries are relatives), which will also encourage promoters in setting up PFT for succession of their business/ wealth.
As per a recent PricewaterhouseCoopers Family Business survey, 75% of Indian family businesses have grown in the last 12 months; 84% expect to grow either steadily or quickly and aggressively over the next five years. Indian businesses have not just grown within India but have established phenomenal presence globally with businesses spreading in multiple countries across regions. Increase in business interest globally has led to members of promoter’s family(s) shifting part or whole of their base outside India to focus and drive international business and in some cases becoming resident of other countries. Such members also have personal assets and wealth spread across various countries.
PFT structures are prevalent in various countries and have been successfully adopted by promoters for many years. In certain overseas jurisdictions such as the USA, UK etc., there are stringent laws and regulations applicable on succession of wealth, which includes estate duty (i.e. tax on FMV of the assets passed on to next generation on death of a person) or gift tax in addition to income tax and other regulations. However, in India, currently there is no estate duty law. All this has made the succession planning of global families a complex and sophisticated exercise.
To summarise, the awareness among Indian promoters to timely put in place a succession plan to ensure smooth transition of business and wealth to their next generations is steadily increasing; however, there is still a significant gap in its implementation. As per a recent PwC Survey, 85% of promoters said that they have a succession plan in place but only 15% have robust, documented and communicated succession plans. Therefore, in order to make “succession” successful it should be seen as a process and planned in advance, not triggered on happening of an event.
Authors: Hiten Kotak, Leader – M&A, PwC India, Praveen Bhambani (Partner, M&A Tax, PwC India), Amit Agarwal (Director, M&A Tax, PwC India) and Rajasi Singhvi (Assistant Manager, M&A Tax, PwC India)
Disclaimer: This views expressed in this article are the personal views of the author. Article includes inputs from Amit Agarwal – Director, M&A Tax, PwC India and Rajasi Singhvi – Assistant Manager, M&A Tax, PwC India
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