[Opinion] Passing the Torch, Preserving the Legacy | Smart and Tax-Efficient Succession Planning

Poonita Harsh Kundra – [2025] 173 taxmann.com 252 (Article)

“The art is not in making money, but in keeping it and passing it on wisely.”

This quote rings especially true in the world of family-owned businesses, first-generation entrepreneurs, and high-net-worth individuals who have built empires through years of diligence. As they continue to accumulate wealth and build enterprises, a critical but often-overlooked question looms: what happens when it’s time to step aside?

Succession planning is no longer just about determining who gets what. Today, it requires designing framework that ensures smooth generational transition, preserves control, and most importantly, does so in tax-efficient and legally compliant manner.

In India, succession has traditionally been viewed through the lens of sentiment rather than structure. However, with increasing regulatory oversight under the Income-tax Act, Companies Act, FEMA, and other statutory regimes, informal transfers and unwritten promises can lead to unnecessary tax exposure, family disputes, and business disruptions. Whether the transfer pertains to ownership of companies, operational roles, or real estate holdings, the method and manner of succession can make or break the legacy.

Succession planning refers to the carefully considered legal and financial strategy of transferring assets, wealth, or operational control to the next generation. Contrary to popular belief, it involves much more than writing a will. It integrates corporate structuring, asset protection, tax optimization, and long-term business continuity planning. The aim is not only to hand over wealth but to ensure its prudent management across generations.

Despite its importance, several common hurdles repeatedly derail succession efforts. One major issue is procrastination. Founders often postpone these discussions due to emotional bonds, fear of relinquishing control, or avoidance of potential conflict. Unfortunately, such delay often leads to legal battles among heirs, especially in the absence of a clear plan.

Another significant barrier is the lack of tax awareness. Families frequently transfer shares, properties, or businesses without understanding tax implications such as capital gains, stamp duty, or taxation under section 56(2)(x), which governs gifts. A lack of knowledge in this area can result in substantial and avoidable tax burdens.

Many families also fail to create legal structure around the succession process. Informal arrangements or verbal assurances hold no legal weight and can be easily contested. Generic wills might work for simple bank accounts but are inadequate for layered holdings like HUF interests, business equities, or jointly held properties. Added to this is the complexity of cross-border inheritance. NRIs receiving Indian assets, or family members residing abroad receiving shares, often trigger FEMA compliance, withholding tax, and international tax obligations.

To overcome these challenges, it is imperative to adopt structured, legally enforceable mechanisms that allow for seamless asset transfer, protect against disputes, and optimize tax outcomes.

1. Private Family Trusts

One of the most trusted tools is the private family trust. Trusts allow the transfer of assets to trustees for the benefit of designated beneficiaries, while retaining control over the management. Trusts help ring-fence assets, avoid probate, and, if structured correctly, eliminate immediate capital gains implications. Irrevocable discretionary trusts are ideal for long-term estate management and ring-fencing of assets, while revocable trusts are preferred during the settlor’s lifetime for flexibility, particularly in scenarios where there is no concern of clubbing under tax laws.

2. Holding Entity Structures

Another highly effective structure is the holding company model. Businesses and assets can be consolidated under a single holding entity, which can be a company or a Limited Liability Partnership (LLP), depending on tax and governance considerations. The equity of such entities can then be distributed among family members or parked under private trusts. This ensures centralized control, allows phased transfer of economic rights, and simplifies governance, especially during generational transitions.

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