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INTERVIEW: MR. SACHIN BHANDAWAT ON TRUST AND ESTATE PLANNING

The September edition of Au courant features an interview with Mr. Sachin Bhandawat, Principal Associate at Khaitan & Co, wherein he discusses Trust and Estate Planning.




Sachin Bhandawat is a Principal Associate at Khaitan & Co with extensive practice in the field of Private Client Practice and General Corporate. As part of the private client practice, he regularly advises promoters and high net worth individuals (Indian citizens/residents as well as NRIs) on: (i) Estate & succession planning, (ii) Family governance, (iii) Corporate Social Responsibility (CSR), (iv) Family disputes, (v) Business governance, and (vi) Migration advisory. In addition to the above, he has also co-authored/assisted in writing articles and posts on CSR and philanthropy, gift tax, and estate planning through trust structures. On the corporate side, he routinely advises companies on promoter exits, business restructuring and transfers, acquisition and sale of shares, structuring investments, and general corporate compliance. He also assists corporate clients on aspects related to employee trusts.


1. The growth of Trust as a means of estate planning is moving upwards in India. But the number of Trusts in the nation is still low as compared to most developed countries. Can we consider fraud by trustees as a reason resulting in the low number of people using trust as a means for estate planning? Can a specific regulation applying to trustees resolve this issue, keeping in mind that the trustees are required to exercise their fiduciary duty under the provisions of the Indian Trusts Act, 1882?


Firstly, it is pertinent to understand how a trust structure works. Trust, as the name suggests, is a relationship based on trust and fiduciary obligations. For instance, say I am the owner of X number of shares. I can settle the same in trust, such that the legal ownership of the assets will be vested with one or more trustee(s) and they will utilize the assets/trust property for the benefit of the beneficiary(ies). The settlor will trust the trustees to use the assets for the benefit of the beneficiaries. The beneficiaries can be members of the settlor’s family or any person the settlor desires. This is an instance of a private trust (and not a public trust) where a settlor trusts a trustee to use the assets for the benefit of identified beneficiaries. The trustee has to act in a fiduciary relationship and has to act in accordance with not just the Indian Trust Act, 1882 but also the instrument of the trust i.e., the trust deed.


As regards trustee liability, Section 23 of the Indian Trust Act, 1882 provides that where the trustee commits a breach of trust, he is liable to make good the loss which the trust-property or the beneficiary has thereby sustained. Hence, the legal regime under the trust law already provides for the liability of the trustee for any breach of trust.


In fact, I will attribute the reason why trusts are not gaining this much popularity to the taboo surrounding death and by association, estate, and succession. Talking about death or about what will happen after one passes away, is still considered to be a very confidential affair, and estate and succession planning is not discussed as much. People don't talk about it as openly and freely as they talk about any aspect of their businesses or any other aspect of their lives. However, the tide is turning fast.


Once a generation realizes that they need to transfer assets to the next generation, or the need to transfer business seamlessly to another generation, they will look for avenues and understand the need for estate planning and succession in a manner that ensures intergenerational transfer, and this taboo surrounding death is one of the principal reasons why trusts are not getting that much popularity in India. Yes, there are a few cases where the trusts may have been misused. However, I think this is more of a perception issue, and in my view, trusts are extremely beneficial structures, which are both legal and adequately regulated.

2. Why do you think that Estate and Succession Planning is important?


In the Indian Context, Estate and Succession Planning is gaining relevance. In the past ten years, there has been a significant rise in the number of individuals/families, which are considering Estate and Succession Planning. The COVID-19 pandemic has also, unfortunately, led individuals to hasten their planning exercise. People have started recognizing the importance of estate planning. Furthermore, because of the work from home culture amid the pandemic, people managed their businesses from their homes. This culture presented business families and individuals with a unique opportunity to think about succession planning and discuss the same with their families.


In addition to that, the reason that one should emphasize estate and succession planning is to ensure seamless transfer of assets and businesses from one generation to another. There have been instances where big promoters and individuals running multinationals have been involved in litigations concerning succession, which has resulted in their businesses suffering. Two individuals of the same branch of the family may have different opinions regarding the running of the business – therefore, having a clear divide. Enough leeway for each individual to manage the business is advantageous and that will only happen when there is a smooth and clear transfer (from one generation to another), and the transfer does not involve any legal problems or challenges.


Finally, another key reason is estate duty. India used to have estate duty till 1985. There are discussions about the introduction of estate duty time and again, and hence, there is a need to emphasize estate and succession planning in India. Other jurisdictions like Singapore, the USA, the UK, etc. already have an estate duty and hence, the day may not be far, when the same is re-introduced in India.


3. The legislations in India presently do not recognize the concept of a 'Digital Will' or any other form of testamentary disposition by electronic means. Furthermore, the 2019 report of the Steering Committee on Fintech Issues has recommended consideration of amendments permitting digital alternatives to wills and trusts by the Department of Legal Affairs. Countries like the US, Canada, Australia, Singapore & South Africa do not permit electronic signatures on wills and codicils, however, New Zealand does. According to you, how feasible can the legalization of Digital Will be for India, and what could be the possible hitches with adopting such an approach?


Indeed, the concept of a Digital Will is not recognized in India yet, and during the Covid pandemic, there were talks of whether the same should be recognized. However, it is important to understand why procedural requirements exist for executing a Will and the possible scope of abuse while executing a will digitally. Since a will is a document enforced after the demise of the testator, the individuals are generally subjected to a very high threshold for duties that they have to discharge. The burden of proof in executing the will is higher since the testator is no more. Therefore, when faced with a legal challenge, the executor must convince the Court that the individual, while writing the will, was of sound testamentary capacity to enter into and understand the contents of the will and after reading and understanding the same, affixed his signature in the presence of two witnesses. While digitization might be a good step forward, it leaves some scope for abuse, and enough regulations or safeguards need to be provided in terms of procedural formalities.


4.'Pandora Papers' have been in the news lately. As per the analysis of the 'Pandora Papers', two major reasons for the setting up of trusts have been highlighted- First, that individuals try to hide their real identities and distance themselves from the offshore entities, in an attempt to make it harder for the tax authorities to reach them; and second, to protect cash, shareholdings, real estate, and other such investments from creditors and law enforcement.

Sir, do you believe that the irregularities in the laws of trust give a haven to those evading tax? What can be the measures taken by countries, especially India, to avoid such tax evasions?


As I said before, I think the problem lies with the existing perception of trusts. Most people/ agencies/the media, just assume that if a trust is settled, there is something fishy that is going on. The same questions may not be asked if an overseas company or other corporate structure would have been in place. To reiterate, trusts are valid structures with distinct and advantageous features and to think that they are just used for tax avoidance, is completely unfounded and not true. In fact, trusts are, in some cases considered as pass-through entities and do not, as such shield the identity of any person.


Hence, in my opinion, setting up trusts is a very legitimate way of undertaking estate and succession planning, not just in India but also globally. If I own legitimate assets offshore, I would want to set up a trust offshore, not to avoid taxes but to ensure that there is a smooth intergenerational transfer of assets and clear segregation between onshore and offshore assets. Therefore, blaming trusts for tax evasion would not be fair since a company, LLP, partnership, etc, all can be potentially be used for avoiding tax. Moreover, there are sufficient disclosure provisions under the current Indian law, such as the declaration of beneficial ownership, etc to ensure that trusts are not used for tax avoidance. Globally speaking, there are reporting/disclosure requirements such as CRS, FATCA, etc, and there is adequate coordination between tax authorities as well as other regulatory authorities like Enforcement Directorate to approach anybody abroad for obtaining information. Tax authorities in India can approach authorities abroad to get information of the structures that Indians have set up and Indians also have to disclose such structures in their income tax returns.


5. When it comes to non-residential Indians, the subject of a private trust is regulated by different laws differently. While the Indian trust law considers it an entity, taxation laws do not consider it an entity. There's no clarity with regards to its position under Foreign Exchange Management Act (FEMA). With NRI's not being required to report their foreign financial interests and assets, how does the law act to ensure proper taxation of offshore trusts created by NRI's?


Beginning with the example of the Panama and Paradise Papers case itself, upon the release of these papers, it was observed that a lot of offshore structures were being set up and notices were issued by the authorities globally to check their legitimacy. However, further investigations revealed that in most cases the structures set up abroad were legitimate. For instance, the liberalized limited scheme of RBI permits individuals to remit around 250,000 dollars per financial year abroad, for a variety of capital and current account transactions. This can be used for making investments in offshore securities, including investment in shares of companies abroad. As such, legitimate assets can be created abroad. Thus, offshore structures, and especially trust structures, have the validity of the law not only in India but also in other foreign nations.


Concerning taxation laws and disclosure requirements, if an individual sets up an offshore trust, the law provides for a mandatory disclosure under Schedule FA of the Income Tax Act. If such an individual received any benefit from that trust, the same also needs to be disclosed under Indian laws. Thus, setting up an offshore trust is legal. There are multiple global disclosure requirements and Indian disclosure requirements as discussed previously. Hence, trust should be viewed as a more trustworthy source with a lot of advantages.


While some people believe that trusts are not regulated enough, it is to be understood that flexibility is the beauty of the trust structure. However, such flexibility does not mean they are not adequately regulated. This perception that trusts are not adequately regulated creates an illusion that they are used for tax avoidance, but the same is not true.


6. According to estimates, over 15 million people in India are already investing in digital currencies. The laws around the management of such assets are still at a very nascent stage in India. Given that it falls in the grey area, can cryptocurrency and other digital assets be included in the will and trusts of an individual? If so, how would they be treated?


Digital assets can be included in the wills and as such have been included in a lot of wills. There are even cases where individuals want to hand over Instagram or Twitter accounts to the members of their families. In such circumstances, the same has been included in Wills.


As far as cryptocurrency is concerned, the legal framework is not very defined. I think, some years back, RBI came out with a circular denying recognition to cryptocurrency per se, but then the Supreme Court released an order stating that it's not fair to ban cryptocurrencies, and cryptocurrency should not be denied recognition. Across the globe, there are some countries (most recently China) that have denied accepting cryptocurrencies, while there are also countries that have accepted them. Thus, a lot of mixed opinions prevail in this regard.


Personally, I think cryptocurrencies should be regulated and given recognition. Decentralization of an instrument cannot mean that they are not valid. Countries like Singapore have embraced digital currencies and passed regulations to recognize and manage them. Another example is El Salvador, which bought huge amounts of bitcoins from the market, giving them recognition. Undeniably, there are also nations that have opined that allowing such currency would create parallel economies and affect their sovereignty. In my opinion, they should be given their due share and the government should consider regulation rather than an outright ban when it comes to cryptocurrency.


7. There are many cases in courts that stretch over many years, like the Faridkot Maharaja case involving property worth Rs. 25000 crores in dispute, going on for 25 years, and other cases where despite the existence of a will, disputes arise. What do you think are the reasons or possible solutions for the same?


This is precisely the reason why estate and succession planning becomes important. While assets are transferred from one generation to another, their transfer is either not planned in a structured manner or not planned at all. In that case, different laws governing succession depending on the person's religious faith come into play, wherein each has its own peculiar way of transferring assets. For instance, Hindus have class 1 heirs which get priority over class 2 heirs, whereas Muslims have residuary, sharers, and distinct concepts such as those.


So, in the case of a non-testamentary succession, there are a lot of beneficiaries and different laws that govern estate and succession planning, and deciding upon those generally consumes a significant amount of time in courts. So, when no such planning has been done, disputes are bound to happen as a lot of individuals tend to claim a stake in a certain property.


Even in cases wherein the property transfer has been planned, disputes tend to arise. Especially in India, in the cities of erstwhile presidential states (Mumbai, Kolkata & Chennai), the Courts still need to approve the will by way of probate for the assets to be transferred. However, this is still way better than not having a plan at all.


In some cases, registration of Wills may also be considered. However, please note that registration is not mandatory at all and just adds a layer of protection, in case of a future challenge. It does not, as such, make a Will a public document. In fact, other measures such as video recording the signing process, medical certificate of sound health and mental state, etc can also be considered while making a Will.


In my view, while a Will is a good place to start. But, in some cases, more nuanced planning and structuring may be required. This may include trusts, inter se/family arrangement documents where all members of the family come together and set out their understanding as to how business, personal and professional assets may be divided and controlled, etc. Therefore, to avoid disputes as such, detailed structuring needs to undertake.