IN THE PENTHOUSES of wealth and privilege, Elon Musk, the globe's wealthiest individual with a net worth of $229 billion, champions a distinctive philosophy on generational wealth. Musk, the visionary behind Tesla and now the current owner of X, is a fervent proponent of meritocracy, suggesting that his nine children from his previous relationships should not merely inherit the helm of his empire unless they truly possess the passion and aptitude to drive it forward. Rather, he insists, if they lack a natural inclination towards his businesses, it would be judicious to pass the control, including that of ownership, to deserving individuals willing to run the corporations.

A few notches lower in the list, the world's savviest investor, Warren Buffett — the sixth-richest individual valued at $119 billion — offers another perspective on legacy. The Oracle of Omaha, who has already given away $50 billion since 2006, has long been vocal about his intention to bequeath 99% of his monumental wealth to charity. The $2.5 billion designated for each of his three children are earmarked exclusively for their respective non-profit foundations. The only tangible monetary advantage for Buffett's heirs comes not in the form of vast personal wealth, but rather, modest salaries they'd draw from their charities! Buffett, at the age of 92, remains prudent in detailing his posthumous directives — his will categorically instructs trustees to retain all Berkshire shares, with a mandate that his wealth be reallocated within a decade of his demise.

In the age of inherited wealth and dynastic ambitions, these two titans provide a compelling narrative on stewardship and the responsibilities that come with affluence. But back home, the story is different. Unlike the West, where institutional owners are the primary owners of listed businesses, in India, the founding entrepreneurs are the controlling owners, accounting for 3/4th of India's GDP. So, often, it is the promoter's family and close kin who tend to be the legal heirs. Interestingly, the ownership of listed companies in India is spread across a clutch of entities owned by the promoter and these entities are either private limited companies, limited liability partnerships (LLPs) or trusts. It was in 2009 that India introduced the concept of LLP firms with Parliament paving the way for the Limited Liability Partnership Act. Many business owners are using the LLP route to keep the family flock together in a joint family business. The partnership deed, which explains the partners' rights and duties to each other, typically includes rules on what happens if a partner passes away and how their share of the business is dealt with. In fact, the country's largest company by market value and the No. 1 on Fortune India 500 list, Reliance Industries, for instance, has 30 LLPs. Of these, five LLPs hold 38% stake (2.54 lakh crore shares), four together hold 0.67% stake, and the rest 21 LLPs hold 4,519 shares in all, with each entity holding an average 215 shares. The 30 LLPs cumulatively account for ₹7.16 lakh crore (87.46%) of Mukesh Ambani's wealth of ₹8.19 lakh crore.

Interestingly, a parsing of the ownership data of the 157 billionaires in this year's list shows that trusts are an integral part of most entrepreneurs' diversified ownership matrix. Vishal Yeole, director, business advisory, Waterfield Advisors, explains that without clarity of the predecessor's intent, there is considerable room for ambiguities which may lead to factions arising within the family members. "If the baton must pass, it might as well be passed on in an organised manner. Some persuasive reasons families look to devise and implement a Trust structure are — segregation of ownership and management; ability to design a framework for income and wealth distribution, and ring-fencing of assets from potential claims and shielding the family estate from a probable re-introduction of Estate duty in India," elaborates Yeole.

Interestingly, the cumulative net worth of 38 billionaires in this year's list, held primarily through trusts, HUFs and foundation, is ₹8.10 lakh crore ($98.5 billion) and constitutes 24.90% of their cumulative wealth of ₹32.52 lakh crore (See: Trust for a Lifetime). Rishabh Shroff, partner and co-head, private client, Cyril Amarchand Mangaldas, believes the simplicity of trusts is what makes the structure attractive. "Compared to a company structure, trusts are far simpler and easier to set up, and are not subject to rigid rules and intense compliance obligations — you can draft your trust deed and the mechanics as you wish, with very few legal restrictions," says Shroff.

Incidentally, during the era of estate tax, which was abolished in 1985, there was an incentive for trust-like structures — including HUFs run by a karta (head of the family who is a male descendant) — given the benefit of different tax slabs provided for family trusts. But the abolishment of the tax in 1985 by the-then finance minister V.P. Singh and the subsequent lowering of income taxes took the sheen away from trusts. More importantly, an increase in the number of co-owners and joint heirs (coparceners) also brought to fore the risk of litigation. As a result, HUFs lost their flavour and, at best, today represent remnants of a bygone era in a few multi-generational conglomerates such as the Birlas where insignificant holdings — 0.01% (89,720 shares) in Grasim, 0.03% (648,632 lakh shares) in Hindalco and 10,228 shares in Ultratech — are held by Aditya Vikram Kumar Mangalam Birla HUF with Kumar Mangalam Birla presiding over as the karta.

Though Birla's ownership over his empire is today ensconced in a mesh of cross-holding and private limited companies, there are some entrepreneurs who have consolidated their holdings in trusts. For instance, of the 38 billionaires, Pankaj Patel (Zydus Lifesciences, Zydus Wellness), Falguni Nayar (FSN E-Commerce), Glenn Saldanha & family (Glenmark Pharma), B.K. Goenka (Welspun group) and Vikram Lal (Eicher Motors) hold over 90% to 100% of their stakes in trusts.

One key reason for the concentration of wealth in trusts, according to Shroff, comes from the fact that trusts are very useful in consolidating fragmented ownership, where in a typical family business the shares are spread across family members across generations, and will continue to fragment as shares get inherited downwards. "In such cases, one can consider a trust per family branch, or even one master trust for the entire family, and that can be the common holding vehicle. The economic enjoyment of the shares, both in terms of recurring dividend and potential capital gains upon a sale, can also be controlled under the trust deed — this can be shared amongst the relevant family members as beneficiaries," explains Shroff.

Though it's not a silver-bullet, a trust-like structure ensures that business families don't end up squabbling with each other over inheritance. Recently, Deepak Parekh, chairman of the erstwhile HDFC, had commented that family businesses must restrain from getting into legal battles to resolve disputes. "Court cases take years, wealth gets depleted, and the same problems get passed down generations. Always opt for an arbitrator — a person mutually trusted — and both parties should sign an affidavit that they will abide by the decision of the arbitrator," Parekh said at an event at the SP Jain Institute of Management & Research. Unlike the Ambani brothers dispute, wherein K.V. Kamath played the role of an arbitrator, very few disputing business families are open to the idea, which is evident in the several inheritance disputes being fought by business families in the courts.

Probably that's the reason why first-gen entrepreneurs are taking the "trusted" path.

A trust, especially a discretionary one, is more flexible than a will or a partnership. With a trust, the benefits to family members can be availed of when they need it, considering their needs, what they've done for the family, and business growth. More importantly, it also smoothens the process of changing leaders and shares management roles between family and outside experts, if need be.

Anand Shah, senior partner and co-head, private client practice, AZB & Partners, says succession planning can be one motivating factor to set up trusts. "Also, holding assets in a trust insulates you from personal liability in the event of a default on credit or, owing to bank guarantee. It helps in ringfencing personal assets," says Shah.

Shroff also points out that families prefer to hold long-term assets in a trust to insulate them from potential creditors and claimants. "If well intentioned (with no intention to defraud creditors) and done well in time, in compliance with the Insolvency Code, then indeed any such trust assets will fall outside the individual’s estate — and out of the hands of any. Such trusts are used to preserve the assets on a long-term basis and are not used for the day-to-day economic requirements of the promoter," says Shroff.

Against this backdrop it's understandable why the infra focussed-leverage dependent Adani Group has a chunk of its holding in trusts. In value terms, the Adani brothers (Gautam and Vinod) top the list with S.B. Adani Family Trust holding stakes — in six listed entities — worth ₹3.14 lakh crore, constituting 60% of the family’s cumulative wealth of ₹5.24 lakh crore.

While the advantage of having a trust is a given from a family succession point of view, the fact that only a handful of promoters have 60-90% of their holdings in trust structures shows that there is no one-size-fits-all rule in play. Shroff points out that one of the reasons why promoters also prefer individual ownership is because it allows them to remain a named promoter in the listed company under relevant laws. "It will help you take advantage of things such as inter-se transfers if the need ever arises. It also shows you have 'skin in the name' by holding shares directly," says Shroff.

Concurring with Shroff, Shah believes that completely moving ownership to a trust also means that the share can no longer go back to the promoter. "That means it restricts the ability of the promoter, for instance, to engage in an inter-se transfer," he adds. Further, since the promoter only has a limited window to acquire 5% every financial year, he cannot transfer more than 5% a year into the trust.

However, there are also complications that can arise from a rejig. In 2018, SEBI had turned down the request of Neeman Family Foundation Trust, associated with Max Group promoter Analjit Singh, to be exempted from making open offers for two group companies owing to a reconfiguration of promoter holdings. Following the proposed reorganisation, the trust was to have over 25% stake in Max Financial Services and Max Ventures and Industries, triggering a requirement for an open offer as per SEBI regulations, but SEBI's whole-time member G. Mahalingam concluded that the exemptions couldn't be provided. The rationale behind the denial was based on the trust failing to meet the stipulated disclosure requirements as a 'promoter' for the three years preceding the proposed acquisition. According to the regulator, open offer exemptions can be granted for promoter entities if they have been named as promoters in the target company's shareholding pattern for at least three years before the intended acquisition. Shah believes regulators don't favourably look at trusts and hence the time taken to seek an exemption can sometimes take years or may never come. For example, Neeman Trust had submitted its application in March 2017, while the regulator responded in July 2018.

Also, with respect to dividend income, the difference in the tax rate between an individual and a structure is insignificant. For instance, the tax rate for individuals/trusts is 36%, while it's 35% for partnership firms/LLP. "The tax rate remains the same at 30%, it's the variation in the surcharge that changes the effective tax rate," says Yeole. In the case of companies, dividend income is taxable at approximately 29%, provided the company has not availed of the beneficial tax regime. However, Yeole points out that it may be imperative to note that, typically, there is a repatriation cost attached for the income transit from the company to the hands of the shareholders. Thus, on a holistic basis, the advantage may or may not accrue to the shareholders.

Though wealth managers feel estate duty or inheritance tax would be in the offing, till date, there seems to be no inclination that the current government is in favour of this tax. In 2020, three senior IRS officers who had prepared a report that suggested increasing the income tax rate to 40% for those earning over ₹1 crore a year and re-introduction of wealth tax for those with net wealth over ₹5 crore, was opposed by the CBDT. The Centre filed a chargesheet against them. "As a guiding principle, if the wealth is not in your hands, and is in another legal entity such as a trust, then that should be insulated from inheritance tax. But there is no way to judge this until the contours of this tax are known," says Shroff.

Though the rising incidence of family feuds clearly shows that trust structures are not sacrosanct since a multitude of India laws and regulations have a bearing on such arrangements, it is still a good-to-have succession mechanism. "Succession is a very personal process, involving factors beyond the scope of legal issues such as emotions and relationships which can prove to be a challenge. But given that devising a trust structure is a detailed and iterative process within a family, such structures have only helped families for the better," says Yeole.

Shah, however, believes families should be prepared for any eventuality. "The last thing you would want as a businessman is to be scrambling for cover," he sums up.

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