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BW Businessworld

A Matter Of Trust

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The first generation of a business, as they say, usually creates wealth, the second nurtures it, and the third often ends up eroding it. A McKinsey report says that less than a third of family businesses survive past the third generation. So how is corporate India, with its myriad entrepreneurial families, protecting itself against the erosion of its wealth, and just as importantly, the continuity of its businesses?

It’s through family trusts, says Bijal Ajinkya, who advises corporates and HNIs on succession planning as partner at law firm Khaitan & Co. “Most of India’s big industrial families already have trusts to manage their wealth. Even first-generation entrepreneurs are lining up to protect their wealth within trusts.”

The practice is gaining currency. Amarendra Phatak, who is director of private banking at Ambit Capital, says that though trust-related revenues now form only a small portion of the revenues from private banking, the proportion is set to grow.

A trust essentially entrusts a professional group of wealth managers (either individuals, or as increasingly seen, professional firms) to take business decisions on behalf of the ownership, thus protecting the business from potentially bad decisions taken by heirs. The heirs would be named as beneficiaries of the trust, so their claim to wealth remains intact.

Trusts aim to provide a robust, long-term and secure way to hold and manage the wealth assets, says Samir Bimal, CEO of BNP Paribas Wealth Management India.

But then, it is not always only about protecting the business. Two examples from India’s biggest families — the Ambanis and the Birlas — serve as crimson reminders. Says a wealth advisor, on condition of anonymity: “It’s difficult to believe that an astute businessman like Dhirubhai Ambani would not have considered that his sons wouldn’t get along. That’s a case of misplaced optimism on succession, which served as an eye-opener for the rest of India Inc.”

Then came the shocker at the Birla family when the matriarch of the MP Birla group, Priyamvada Birla, died without heirs writing away the entire estate to R.S. Lodha, her financial advisor. Legal cases still continue in several courts, from different branches of the extended family.

Encapsulating the assets of a business within a trust means that the head of the family or business can decree that the wealth that he leaves behind is used as per his wishes, even while ensuring that the heirs get beneficial ownership of the wealth. This helps to protect the business from disruptions in the owner family, and the family head continues to exercise control through the trust deed, says Sonali Pradhan, managing director at RBS Financial Services. Even charity can be allotted a share, and that’s what Indian business leaders are doing, she says.

Sometimes such controls are exercised through a ‘letter of wishes’, which guides the trustees while executing the trust.

That, of course, is not the only reason why India Inc is queuing up at the trust advisors’. Avinash Gupta, head of financial advisory practice at Deloitte, says apart from divorcing the ownership of a business from its management as well as helping a smoother handover, putting your wealth in a trust helps insulate the wealth. That’s why more and more promoters are starting trusts even during their lifetime, he says.

For example, careful planning can protect the assets held in a discretionary trust if the settler (author of the trust) or the beneficiaries go bankrupt, says Ajinkya, because the beneficiary technically does not have a claim on the assets.

Sometimes a trust is created to protect the wealth from the whims and fancies of the heirs. Phatak gives the example of a wealthy gentleman who, convinced that his wife and daughter would not want the hassles of taking business decisions, bequeathed his wealth to a trust, with precise instructions on how much money should be paid to the two, including details such as allowing them a new car of the requisite status (rather than a fixed amount, as cars get expensive over time) every three years. One of the benefits of having a trust is that your heirs can enjoy the wealth without having to take investment decisions, something which intimidates many, says Phatak.

Or what happens if a promoter dies while his business is still at a nascent stage, and his heirs are still minors, or even worse, die with him. In that eventuality, a trust helps to ensure that the business will not be affected by the mishap. At that point, the trustees will come in and appoint a professional manager, perhaps leaving the question of ownership to be decided at a later stage, depending on what the Will requires.

And to top that, a new worry has emerged in recent years. With divorce rates going up, how does one protect the estate, especially given that alimony takes into account the husband’s wealth? A discretionary trust, just as in the case of bankruptcy, cannot be counted among the assets of the beneficiary.

Incidentally, the central government plans to introduce an amendment to marriage laws which, in case of a divorce, would give the wife an equal share of not only the property the husband acquired during or before the marriage but also his inherited or inheritable property. Families couldn’t be more worried.

Several promoters have chosen to have a huge chunk of their holdings in family trusts. For example, the Adani family holds about 29 per cent of their stake (Rs 13,007.49 crore) in the Adani group companies through four or five family trusts;  Zydus-Cadila promoter Pankaj Patel’s family has chosen to hold over 90 per cent (or Rs 11,357.62 crore) of their stake in the companies through the Zydus family trust. The Mariwala family, which owns Marico, holds nearly 77 per cent (or nearly Rs 6,290 crore) through family trusts.

But there is a flipside, too. Transfers to trusts are strictly one-way streets. An irrevocable trust does not even give you the flexibility to dissolve it at a later date, if you have a change of heart, unlike a Will. Similarly, the instructions on how the funds should be employed can be a deterrent. There are cases where the trust deed permits the trustees to invest the funds in only debt funds, says Ambit’s Phatak. An instruction like that is all but cast in stone. Once the settler dies, such an instruction cannot be changed by anybody, he says.

To guard against such eventualities, trust deeds are usually written using words that give trustees some amount of flexibility in executing it. If that also doesn’t work, then all the beneficiaries in a trust can come together and ask for a trust to be dissolved, says Siddharth Shah, another partner at Khaitan & Co.

And then, finally, there are the cases where the patriarchs don’t want their children to inherit the wealth at all. Case in point: Paris Hilton, whose grandfather, miffed with her ways, bequeathed almost 97 per cent of his then $2.6 billion to the Conrad Hilton foundation, a family charity.


(This story was published in BW | Businessworld Issue Dated 17-06-2013)