A private family trust is a legal body that allows transferring of assets from one generation to the other. It is usually established by family members for succession planning so that the family can continue enjoying the assets long after the settler’s death. Beneficiaries of private trusts can be an individual family member, or a group of representatives of the same family.
As long as all the Trust members are Indian citizens, there is no issue with FEMA. But these days, many families have members living abroad. Under such conditions, FEMA invariably comes in the picture. Establishing a private trust is the best way for NRIs to ensure progressive succession of inheritance.
Under the Indian Trust Act 1882, a Trust is a contract of faith which a settlor accords in the trustee for the benefit of the beneficiary. But FEMA rules have dubious explanations of the word “Trust”, which sometimes create unnecessary confusion. A trust is seen as an unregulated entity by the Government of India. The Trust body can be easily managed and altered. Hence, any foreign investment in a Trust is allowed on a case-by-case basis.
Parties Involved in Creating a Private Trust
There are three parties involved in creating a private family trust.
Settlor: A Settlor is a person who is making the settlement for the Trust. He is responsible for creating the trust and entrusting his assets to it. It is usually the owner of the assets who creates the Trust. However, at times, a professional may also establish a Trust with nominal funds.
The Settlor legally transfers his assets to the trustee with instructions that the asset be held for the beneficiary. A settlor can also be a trustee and a beneficiary. However, they cannot be the sole beneficiary of the Trust, as it defeats the purpose of creating a Trust.
Trustee: A trustee is a legal entity that possesses the assets for the profit of the beneficiary. For all purposes, he is the legal owner of the transferred assets and holds the assets in the name of the beneficiary. Although he cannot enjoy any profits from the same, he is responsible for managing the assets and maintaining legal compliance.
Trustees can be the owner, family members, or professionals like lawyers and accountants. A trustee cannot quit without court consent or the unequivocal consent of all its beneficiaries.
Beneficiary: He is the person who enjoys the profits and income arising out of the assets held in the Trust. The beneficiary’s name may be explicitly stated in the trust deed. But it might also be omitted for future reference (in case of an unborn child).
Importance of Creating a Private Family Trust for NRIs
You might be considering establishing a private trust for a number of reasons. Parents may want to leave their legacy for their NRI children. It can also be utilized to provide for specific needs of beneficiaries – for example, education. A Trust is a powerful tool to manage your assets while residing abroad.
- Asset Protection: NRIs may need to make a declaration of wealth in their country of residence. Since the legal owner of a Trust is the Trustee, an NRI beneficiary is exempted from declaring any assets.
- Immigration/migration: In case one generation lives abroad, a Trust ensures the assets are enjoyed by the beneficiary.
- Minimize family disputes: A Trust deeds clearly spells out the beneficiary terms, hence disputes can be avoided for subsequent generations.
- Controlling distribution: In case a settlor doesn’t trust the beneficiary, a Trust can leverage the controlled distribution of assets.
- Protecting the interest of children/minors: It helps ascertain that asset are transferred to the 3rd generation or future generations
FEMA Rules to Create Private Family Trust for NRIs
- An Indian citizen can only remit funds up to $250,000 under LRS to a nonresident.
- An Indian citizen can gift immovable property to an NRI/OCI.
- An Indian citizen can gift shares of Indian companies to NRI, not exceeding $50,000. RBI approval is needed for this.
- An NRI citizen can transfer non-repatriable assets or funds outside India to a maximum limit of $1 million per year.
- A trustee can be a resident or a nonresident. In case he is a nonresident and claims fee, it should be at par with the revenue expenditure of NRI directors of Indian companies.
- In the case of NRI beneficiaries, the amount distributed to the beneficiary cannot exceed $250,000 per year.
- In case of the death of the Settlor, NRI beneficiaries can remit a maximum $1 million per year. If the distribution amount is more than $1 million, RBI approval will be needed.
- Depending on the Trust deeds and prevailing income tax laws, either beneficiary or trustee could be liable for income tax deductions on any income generated by the Trust.
- If all beneficiaries are NRIs, trustees can invest in immovable property. If any beneficiary is not an NRI, trustees cannot invest in immovable property.
Private family trusts have been used for a long time in the country by both NRIs and Indian residents. You need to be aware of any cross-border succession laws, especially in the country of your residence. Be sure to take proper legal advice before forming a trust.
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