For centuries, private family trusts have stood as guardians of family fortunes - designed to preserve and distribute the wealth of high net-worth families across generations. A number of these enterprises were built using the reliable rotary dial telephone to generate business. However, just as the rotary dial has become obsolete, several antiquated trust structures in India are now experiencing sonic interference from contemporary challenges, rendering them less optimal for generational wealth transfers. Family members who were hesitant to disrupt the peace are now feeling increasingly stifled by the status quo. As peers adopt modern, robust strategies for wealth creation and preservation, the fear of falling behind in an ever-evolving economic landscape looms large.

Some critical challenges and potential strategies that families should consider for breathing new life into their antiquated trusts are discussed in depth below.

• Conventional trust deeds are cast in stone

  • Powerless to amend

    Many trust deeds exhibit a notable absence of provisions to facilitate amendments, whether by design or oversight. The result is an inability to adapt and respond to changing circumstances. Amendments might be crucial in situations like changes in beneficiary circumstances (e.g., divorce and remarriage) or shifts in tax and regulatory regimes. However, when a trust deed lacks an amendment clause or contains an overly restrictive one (which could involve obtaining approval from multiple stakeholders), trustees might transgress their authority and engage in actions not specifically authorised by the deed, potentially leading to decisions being contested by beneficiaries.

    When there is no explicit amendment provision in a private trust deed, the Indian Trusts Act, 1882 (Trusts Act) prescribes that the trustees must apply to a civil court. Under Section 34 of the Trusts Act, a trustee only has the power to apply to a civil court for its opinion, advice or direction for the management or administration of the trust-property. In such circumstances, the trustees can opt to file a civil suit for rectification of the trust instrument if, due to fraud or mutual mistake of the parties to such instrument, the real intention of the parties is not expressed in the trust deed.¹ Notably, such civil suits would also succeed if trustees and beneficiaries mutually consent that the changed circumstances warrant the proposed trust deed amendments and any external parties are not likely to be adversely impacted by the proposed amendments to the trust deed.² While seeking the court's blessings offers a way out, the confidentiality of the structure will be compromised.

    Accordingly, families will have to consider whether to submit the trust documents to the court or, alternatively, resort to collapsing the existing structure altogether and adopting a fresh one. Correspondingly, in cases where families have established a public charitable trust, the process of amendment could be multi-layered. For instance, in states such as Maharashtra and Gujarat, the consent of the Charity Commissioner is a prerequisite to a suit being filed in a civil court.³ Since a public trust structure has a significantly wide beneficiary base, it is imperative that trustees seek legal opinion and guidance in such matters.

  • Recalibrating management of the trust assets

    Apart from the absence of amending provisions, antiquated trust deeds often have ambiguous and generic language related to the deployment of the trust corpus or income. Some trust deeds restrict investment of the trust corpus to limited avenues. However, high net-worth families globally are increasingly exploring alternative asset classes and geographical diversification.⁴ With such promising opportunities, a strict focus on traditional investments would be imprudent. This renders it onerous for trustees to make decisions to efficiently use the trust corpus, make sophisticated investments, diversify the trust portfolio, extend loans to beneficiaries, or hypothecate trust assets when circumstances require it.

    These nuances need to be carefully defined in the trust deed. An effective method to ensure proper utilisation and expansion of the corpus is to provide for a robust matrix to allocate certain percentages of the trust corpus and incomes to fulfil specified purposes. Such thoughtfully designed architecture will modernise the trust in tune with the evolving needs of its stakeholders.

• Cross-border saga: Navigating regulations and tax headwinds for non-resident family members

  Traditionally, trusts were created for the benefit of family members residing solely in India. However, with globalisation, several family members now venture overseas. This has created challenges for several antiquated trusts conceived in a more localised context. Trust structures must now adapt to serve globe-trotting families spread across several continents. Some of the regulatory hurdles that come into play, along with their potential resolutions are outlined below.

  • Non-resident trustees

    There is per se no express legal prohibition preventing a non-resident from being appointed as a trustee of an Indian trust. However, Section 60 of the Trusts Act empowers beneficiaries to demand that the trust assets are managed, safeguarded, and suitably administered by 'proper' trustees. The Trusts Act specifies that such proper persons do not include persons residing permanently outside India or persons domiciled abroad. Moreover, in case trustees are absent from India continuously for six months or leave India to reside abroad, a new trustee may be appointed, replacing the previous trustee.⁵ This right is typically not exercised by beneficiaries and most are unaware that such a right even exists. Should the relationship between stakeholders become inimical over time, this provision can be weaponised.

    To mitigate any such risks, one can lean on the exception to this right, which is that the trust deed should expressly permit non-resident trustees to hold the office of a trustee. Often, such an express provision is absent.

  • Restrictions under Indian foreign exchange control regulations

    There are no express provisions under the foreign exchange control regulations (FEMA) permitting or restricting transactions related to private family trusts involving non-resident family members. However, the Reserve Bank of India (RBI) has clarified that what is not permissible directly under the extant regulations should not be undertaken indirectly through a private trust structure. FEMA imposes various restrictions vis-a-vis transfer or gift of funds or assets to non-residents, as well as repatriation of cash or proceeds on sale of such assets by the non-residents.⁶ However, timeworn trust deeds may provide for such transfers that are inconsistent with the extant restrictions. For instance, an antiquated trust established by a resident settlor, who has since died, may provide for distribution and repatriation of funds to non-resident beneficiaries in accordance with identified events and amounts within specified timelines, which may be repugnant with the current exchange control regime. In such cases, the trustees and beneficiaries may find themselves in a quandary as to how to proceed.

    Some strategies may include the establishment of separate structures for non-resident family members altogether or suitable amendment to the timelines for distribution or revision of the allocation matrix for assets and income streams between resident and non-resident beneficiaries. It is recommended that the trustees consider specialised legal counsel and obtain the authorised dealer bank's assurance when confronted with such scenarios.

  • Tax implications in overseas jurisdictions

    Recent changes in the United Kingdom (UK) tax law are a pertinent example of why it is crucial to assess tax implications in foreign jurisdictions. Claiming 'non-domiciliary' status has been made more difficult, thereby imposing UK taxes even on income from non-UK sources, including beneficial interests in Indian Trusts, for several non-resident Indians residing in the UK.

    It thus becomes necessary to seek the help of local experts regarding the beneficial interest accrued or the distributions received by the non-resident family members. Appropriately amending the beneficiary structure and the distribution mechanics of the trust should help achieve the desired succession planning objectives in a tax-efficient and regulatory-compliant manner.

• Tug of war: Traditional versus modern realities

  In addition to overseas movement and expansion of families across the globe, the once-familiar contours of the traditional family have also evolved substantially with the transformation of society. This has ushered in a complex family dynamic with multiple layers. Some of these aspects include:

  • Concept of 'excluded persons'

    In conjunction with the authority to add or remove beneficiaries, the trust deed may also establish criteria for disqualifying individuals from being beneficiaries. These criteria may exclude spouses of children who undergo divorce or separation, engage in unlawful activities, bring disrepute to the family, indulge in substance abuse, etc., from qualifying as beneficiaries. These exclusions can also be made applicable to specific individuals, preventing them from seeking the benefits of the family trust.

  • Meaning of 'lineal descendants'

    The interpretation of lineal descendants has entered a realm of new possibilities, expanding its horizons to include adoptive children, children born via surrogacy, etc. These emerging dimensions bestow families with a renewed sense of responsibility to meaningfully examine and make definitive decisions concerning their trusts.

  • Emerging family dynamics

    The modern family unit has become incredibly diverse. India is no longer an exception. These family units may now include same-sex couples (whether married in a foreign jurisdiction or otherwise), civil partners, as recognised in several jurisdictions, live-in partners, etc.

  In this light, it becomes imperative for families to craft a bespoke framework that echoes their distinctive philosophies - whether leaning toward traditions or embracing change. Consequently, a deliberate re-assessment with the help of trusted family well-wishers or seasoned professionals is warranted, rather than relying solely on the conventional understanding of such terms and concepts used in the trust deeds.

• Quandary of trust disputes: Validity of the arbitration clause in trust deeds

  Disputes and differences between the trustees and the beneficiaries cannot be ruled out, even in the case of the most meticulously designed trusts. These disputes may stem from various factors, such as ambiguous provisions in the deed, conflicting and evolving interests of the stakeholders, inefficient management of trust corpus, or breach of fiduciary obligations by the trustees. Therefore, it had become customary to include arbitration clauses in trust deeds. However, in 2016, a judgment of the Supreme Court brought a significant shift in the landscape of trust disputes⁷ by holding that disputes pertaining to affairs of a trust (inter se trustees and beneficiaries) are not arbitrable. Beneficiaries are not signatories to the trust deed, and hence, do not consent to the arbitration clause. In effect, an arbitration clause in the trust deed is rendered redundant, and consequently, any dispute arising out of the trust deed must be decided by the competent court of law.

  Accordingly, families should evaluate incorporating alternate dispute resolution mechanisms into their trust deeds, which would be triggered under pre-determined conditions before disputing parties go knocking on the doors of a civil court. These could include internal or external mediation with a pre-defined panel of family well-wishers and professionals.

Families should evaluate incorporating alternate dispute resolution mechanisms into their trust deeds, which would be triggered under pre-determined conditions before disputing parties go knocking on the doors of a civil court.

• Embracing the new dawn: Refine today, fortify the future

  Recent shifts in the dynamics of families with business interests have resulted in enhanced public and regulatory scrutiny (particularly for families controlling publicly listed entities) and demands for transparency and the highest levels of corporate governance. The Securities and Exchange Board of India (SEBI) has mandated that listed companies disclose agreements, arrangements, etc., made by promoters that impact the management and control of such listed entities. This includes family trusts connected to such entities. Evidently, documents that were previously inaccessible to even family members are now subject to scrutiny by regulators, proxy advisory firms, and stakeholders.

  The trust deficit between the regulator and the promoter class is real and rising. Families must introspect and deliberate on potential revisions within the prevailing trust frameworks, ensuring their resilience in case of public scrutiny.

The inexorable march of progress and change limits the utility of all objects and structures. What was once considered cutting-edge may no longer meet the demands of the changing world. Just as an artist returns to their canvas, adding nuances and adapting to the changing composition, families should prioritise revisiting and fortifying their trust frameworks. In doing so, they not only navigate the intricate legal and regulatory terrain but also ensure the resilience and enduring relevance of their legacies for generations to come.

^[1] Section 26, Specific Relief Act, 1963; Commissioner of Income Tax, Kanpur v Kamla Town Trust [(1996) 7 SCC 349]
^[2] Section 11, Indian Trusts Act, 1882; Muffakham Jah Bahadur v HEH Nawab Mir (AIR 1989 AP 68)
^[3]Section 51 of the Maharashtra Public Trusts Act, 1950; Section 51 of the Gujarat Public Trusts Act, 1950
^[4] Global Family Office Report 2023, UBS Singapore; Latest Investment Trends-Where are the wealthy Indians investing in 2023, The Financial Express
^[5]Section 73, Indian Trusts Act, 1882
^[6]For instance, a limit of USD 2,50,000/FY on gifts of funds from a resident to non-resident (under RBI's Liberalised Remittance Scheme); USD 1 million/FY on repatriation by non-residents from their NRO account in India; USD 50,000/FY on gifting of shares of an Indian company from a resident to a non-resident (under FEMA Non-Debt Instruments Rules, 2019); etc.
^[7]Vimal Kishor Shah v Jayesh Dinesh Shah [(2016) 8 SCC 788]

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