Article series: KCM Heirloom

What is a Private Trust?

Unlike companies, private trusts are not separate legal entities. A private trust is best described as an arrangement between two people. A person (the Settlor) transfers some of their property to another person (the Trustee) on condition that the Trustee would hold, manage and deal with the property only for the benefit of designated Beneficiaries. The Trustee cannot take, use or enjoy the property for themselves.

Formation of private trusts, rights, duties and liabilities of trustees and beneficiaries are governed by the Indian Trusts Act, 1882. A trust can be set up during the wealth-owner’s lifetime through a written trust deed, or under a will by providing the terms of the trust in the will itself.

Why Private Trust?

Separation of Control & Benefits

The Trustee controls the trust property as per the trust deed, whereas the beneficiaries simply receive the benefits. This makes trusts very useful where there is a family member with special needs, a minor, or someone not accustomed to handling significant wealth. A reliable trustee can manage the wealth while the dependent beneficiary’s needs are met.

Trusts are not just for beneficiaries who lack ability to manage wealth. For example, through a trust one family member could control the business while others receive the financial benefits — the trustee holds the power to vote, hire/fire directors, and make major decisions.

Governing a Lasting Legacy

A trust is particularly well-suited for preserving a family legacy. The trust deed serves as a rulebook for trustees regarding asset management and decision-making, ensuring long-term governance across generations.

Compared to Wills

Unlike a will (which takes effect upon death), a trust is effective immediately, allowing the Settlor to monitor its implementation. Starting December 2025, wills in India no longer require mandatory probate, but obtaining voluntary probate for a significant estate is still advisable. Trusts do not require probate and continue according to the trust deed even after the Settlor’s demise.

Ring-Fencing from Personal Liabilities

Private trust assets are considered separate from the Settlor’s personal property. Creditors cannot claim trust assets in case of bankruptcy, and in matrimonial disputes trust assets remain protected. This protection extends to beneficiaries as well.

Planning for Incapacity

A private trust can address incapacity by including a trustee succession clause — specifying that if the current trustee becomes incapacitated, another trustee will take over. Powers of attorney and nominations are not effective in mental incapacity, making trusts a crucial planning tool.

Cross-Border Utility

For global families in countries with estate or inheritance taxes (USA, UK, Canada, Germany), private trusts can help minimise tax liabilities which can sometimes reach 50% of estate value. In countries with forced heirship laws, a trust may help shield against these laws and ensure distribution according to the Settlor’s wishes.

Frequently Asked Questions

Can the Settlor be a Trustee? Yes, but the condition remains that they hold the property for the benefit of the beneficiaries, not for themselves.

Can the Settlor be a Beneficiary? Yes — the Settlor can be a trustee and one of multiple beneficiaries. They just cannot be the sole trustee and sole beneficiary simultaneously.

What property can be settled in trust? Any property — movable or immovable.

Do private trusts save income tax? No. There is no meaningful difference in income-tax whether you have a trust or not. But the trust needs to be structured appropriately to avoid paying higher tax than otherwise.

Are trusts only for ultra-wealthy families? No. The quantum of wealth is not the relevant factor — the objective is more important. Whether it’s family governance, incapacity planning, ring-fencing, or cross-border succession, trusts serve diverse needs.

Why Family Businesses Need a Shareholders’ Agreement

A family-owned company is, in essence, a joint venture between members of the same family. A shareholders’ agreement (SHA) is a legally enforceable agreement between shareholders and their company governing rights and obligations. In family businesses, the SHA has considerations extending far beyond typical joint venture agreements — it addresses governance, succession, and the preservation of family unity.

The foundational thought process: what major areas can lead to a dispute which we can avoid by clarifying today?

Key Areas a Family SHA Should Address

Decision-making rights: What key matters require consent from all family shareholders? Issues like going for an IPO, taking on significant debt, or changing the CEO should not be controlled solely by a majority faction.

Board succession: Who succeeds the founder on the Board? This can follow a merit-based eligibility criterion or a direct nomination approach, but it must be clearly articulated.

Exit restrictions: Can the next generation sell their stake to anyone? Many families prefer lock-in provisions post-demise of the founder, combined with Right of First Refusal (ROFR), Right of First Offer (ROFO), Drag-along and Tag-along rights.

Continuity mechanism: To ensure the SHA survives generational transitions, a Deed of Adherence should be signed by any person who acquires shares, binding them to the SHA’s terms.

Entrenchment in Articles: Critical SHA terms should be incorporated into the Articles of Association, potentially with entrenchment clauses requiring 100% shareholder consent to amend, rather than the standard 3/4th majority.

IPO Considerations

For family businesses pursuing an IPO, the SHA should specifically address Minimum Promoter Contribution (MPC) allocation among family members, who offers how much shareholding for sale, and confidentiality concerns — since SHA details must be disclosed in the prospectus and filed with stock exchanges and SEBI.

What is a Family Council?

A Family Council is a governance forum serving the family’s collective interests — addressing the role of family members in the business, resolving disputes, and providing a formal space for discussion. It is distinct from the business board. Though a Family Council is a concept (not a legally binding construct covered by a statute), its structure and terms can be woven into legally binding documents like shareholders’ agreements, trust deeds, and family constitutions.

The Shah Family Case Study

Through the fictional case of the Shah family — a pharma business spanning three generations with shareholding scattered across branches — this edition demonstrates how a Family Council addresses practical challenges: merit-based membership selection, clear board induction criteria for the next generation, communication and reporting mechanisms for non-active family members, exit restrictions (ROFR before any external sale), creation of a Family Fund for contingencies and ventures, expulsion criteria for members whose conduct becomes detrimental, and leadership building for the third generation.

The Core Principle

The Family Council does not run the business — that is the Board’s domain. It creates a safe space where the family tree transforms into one family voice. Clear demarcation between business decisions and family council decisions ensures smooth operations and preserves the family’s legacy across generations. All of these can be made legally binding through a framework of trusts, shareholder agreements, and wills.

What is a No-Contest Clause?

A no-contest clause is a provision that states: if any beneficiary contests the Will and loses, they forfeit their share of the estate. If drafted thoughtfully, it is a powerful deterrent against will challenges. This clause recently attracted significant attention due to Ratan Tata’s inclusion of it in his Will.

Legal Validity in India

The Indian Succession Act, 1925 permits conditional bequests and event-based conditions linked to beneficiary actions. A no-contest clause is legally valid as a condition attached to a bequest — validated by the High Court of Sindh in Gopaldas Metharam v. Hemandas Ramrakhionmal (AIR 1942 Sindh 145).

Practical Considerations

Scope of protection: The clause only deters beneficiaries named in the will. Creditors or excluded heirs have nothing to lose by challenging. One must ensure that all heirs have “something to lose” if they challenge the will.

Balance the implications: A broad no-contest clause may hurt the very beneficiaries the testator wanted to protect. Consider softening the clause with appropriate relaxations and exceptions.

Gift-over clause: Specify who receives the forfeited bequest — this provides further clarity and strengthens the overall disposition.

The Challenge

Who is the right person to ensure your wishes are fulfilled after your lifetime? The fiduciary — whether an executor (for a will), guardian, or trustee — is entrusted with significant powers to deal with the deceased estate. Unfortunately, jurisprudence across the globe includes numerous instances of fiduciary mismanagement, self-dealing, and inaction that damaged estates.

Key Parameters for Selection

Age and health: The fiduciary should not be too advanced in age. Health conditions matter for practical continuity.

Financial competence: The fiduciary should have commercial/financial acumen to manage the estate effectively — including compliance, property registration, investment decisions.

Independence: A fiduciary dependent on one of the beneficiaries is likely to be biased. Independence from beneficiary influence is crucial for fair and impartial estate management.

Alignment: The fiduciary should understand and respect the Settlor’s values and intentions for the estate.

Proving Wills and Common Litigation Exposures

“Where there is a will, there is a legal dispute” — though spoken in humour, the multitude of contested will cases in India and the West bears this out. Common grounds for challenge include forgery, lack of testamentary capacity, undue influence or coercion, suspicious circumstances, and witness reliability.

Video Evidence for Wills in India

With the Information Technology Act, 2000, a well-prepared video recording of the will execution ceremony serves as excellent evidence. The Delhi High Court in Sayari Kumari v. State & Ors. (2009) specifically observed that video recording of the execution made the Court’s task easier in determining the will’s genuineness. Video recordings are legally admissible and actively encouraged by Indian courts.

Practical Tips from Court Observations

Convincing appearance: The testator’s appearance in the video should reflect their true state. If the testator is bed-ridden but of sound mind, additional safeguards should be incorporated.

One take: The video needs to be recorded in a single take. Multiple recordings may raise questions about concealment or manipulation.

Metadata preservation: Court scrutiny extends to file metadata — timestamps and filenames must be consistent and preserved. No editing or tampering.