In India, trusts can be mainly private, public (charitable or religious), foreign, or mutual funds. Private trusts are created and governed by the Indian Trusts Act, 1882. Families that use trusts as a tool for estate planning create a private trust.

Outside India, a primary motivation to setting up trusts is to avoid inheritance tax. However, as we do not have such a law, the driving force behind setting up a trust here is asset protection.

In essence, how does a trust work? A person transfers his or her property to another person/s to hold it for the benefit of certain beneficiaries. Lets look at the definitions of the common terms:

A trust is a customized document in India and settlors have the flexibility to choose a trust structure that best suits their needs and of their beneficiaries. There are various structures the trust can follow:

There are two forms of trusts. The Living trust is created when the settlor is still alive and can have a revocable or irrevocable structure. With a living trust, the settlor can also be a beneficiary of the trust. The living trusts are popular with angel investors and other professionals in risky professions who want to protect their personal assets from liabilities and creditors.

Testamentary trust become effective on the demise of the settlor. This kind of trust is an effective choice where beneficiaries are either minor, or disabled. With trusts for children, the settlement or assets are handed to the child upon attaining a certain age or on marriage  and till then, managed by trustees.

For Indian families, a primary concern is the potential loss of control. Since legally, the ownership of the trust passes from the settlor to the trustee who holds them for the benefit of beneficiaries, many families struggle with the perception that they may not have control of their own assets. However, settlors can use the flexibility of trust structures to decide the level of control. For example, by forming a non-discretionary trust, one may appoint professional trustees for predefined activities and thus have complete control.

In order for a trust to be set up successfully, it is crucial to have family meetings that also involve a financial planner and lawyer. Families need to discuss to decide the priorities and purpose of trust, determine the type of trust structure and identify the beneficiaries of the trust. Decisions must also be made on when the trust will dissolve, who from the family will control the management of the trust, appointing a trustee, choosing a protector.