SUCCESSION PLANNING - Whom to trust your child's future with?



BY H ARSHADA KARNIK


Stepping out of the house every morning for working parents living in nuclear families is distressing.

Leaving your child with a baby- sitter or at a day care centre and not knowing what exactly is happening in your absence is not easy. Yet you try to make up by ensuring that even dur- ing your absence, your child gets the best--you choose the best babysitter or a day care centre available and provide for everything that he may need while you are at office.

But what if this absence were to become permanent? Your first thought would be that your spouse would be around to take care. But what if worse comes to worst and both of you meet with a fatal accident and are not able to return home, ever? Who would take care of your child then and provide for his daily needs?



While the emotional scars on your child may take a lifetime to heal, you can at least secure his future financially. To do this, we recommend you plan your succession by creating a trust or providing for its cre- ation in your will.



A will is susceptible to misuse as your minor child wouldn't be in a position to use the inheri- tance in a way that is best for her.

Even a well meaning guardian may not be able to do justice to your plans. On the other hand, in a trust, you can specify exactly how, in what proportion and when your wealth goes to your child and serves what purpose.



“Trusts are gradually gaining popularity; 70% of our clients have opted to create one. It is still more popular among high net- worth individuals but the upper middle class is also fast catching up,“ says Sandeep Nerlekar, managing director and chief ex- ecutive officer, Warmond Trus- tees and Executors Pvt. Ltd, a trusteeship company that spe- cializes in succession planning.

Why does creating a trust make sense?



A trust deed can be worded exactly how you wish it to be. Hence, it enables you to secure the future of your child and give him a basic handbook to go back to in case of problems.

The children can be brought up more or less in the same way you would have liked them to grow up.



It's best to involve an unbi- ased third party to take care of the trust. “People are getting more comfortable with an in- dependent professional or in- stitutional trustee to secure the financial future of their chil- dren as they can benefit from his professionalism in manag- ing finances,“ says Adrish Ghosh, head (wealth advisory), Barclays Wealth India, the wealth management division of Barclays Bank Plc.

How to create a trust?



You can buy a stamp paper and get your trust deed printed on it. Alternatively, you can first get your trust deed printed on a legal paper and then go to any authorized bank to get the deed stamped. It is not manda- tory to register the trust in all states. However, if the assets mentioned in the trust include an immoveable property, then you would be required to regis- ter it at the sub-registrar's of- fice in most states. It is advis- able to have at least two trus- tees, but if you appoint a pro- fessional trust company, then that one institution suffices.



Costs: The cost of maintain- ing a trust depends on the scope of the work, asset size and the complexity of the as- sets. If the trustees are your own relatives and are doing the work out of goodwill, they may not charge you anything. How- ever, a professional may charge you an annual fee of anything between `200 per lakh and `1,000 per lakh of assets.



“You can create a living trust with an amount as small as `10,000 and transfer all your assets to it on your death through your will. If a couple leads a hand-to-mouth exis- tence, then creating a trust does not make sense. However, I would say that if the couple's total assets add up to `50 lakh or more, it is a good idea to create a trust or provide for the creation of one in your will,“ says Nerlekar.



Types of trust: There is a tes- tamentary trust and a living trust. Testamentary trust is cre- ated though a will and comes into existence on the death of the testator, one who writes the will. In case of a living trust, you may set aside a small amount as part of the trust cap- ital or regularly transfer money to it. “Creating a living trust eliminates the necessity for a probate (the process by which the court establishes the au- thenticity of a will), which a testamentary trust may have to undergo. The probate could take a minimum of five-six months since our courts are overburdened,“ says Anju Gandhy, partner, SN Gupta and Co., a law firm.

What to budget for?



The typical expenses you will have to account for are day-to- day expenses that the guardian will incur to raise your child, medical expenses and educa- tion and marriage expenses.



A regular income flow to the guardian for the upbringing of the child and the maintenance fees and expenses of the trust are also to be budgeted for.



“I usually advise my clients to set aside an adequate and fixed amount for each child for spe- cific big-ticket expenses. For in- stance, undergraduate studies, postgraduate studies and mar- riage. Since education is on the agenda for most parents, they allow the trustees to let the child dip into the marriage fund for education, if need be,“ says Ranjit Dani, principal planner, Think Consultants, a financial planning firm.

How do you divide the money?



If you have two or more chil- dren, making equitable distri- bution is the best you can do since you would not be around to take decisions and justify them. “The needs and capabili- ties of the children are likely to be different and, hence, their financial requirements will dif- fer. However, equality in distri- bution and vesting of the trust are generally widely accepted,“ says Ghosh.



“It is very essential to ensure that the funds allocated are not misused or abused and, hence, you need some amount of rigid- ity in the trust deed. So, though it may not be the best idea, most would prefer to divide the money and assets equally be- tween two children and not al- low them to dip into each oth- er's resources,“ says Dani.

Releasing the money Since the trust is created to ensure that your children have the money when they need it, the funds would have to be re- leased in instalments. Howev- er, once the children become self-sufficient and are mature enough to handle the money, the remaining assets can be distributed between them.



“There are two models that can be used. You could release the children's respective shares to them as and when they reach the stipulated age (usually 21-25 years) or release the funds to them when the young- est child reaches the stipulated

source:harshada.k@livemint.com