Business families creating trusts to protect family wealth in times of fragile marriage

Sat, 16 Dec 2017 21:51:00 GMT
Lijee Philip

Rising concerns over fragile families among the young generation have compelled many business families to create various structures to protect the family wealth.

When the young scion of a Delhi-based business family and his wife separated within two years of their marriage, the woman could not claim any rights to the family estate except the properties jointly held by the couple.

Sensing trouble, the patriarch had already parked the family estate into a trust. The son’s estate ownership displayed at the time of marriage had shrunk by the time of separation since he hardly had any family assets in his name.

Rising concerns over fragile marriages among the young generation have compelled many business families to create various structures to protect the family wealth, top family consultants and lawyers said. Patriarchs of such families often choose to park their estate in a trust to ensure that it remains within the family bloodline, and not made divisible by the claims of an estranged spouse.

Patriarchs are parking their estate in a trust to ensure that it remains within the family bloodline, and not made divisible by the claims of an estranged spouse.

“Growing litigation and awareness of women’s rights in claiming family inheritance have led to this trend. The greed today is also of a different kind and, unlike in the past where marriages lasted for a long time, there are far too many break-ups happening today,” a leading Mumbai-based industrialist told ET.

“Many of my friends tell me that they include their grandchildren in the will but not their daughters in law.” While increasing divorces is a concern, death of a family member too could cause problems over the ownership of assets. For instance, when family assets are held in the name of the son fully or partly, if he dies his wife suddenly gets the family assets disproportionately, said consultants.

Here too, to ensure that the family assets are not divided, the impersonal structure of a trust is preferred.

Many leading business families, though, set aside a substantial sum for the daughters in law so that they are not starved of funds in case of emergencies or demise of their partner. These funds are reviewed every few years to ensure that they are adequate to meet her requirements at every stage of life.

“We see to it that our daughters in law have enough money and what is enough is reviewed often as the family grows. We see to it that the daughter in law is in the family by choice and not by compulsion. Also since ours is a large joint family, a daughter in law never feels like an outsider and she has many family members to turn to for support,” said the patriarch of a 100-year old leading family-owned business, speaking on the conditions of anonymity.

In many cases, non-transferable life interest in residential properties and other assets is created in favour of the daughter in law so that during her life time she may continue to use and enjoy the identified family assets. Similar concerns arise around including sons in law in the family will.

“The concerns are more around giving a share of inheritance to daughters where the spouse can also lay claim to in case of a separation. Many families don’t want their estate or shareholding to get into the hands of an outsider by accident of marriage. Many of them tell us that they are keen that the inheritance should revert to the family and bloodline,” said Sunil Shah, director of Evergreen Family Business Advisors.

A 2005 Amendment to the Hindu Succession Act brought about certain changes in favour of daughters. When a woman is part of the undivided property, her interest in the property continues even after marriage. Through this, the interest of her husband and children too continues and, thus, for personal gains this creates an opportunity for the husband to influence or force her to demand her share in the undivided family. This affects the assets in the family in a negative manner causing value erosions in the business.

The dispute created will lead to the freezing of assets by court. Thus creating of a Hindu Undivided Family refers to automatically exposing assets to risk as disputes are inevitable and any business which is a part of an HUF gets affected if a member opts out of it. Many communities in India continue to follow the social system which tends to be more powerful than the legal system, said consultants.

Ashwini Chopra, a succession planning advisor to several business families, said strained marriages among the younger generation has created a lot of stress in family businesses.

“Things are more complex today than it was some years back as far as the rights of daughters in law are concerned. While families want to protect the rights of their daughters, the protection of the rights of daughters in laws is probably moving in the reverse direction. And that is a subject of heated debate in many families. Since trusts are not personal assets, the spouse can claim right to the family inheritance only until the time they stay married,” Chopra said.

Much of the wealth in many of the business families in India is self-acquired and not ancestral wealth. Many of the families have made wealth in the past 25-30 years, said Shah. Therefore, such concerns are arising now when the younger generation are getting married.

A business family based in Gujarat, which has a daughter, told a family adviser that her inheritance should not be lost to her husband in case of a divorce.

“They asked us to direct her inheritance to be kept in ‘in trust’, which would go to her children or back to the family in case anything happens to her. So, while the daughter can be the legal and beneficial owner, the trust can direct that upon her passing, the assets go to her children, not the husband. In effect, in case the couple gets divorced, the husband will not get any of their assets and they can ensure that the money will stay in the family bloodline,” a family adviser told ET, speaking on the condition of anonymity.

Rajesh N Gupta, managing partner, SNG & Partners, said families do ensure that the interest of daughter in law is adequately protected but also that it doesn’t hurt the rights of others. “…families deliberate and plan that if the marriage fails at the early stage, it should not so happen that towards her claims on maintenance and permanent alimony the daughter in law jeopardise the rights and interest of other family members. A balance is required to be maintained,” Gupta said.