Estate Planning, Wills and Family Settlements

Bombay Chartered Accountants’ Society

Dileep C. Choksi
14th December 2016
Illustrative Family

Origin of Business: Management organisation: SEBI: Offshore: Family members: Partnerships and others

HINDU FAMILY - INDIA

PIO
NRI

S1 S2 (Non Hindu)
D1
S3

(DIVORCED)

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Management structures

Management Co.
Management Co. Nature and sp.
provisions

Textile Chocolate
Single Profit

- Tax efficiency
- Patriarch
- Status
- Inter-dependence
- No compromise on quality

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 Succession – of families - business

BANK
FAMILY OPERATIVE
ACCOUNTS
MEMBERS OR 1 OR MORE
PROPERTY LOCATIONS OWN
TRUSTS

OR
» Outside India

FAMILY
» In India
1 Textiles
BUSINESS
2 Chocolates

3 Textiles See family composition

4 Chocolates

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Needs of families

Family businesses represent 50% -90% of GDP in all free market economies.

Family businesses dominate certain industries – travel, luxury products, cars.

Most businesses have substantial family interest – experience of takeover bids – consolidation of
holdings.

The role of the SME sector – meeting its needs and wants. Personal guarantees, individual options and
other factors.

Multi-family offices typically provide a variety of services including tax and estate planning, risk
management, objective financial counsel, trusteeship, lifestyle management, coordination of
professionals, investment advice, and foundation management – The Indian Context

Special challenges

Business viability and growth

Maintaining family harmony

Responsible and unified ownership

Succession

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Aspects affecting businesses and individuals

Physical Mental Emotional

Status Entrepreneurship Philanthropy
Position Sick units CSR
Occupation Disputes Equality
Expansion Opportunity

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 Illustrative issues facing coming generations
» Role of male, female and other members
» Compensation and income streams of members not involved in the family business
» Investment in real estate, financial and non financial assets, Non income bearing assets
» Education, health, entertainment etc.
» Physically / mentally challenged members
» Divorce, untimely death and unexpected events
» Migration, Permanent residence and Residential status
» Family disputes and their resolution
» Exit from family business – Process, valuation and liquidity
» Family Partition
» Estate Duty implications, foreign assets, foreign citizenships.

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Corporate
» Two Tier Boards
• The board of directors and the supervisory board exist side by side.
• The board of directors conducts the day-to-day management of the company, while the supervisory
board conducts supervisory or strategic functions.
• Non-executive directors frequently experience challenges effectively asking management critical
questions, information gaps and interpersonal working relationships with executive directors

» Board of Advisors/Advisory Council

• Is a body that provides non-binding strategic advice to the management of a corporation, organization,
or foundation
• Benefit from the knowledge of others, without the expense or formality
• Strengthens the existing board, but not interfering with authorities of the existing board
• Distanced control

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Family constitutions

Family arrangement

Family reorganisation

The undivided family

The divided family

Independence – interdependence

Hindu Undivided Family

Partial Partitions

AIFs

Estoppel

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Family constitutions

A family agreement is a valid, legally-binding and enforceable contract, applicable to all the signatories of
the agreement. While a will relates to a bequest of an estate, a family agreement provides for an
arrangement by which some rights are created or declared (or assigned/ extinguished) whether in
present or in future.

Neither a family agreement nor a will is superior or of greater legal character than the other. However,
legal consensus points out that the cast and terms of the family agreement would determine if there are
any bequeath able assets or titles that can become the subject of a will.

Indian courts seem to give greater legal sanctity to a family agreement. Experts point out that the courts
have applied the rule of estoppel - a legal bar to alleging or denying a fact because of one's own previous
actions or words to the contrary - to prevent the unsettling of a family agreement.

A family constitution entails the documenting of the family’s mission and vision statements and outlines
roles, responsibilities and expectation of family members in pursuit of them. It could include role of all
family members, CSR policy, compensation and evaluation control and reward and related matters.

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Family constitutions

Will mainly concern regarding the operations of the Company

What are the family businesses and how are constructed

Would you like to treat the profits of all businesses as one profit pool?

Is consolidated holding a preferred option?

In the event of there being more than one child, how would you define control of family business?

What happens if none of the family members want to continue that business ?

To what extent can existing business support diversification and expansion keeping in mind the need for an
equitable distribution of family income?

Are any family member non-residents or have any offshore assets? What are your plans regarding their
devolution?

Specific matters requiring attention such as board constitution, having an advisory council, pursuit of socio-
economic objectives, nature of role of all family members.

Should there be an exit policy? What should be its contours?

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A representative trust structure

Protector

Vigil on
Portfolio Manager Advisory Board
Trustees
Advisory
Trustees
Advisory services
services Trust Management
Deed /
LOW
Settlor
Transfer of property to TRUST
the Trust

Beneficiaries

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Illustrative types of Trusts

1. Living Trusts
2. Testamentary Trusts
3. Discretionary /Definite Trusts
4. Revocable Trusts
5. Grantor Trusts
6. Asset Protection Trust
7. Dynasty Trusts
8. Generation Skipping Trusts
9. Crummey Trusts

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Role of trustees
Some illustrative issues:
1. Nature of trust obligation
2. On termination
3. Approaching the Court
4. Choice of law in international contacts
5. Legal personality of institutions
6. Maintenance law re: obligations towards
7. Children and infants
8. Testamentary dispositions; Divorce
9. Legal separation; marriages; succession
10. Succession to Estates
11. Personal Law-Role

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Other current issues on the horizon

Live-in relationships

Pre-nuptial agreements

Living wills

Nominations vs legatees

Children's duty to parents

Adopted child

Illegitimate child

Step children

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Disputes and dealing with them
a) Control of Assets in Corpus – freedom of interchange?
b) Revocation
c) Letter of wishes and Revocation
d) Protector; dispute resolution;
e) No arbitration or conciliation
f) Customs; Traditions and Law
g) Conventions – International agreements
h) Adoption
i) Right of choice
j) Inheritance; renouncement
k) If not in favour of relatives

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Basis of Applicable Law

Personal law
Largely Uncodified
Religious and
philosophical
application

Common law &

Precedents
Indian Statute law
Codified
Legacy Legal Commercial
legislation
System

Conventions
Best practices
Global

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Lessons from History – some case studies

The Birla family
The group had a succession plan in place for most of the companies. In one family there was a dispute
where Priyamvada Birla, chairperson of the MP Birla Group, who passed away at the age of 76, left her
entire USD $1billion estate to her accountant.

The Dabur Group
The family decided to implement a proper succession plan where majority of the assets were held by a
trust and the family divested itself of management control. The board of trustees appointed a professional
CEO and the company has gone from strength to strength.

Ranbaxy
Before the chairman (Dr. Parvinder Singh) of the company passed away he ensured that there was a
succession plan in place and that the management was in the hands of professionals.

RPG Enterprises
In the recent succession plan chalked out, Group Chairman who segregated the ownership and control of
various group companies among his sons, with one as chairman and the other as vice chairman.

Amarchand Mangaldas
In recent reports one reads about a private arbitral type of settlement required to resolve between a will
and a family agreement.

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Lessons from History – some case studies

The Modi Group
By the late 1980’s most of the family business had been divided and diluted and, because of infighting in the
family and the lack of a cohesive succession plan through the generations, the group lost most of its value. In
the last ten years some of the group companies have started doing well again and very recently the group
stated that it plans to have a proper succession plan in place soon.

The Bhushan Group
The patriarch of the family tried to arrange a family settlement and have a succession plan but it was disputed
by two of his three sons who went to court and sued their father. This carried on for ten years wiping out
almost USD$1billion from the companies’ market value. Finally a settlement was reached within the family and
the companies distributed.

With the globalisation of business, and the multiplicity of solutions required by Indian families and their
businesses, no one jurisdiction can cater to all their needs. The key is to be able to offer a raft of services to the
right families in India to meet their varying needs. One way of achieving this is to have a global spread of
expertise where the fiduciary company can provide a range of solutions in a variety of geographies.

The kind of proposition will become all the more compelling to families as they continue to see the benefits for
their business and their families of such structuring.
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