How can you effectively plan your succession, both in your business and in your family? Some useful tips

There was a time when it was not considered wrong to let your children know verbally what they would inherit once you were gone. The recent high-profile case of billionaire industrialist Mukesh Ambani appointing his successors, however, has put the spotlight back on succession planning. For the first time, at the annual general meeting of Reliance Industries Ltd (RIL), the Chairman detailed his succession plan, where his older son Akash and daughter Isha took over the reins of RIL’s telecom and retail businesses, respectively, while younger son Anant will lead the new energy business.

Clearly, Ambani is wiser, having weathered the bitter break-up of the erstwhile Reliance empire since his father Dhirubhai Ambani had not outlined a clear succession plan. This had resulted in a bitter tussle between Mukesh and his brother Anil, for control of the group, and finally led to a very public break-up of the conglomerate in 2005. Therefore, it is understandable why Mukesh Ambani is already making provisions to implement a succession plan to protect his children from potential conflicts in the future.

Succession planning ensures that the title of an asset is clear throughout the transition and the rightful heir can own the property in the most hassle-free manner possible. “Ensuring that a business always has the right leaders in place in case of any unprecedented and unfortunate change is the goal of succession planning. Furthermore, in the case of family-owned businesses, the continuation of any family business and the preservation of the wealth depend a lot on succession planning,” says Aditya Chopra, Managing Partner of Victoriam Legalis Advocates & Solicitors.

Succession planning is a methodical strategy to transfer wealth to the next generation. Broadly, the passing of wealth can be planned in two ways—through a Will post the demise of a person, or through the creation of a Private Trust—which enables the person to enjoy the assets during their lifetime and also create a framework for smooth succession post their demise.

When there’s a will

One of the most preferred ways to pass on one’s wealth is by making a Will in favour of the inheritors. It is an official document—with details of all the assets of the testator (person whose Will it is)—that specifies how their belongings will be distributed after their death. “A Will lays down the basic groundwork of distribution of assets including movable and immovable properties, and allows for a seamless transfer of the assets to the legal heirs. However, many individuals tend to leave behind multiple Wills, which often leads to legal complications for the heirs,” says Himesh Thakur, Senior Associate at PSL Advocates & Solicitors.

It is not mandatory to register a Will. However, registration adds to its authenticity in case it is challenged in the future. A Will can be registered at the local sub-registrar’s office in the presence of two witnesses. And it is only considered valid if it is made in compliance with certain legal requirements. For example, it must be made by someone who is of sound mind, free from fraud and undue influence. Also, a minor cannot make a Will. Moreover, it must be written in a clear and unambiguous manner, and be duly signed by the creator along with two witnesses.

It is important to note that a Will can be amended or overridden multiple times during the lifetime of the testator. This enables one to have complete control over their assets. One of the most essential points about a Will is that it supersedes all nominations in financial assets such as insurance policies and bank accounts, which tells us just how valuable a Will is in the eyes of law.

But a Will has its own limitations. For example, it has a high likelihood of being challenged. “Additionally, it is not possible to maintain ownership or control of assets in a common pool in a Will, which causes the family wealth to be divided. Due to these limitations and concerns about defining family norms and ring-fencing assets from legal challenges, Indian businesses are giving serious consideration to succession planning through Private Trusts for the benefits of family members,” says Pranav Bhaskar, Partner at SKV Law Offices.

Trust me

Private Trusts have become popular in recent years among Indian businesses, especially in light of the volatility in certain businesses during times of succession. Going by its official definition, a Trust is a legal relationship in which the holder of an asset or right (the Settlor) entrusts it to another person or entity (the Trustee/s) for the benefit of another person (the Beneficiary).

The creation of a Private Trust is particularly advisable for someone who owns multiple assets and who wishes to dictate the manner in which certain property should be enjoyed by the beneficiaries, or to create a long-lasting mechanism for the operation of family-owned businesses. A major reason for the rising popularity of Private Trusts is also the operation of the Insolvency and Bankruptcy Code (IBC), 2016, which has ensured that even long-standing companies can undergo insolvency proceedings due to a relatively short period of financial strain. In such cases, even the personal or family property of company promoters is not protected because of the personal guarantor clauses present in IBC. Not only that, Bhaskar says that speculation about the introduction of an estate duty by the government has also spurred many business families to consider creating Private Trusts to safeguard their wealth.

One more option of passing on your property is just by gifting it away, but it is not without its downsides. “Whilst gifts made during the lifetime of a person is a simple process, it technically means that the person loses control over the assets, and therefore one must opt for a gift only if the decision to gift the assets is irreversible,” says Parekh of DSK Legal.

Further, Yeeshu Sehgal, Senior Associate-Advisory & Tax, AKM Global explains that any sum of money or property received under a Will or as a gift is exempt from any taxes, but charges such as stamp duty, registration and municipal taxes will still be levied.

“However, if a person receives an immovable property without paying anything from any person other than relatives, and the stamp duty value of that property exceeds `50,000, then such stamp duty value shall be taxable in his/ her hands. On the other hand, if the property is received after paying some amount from any person other than relatives and that amount is less than the stamp duty value of the same property by an amount exceeding `50,000, the difference between the stamp duty value of the property and such amount shall be taxable. Further, when a property is settled under a Trust, it is also exempt from taxation,” he adds.

Each of the above methods of succession planning has its own advantages. Therefore, a succession plan should be prepared according to the objectives of the individual bequeathing his/her property and its size and legal situation. As there is no one-size-fits-all formula, one must first be clear about one’s objectives. Once that is clear, professional advisors can assist them in creating the right mechanism for giving effect to the objective.

“A businessperson may want to undertake succession planning because he/she believes that the business will be best carried forward by someone other than his/her own children. It is therefore different for each individual,” says Parekh. Not to mention that estate planning is a complex process if it involves overseas assets, which may create overseas tax exposure as well. “One should therefore appoint specialist advisors who can advise on different aspects of estate planning. A lot of people rely on hearsay advice and implement estate planning without realising the tax and/or regulatory challenges,” adds Parekh.

Ambani involved his children in the business from an early stage. This paved the way for them to learn the business before taking over its reins. “The key factor of Mukesh Ambani’s succession plan is his focus on the upcoming generation that has allowed him to appoint his children on the boards of several companies under RIL,” says Thakur.

@Teena_Kaushal