Will vs Trust vs Gift: What you can learn from the Ratan Tata family's succession planning strategy

The passing of Ratan Tata has left a significant leadership gap at Tata Trusts, the philanthropic arm that guides the $165-billion Tata Group. 

The Tata family, one of India’s most respected business dynasties, has long relied on trusts to ensure the continuity and stability of their empire. Ratan Tata reportedly did not name a successor before his death, leaving the responsibility of appointing a new head of Tata Trusts to the board of trustees. This situation raises a key question for individuals planning their own succession: should you choose a will or a trust to ensure a smooth transition of your assets?

What is a Will?

A will is a legal document that specifies how your assets—ranging from real estate to personal belongings—will be distributed after your death. It also designates beneficiaries and appoints an executor responsible for ensuring that the instructions outlined in the will are followed. Wills are often used for straightforward asset transfers and are suitable for individuals with relatively simple estate structures.

What is a Trust?

A trust, on the other hand, is a more flexible tool for managing and distributing assets. In a trust arrangement, the settlor (the person creating the trust) transfers assets to a trustee, who manages them for the benefit of the beneficiaries. Trusts can be customized to control how and when assets are distributed, making them especially useful for preserving wealth, managing complex estates, or ensuring that a family business continues to operate smoothly after the settlor’s death. For Tata family the journey began in 1892, when Jamsetji Tata, the founder of the Tata Group, established the JN Tata Endowment to support higher education for Indians.

The choice between a will and a trust depends largely on your goals. If you want a simple transfer of assets to your beneficiaries after death, a will might be sufficient. However, if you're concerned about long-term wealth preservation, family business continuity, or controlling how beneficiaries access their inheritance, a trust might be the better choice.

Wills come into effect only after the testator’s death, while trusts can be set up to manage and distribute assets during the settlor’s lifetime and after their passing. Trusts also offer the advantage of avoiding probate—the often lengthy and public legal process that wills must go through. This makes trusts a popular choice for individuals who value privacy and efficiency.

Trusts for Family Businesses

Family-owned businesses often benefit from being placed in a trust. A trust allows for the smooth transfer of control and ownership, preventing the business from being sold off or mismanaged. By using trusts, Tata family has ensured that the company remains under the stewardship of trustees who share his vision, thereby protecting the legacy for future generations. This type of planning is particularly important for families who wish to maintain control over a business while also ensuring that it thrives long after their tenure.

One of the most significant challenges a business can face is replacing leadership. “If there is no strategy, the company may fail in difficult times from lack of direction.

The plan safeguards and maintains the goodwill and value of small enterprises and professional services, enabling the family to receive a recurring royalty or dividend. Therefore succession planning for a firm should start in advance rather than at the very end of the owner's career or life. Start by determining the course that the company should pursue and the individuals who can make this happen.

Whether they are family members or not, have a conversation with them, and if they agree, train them so that they are prepared for a seamless transfer when the time comes. Execute the strategy through test runs to find any gaps and flaws so that the company can run well without you or other executives present,” says Aditya Chopra, Managing Partner, Victoriam Legalis, Advocates & Solicitors.

Trusts also offer protection against insolvency, particularly under India's Insolvency and Bankruptcy Code (IBC) of 2016. Company promoters and business owners may face personal liability if their companies run into financial trouble, which could put personal assets at risk. A trust can help shield family wealth from creditors, ensuring that personal property remains protected even if a business faces insolvency.

With ongoing speculation about the reintroduction of estate duty in India, which could impose a significant tax burden on heirs, trusts have gained popularity as a method for minimizing tax liability. By transferring assets gradually and strategically through a trust, wealthy families can reduce the tax impact on their heirs, preserving more of the estate for future generations.

For those looking for other methods of asset transfer, a gift deed can be an attractive option. Unlike wills and trusts, a gift deed allows the immediate transfer of property or assets during the lifetime of the donor. While this method offers immediate benefits to the recipient, it comes with tax implications that should be carefully considered.

There is no definitive answer to whether a will or a trust is better for succession planning. The decision depends on various factors such as the size of the estate, the complexity of the assets, and the specific goals of the individual. 

In conclusion, both wills and trusts play crucial roles in succession planning, but they cater to different needs. Wills offer simplicity, whereas trusts provide greater control and flexibility, especially for those looking to protect family businesses or ensure multi-generational wealth preservation. Whether you choose a will or a trust, consulting with legal experts can help ensure that your estate is passed on smoothly, without disputes, and in accordance with your wishes.