Trust Can Help In Consolidation And Smooth Succession Of Assets: Gautami Gavankar, Kotak Mahindra Trusteeship Services

What is a Family Office? Why should one set up a Family Office?

While the term “Family Office” is a new term, the concept of Family Office has been in existence for many decades now even in India. Lot of families used to appoint their “Munims” or “Estate Managers” who provided all the services which today a professionally set up Family Office will do.

Family Offices manage the investments of the family as well as all other non-investments related matters of a family. A Family Office provides services such as managing investments, estate/ succession planning through Wills or creating Trust structures, philanthropy, legal advisory, tax structuring as well as other lifestyle services such as concierge services, art advisory/ cataloguing etc. 

A Family Office can help align interests of family members and make it easier for the family to manage its assets and affairs and provide family members the freedom to focus on what they enjoy.  

Can a single Family Office and multi-Family Office co-exist?

A Family Office can be a Single Family Office (SFO)  or a Multi Family Office (MFO). Depending on the wealth, size and requirements of a family, each family will decide whether it requires full-time professionals to manage its affairs and wishes to set up its own Family Office - SFO  or if it wants to work with an external entity which advises and assists many families - a MFO. A number of leading wealth management firms in India provide Family Office services in the format of Multi Family Office. 

There has been an increase of single family offices in India in the past few years, with a large increase in nouveau wealth and as second and third-generation wealth is being transferred. However, these family offices appear to be more a private investment arm rather than an SFO in the real sense. Any needs of the family other than investments is then catered through assistance from external advisors/ experts.

Compare this against those in the West, where families set up SFOs primarily as a one-stop shop, from wealth management and investments, philanthropic giving, tax planning, through to trust and estate planning. Families also utilise the governance, education, social, and administrative functions of the SFOs. However, this same full-service model has yet to fully unfold in the Indian context barring a few families. 

The challenge in SFOs is typically how can they be institutionalised to achieve a larger vision. The importance of attaining measurable investment returns at times restricts SFOs from investing in less tangible outcomes such as setting the long-term goals and vision of the family or other initiatives to strengthen the family legacy, which are fundamental pillars to maintaining harmony and unity of families on a long-term basis. 

Both single and multi-family offices have their own advantages. A Single Family Office ensures a customised investment approach based on the family’s needs and higher levels of confidentiality. A Multi-Family Office is able to provide a range of sophisticated services from professionals who have specialised experience and expertise. Multi-family offices also offer tailor-made services to each family on a non-exclusive basis, which helps reduce costs. 

One important point to note is that single and multi-family offices can and do co-exist together. While a Single Family Office will have experts for investments in debt, equities, foreign exchange, gold etc, they may choose to work with a Multi-Family Office on specialised requirements such as tax or legal advice. A combination of both single and multi-family offices can help a family get the best quality and range of services to achieve its goals. 

What are the trends in succession planning in the Indian context? Why is it important to pay attention to this process? 

Traditionally, Wills were used as a mode of succession but over the last decade, private family trusts have become a popular instrument among families to achieve many objectives. .  

The larger objectives of setting up trusts are to ensure seamless succession of wealth to the next generation and ring fencing of assets against any potential third party claims. The objectives for setting up a trust typically varies based on whether the family is a business family or otherwise, the size of the family, the dynamics within the family and the type of assets owned by the family.

Succession Planning is extremely important to ensure the long-term continuity and growth of family businesses and for the estate of the family. Families and businesses are complex organisations/ institutions, and family-controlled businesses are even more complex. The key issue is planning the succession of the ownership and the management of the family business and ensuring that the family stays together in a harmonious fashion without the family wealth being eroded over time.

With a view to ensure continuity of business over multiple generations and promoting family harmony, more and more families are adopting a governing charter i.e. a family constitution which lays down rules related to key issues.

The creation of a family constitution is a detailed process which involves the participation and agreement of all family members. It is a process by which family members come together and candidly communicate their needs and expectations to reach a consensus with respect to all the above and other important issues. This can prove to be very important to ensure that the family lives in harmony over time. 

What are the key reasons people consider trusts? Internationally why are trusts so popular?

Succession and ring-fencing of assets are the primary reasons families create trusts.  A trust can help in consolidation and smooth succession of assets without any operation, administration and other hindrances and delays, and can help in protecting the financial interests of the family and making sure their lifestyle needs are met in the easiest possible manner in case of any unforeseen event. Regular cash-flow requirements of the family members can be met in a planned and systematic manner. 

A Will requires a probate and other legal formalities to ensure smooth transmission of assets. A Will can be quite easily challenged. With a trust, a family can do away with administrative and legal issues and ensure a hassle-free transmission of assets. 

In case of an unexpected incapacity or health problem, a trust can help in planning cash flow requirements for the family. This may be especially important for dependent family members whose financial interests need to be protected during their lifetime or till they reach maturity. 

Apart from these, a trust can be planned to protect and ring-fence the assets against future liabilities/family conflicts and possibly protect against any reinstatement of estate duty in India. 

How have corporate trustees been accepted by Indian families?

The trustee is one of the most important roles in any trust structure as the trustee becomes the fiduciary owner of the assets settled in the trust. It is, thus, very critical to appoint a trustee who one can rely on and trust completely; someone who has no vested interest or preferences between beneficiaries and who will take unbiased decisions. Whether the individual who can be named as a trustee is a family member, a friend, a third party professional individual or a professional independent corporate entity will have to be decided by the owner of the wealth. 

While choosing the trustee it is also pertinent to keep in mind that such an individual/s should also be in a position to manage the assets settled in the trust and take decisions on the same as would be done by the owner. To achieve the twin objectives of having a family confidant as well as the benefits of professional management and continuity in management, families do consider appointing a corporate trustee in addition to having a family trustee. The key is to understand that the control over the assets still remains within the family even with a professional trustee.

It is also important to include provisions which will allow the appointment of successor trustees and also removal of trustees to ensure efficient management. Indian families are warming up to the idea of professional trustees and understanding the value they add both from a perpetuity perspective as well as from a professional management point of view. 

How are families approaching ‘giving’ now? What are the key challenges families face while approaching philanthropy? 

Individual giving is a personal matter and each philanthropist has his/her own viewpoint on how they would like to go about it. Family Offices have started playing an important role in this space and are designing strategies and putting in place structures to help families channelise their philanthropic initiatives. 

At Kotak, our aim is to bridge the gap between the social sector and philanthropists. Potential donors need access to guidance, knowledge, networking platforms etc where they can get relevant information around causes. They also need to make a choice between setting up their own foundation versus giving to a cause. 

At Kotak, we have set up a philanthropy desk. We have organised panel discussions where eminent philanthropists share their experiences with our clients. We have also introduced NGOs to our clients based on their areas of interest. We have identified causes that are important to our clients, completed due diligence on NGOs operating in these fields and have empaneled them. 

As advisors, we are able to help them take decisions around the causes to choose, the corpus they can begin with, successful philanthropic models etc. Most importantly, philanthropists need guidance on how to structure and plan their giving such that it is sustainable, makes maximum impact and focuses on outcomes and not just output.