Wealth Management

Unlocking the potential of Alter Ego Trusts: A strategic alternative to Wills

May 2024

Read Time: 7 minutes

A Will is a foundational instrument, and almost everyone is now alive to the fact that it should be written and executed properly. Yet, despite its widespread acknowledgement, the efficacy of Wills is occasionally questioned due to certain inherent challenges.

Key challenges of Wills

  • Revocability: Wills can be revoked and replaced an unlimited number of times. This advantage of a Will, ironically, is also its biggest disadvantage, especially if older Wills have not been destroyed and expressly revoked.
  • Challenges: Any heir can contest a Will, leading to potential conflicts.
  • Post-Life Procedures: The need to obtain probate, letters of administration, succession certificates only complicate matters during a family's time of grief.

Amidst these complexities and challenges, Alter Ego Trusts emerge as a strategic alternative to Wills. Alter Ego Trusts do not seek to replace Wills entirely; instead, they step in to simplify and streamline many of the traditional requirements of a Will, offering a fresh approach to estate planning.

Understanding Alter Ego Trusts

An Alter Ego Trust is established either for your sole benefit or jointly with your spouse. Once set up, the assets you transfer into the trust cease to be held in your personal capacity. Instead, the trust holds the assets, and are overseen and managed by an appointed Trustee. If you assume the role of the Trustee, you then manage these assets in your official capacity.

Criteria to set up an Alter Ego Trust:

  • The Trust Deed must state that only you or you and/or your spouse are entitled to the trust assets during your lifetime.
  • The Trust Deed must clearly outline who will inherit the trust assets after your and/or your spouse’s demise. You may opt to dissolve the trust upon your death and distribute the assets or continue the trust as a family trust.

This setup transforms Alter Ego Trusts into a practical alternative to Wills, effectively acting as a ‘Will substitute’.

Why consider an Alter Ego Trust?

  • Reduces the need for post-life procedures: Assets under a trust are not your personal assets, and they are not considered part of your estate on your demise. This means that unlike estate assets, the distribution of trust assets through an Alter Ego Trust bypasses the need for probate proceedings before they can be distributed to beneficiaries. Since probate is not required, this also means that probate fees are not payable.

  • Reduces the cost of post-life procedures: Significant savings can be realized with an Alter Ego Trust, especially when dealing with sizable estate assets. Although probate is not compulsory throughout India, in jurisdictions where it is required, court fees can, subject to caps in some high courts, range from 1% to 13% across different high courts. Additionally, these fees are levied on the value of assets at the time of death, which could be higher than their current valuation.

  • Privacy is preserved: A filed probate application and the associated Will are available with the court registry and open for examinations subject to the rules prescribed. In contrast, the terms of an Alter Ego Trust remain private.

  • Beneficiaries may receive their inheritance with minimal delay: Depending on the court's jurisdiction and the specifics of the case, claiming assets from an estate can take more than a year. Preparing and filing probate and other necessary applications is time-consuming. This is why Indian regulators encourage nominations, allowing nominees to quickly receive assets without delay. However, nominees don’t assume ownership of the assets in an estate, and this can throw up challenges.
    In contrast, an Alter Ego Trust Deed usually designates a replacement Trustee in the event of your passing. Subsequently, the Trustee executes the Trust Deed's directives, to distribute trust assets among your selected beneficiaries in the manner you’ve provided.

  • Reduction in professional fees: While maintaining a trust does involve paying trusteeship fees to professional trustees, post-life procedures typically require the appointment of lawyers and accountants. Though these legal costs are one-time, they are generally higher than the ongoing fees associated with a trust. Additionally, since the chances of disputes over trust assets are far lower, the overall costs of managing a trust tend to be much lower.

  • Continuity of asset holding: Inheritance, whether governed by a Will or not, requires that heirs review the whole estate and, as per the distribution schedule, transfer the assets to the name of the heirs. This may take them some time, especially in case of complex estates or where businesses are a part of the estate. Business dynamics also take a back seat and business may suffer. However, in case of an Alter Ego Trust, no such changes are required, saving the family considerable time and effort.

  • Incapacity planning is partially achieved: In India, the validity of a Power of Attorney ceases on the day a person loses capacity to contract or passes away. An Alter Ego Trust Deed typically designates a replacement trustee in the event you become incapacitated. This allows the Alter Ego Trust to effectively function as your representative ensuring the management and availability of your trust assets for your benefit till you are alive.
    This arrangement is especially beneficial for single individuals, older adults whose next generation lives abroad, or those who prefer not to rely on the munificence of their children.

  • Reduced risk of challenges to Wills: Wills can be contested by the spouse or children of the Will-maker. Regardless of whether the challenge is ultimately successful or not, families become entrenched in bitter disputes, often leading to protracted and costly legal disputes that can deplete estate assets.
    In contrast, Alter Ego Trusts are not subject to this risk, even though their terms essentially function in a similar manner. If your circumstances and intentions are likely to provoke disputes, an Alter Ego Trust can provide a more secure and less contentious alternative. Please note that for the residue of assets for which you will need to write a Will, a challenge is still possible, albeit for only a small portion of the total estate.

  • Income tax treatment: Alter Ego Trusts are taxed as revocable trusts, which means that the tax liability will continue to be in your hands. Consequently, if the next generation reside in the US or UK, the trust assets will not be subject to taxation in their hands.

Exploring the other side: Potential challenges of Alter Ego Trusts

While there are notable benefits to Alter Ego Trusts, it's important to consider the potential downsides as well.

  • Tax returns requirement: Annual tax returns must be filed for your Alter Ego Trust, which may require the assistance of an accountant, incurring additional accounting fees.

  • Tax rate: Any income generated by trust assets will be taxed at the highest marginal tax rate. Trusts are ineligible for Section 54F or 54EC benefits on any capital gains they earn.

  • Accounting and administration: Maintaining a trust involves meeting certain minimum standards. This includes mandatory audits of the trust’s financial records, requirement of trustees to pass resolutions for all actions they undertake and compliance with other laws, such as the Companies Act, may be more stringent.

  • Cost of administration: Administrators and professional trustees charge fees for maintenance of the trust.

Navigating the path ahead: Is an Alter Ego Trust right for you?

As the landscape of estate planning evolves, Alter Ego Trusts emerge as a compelling choice, bridging the gap between traditional Wills and contemporary needs.

To determine if an Alter Ego Trust aligns with your estate planning needs, you will need to weigh both the pros and cons relevant to your unique circumstances. Consider what your personal priorities are; for instance, to some individuals, the top priority at all costs is to avoid future estate litigation. Others may prioritize tax efficiency or maintaining privacy. In any event, tax and legal advice is always recommended so that any tax implications can be understood and planned for accordingly.

For important details, please read our disclaimer.

Author: Ashvini Chopra, Executive Director and Head – Family Offices, Avendus Wealth Management

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