Published Editorial

Plan early for business succession

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The Hindu Business Line


Ajay Agashe
Associate Director-Tax & Regulatory services
Ernst and Young

Family businesses are a key component in the world of business and make up more than 60 per cent of all companies in Europe and the Americas. India is no exception to this.

It is also usual in India to have extended family members. On many occasions even 2nd or 3rd generation members (NextGen) get into the family business. In certain cases, some family members may choose a path drastically different from the family business. This makes succession planning a complex but relevant task for the family head.


Apart from business itself, the succession plan needs to consider the personal wealth of the family. With globalisation and ease of making outbound investment, more and more personal and business wealth could reside outside India. Succession of such global wealth could be more complex considering varied rules governing inheritance and wealth in different countries. Failure to consider these levies may lead to erosion of wealth and even impact the ultimate disposition of wealth to NextGen.


While the traditional method of passing on wealth through a will has been in vogue, it has quite a few administrative hassles. Hence, mere reliance on will as a tool for succession planning is not advisable.

Self-sustaining, professionally managed structures which offer flexibility for investing onshore and offshore, that allow exercise of control over the assets and also help in providing requisite liquidity, have been preferred by HNIs wanting to pass on the baton to the NextGen.

While partnership firms, limited liability partnerships (LLP), holding companies are commonly used holding vehicles for succession planning, the one that is increasingly finding favour with HNIs is private family trust. Accordingly, interposing a combination of Trust and LLP/ firm/ holding company in the group holding structure could assist in achieving the desired objectives of succession planning.


Typically the Trust consists of Settlor, Trustee (person appointed by the Testator to administer the Trust), Beneficiary (person for whose benefit the Trust is created) and Trust property (subject matter of Trust which could be movable/ immovable property). A Trust could be settled as a Discretionary Trust, wherein the Trustee has discretion to distribute the income/corpus of the Trust or as a Specific Trust, wherein the Settlor pre-fixes the entitlement of the beneficiaries.

A Trust could also help to ensure that all the family members are treated fairly, regardless of the dynamics of the family business, assuming the same is structured appropriately.

For example, a trust deed could provide for separate financial provision for heirs who do not work in the business, or for a minor’s education, daughter’s wedding, medical expenses of a dependent.

A Trust could also assume the role of ‘Family Office’ to advise the NextGen in their new venture or running the existing business operations.

While Trust structure may serve as a viable tool for succession planning if planned appropriately, another important aspect to delve into would be mechanics for migrating to the Trust structure and consequential transaction costs such as income-tax, stamp duty, inheritance tax, as applicable and regulatory implications such as compliance with SEBI takeover code, Foreign Exchange regulations.

To summarise, a holistic approach to estate planning is necessary.

The most important thing that families can do is plan early for the right solution thereby ensuring a smooth transition.