Family trusts a preferred option to protect children's interests post divorce

Family trusts a preferred option to protect children's interests post divorce

How family trusts can protect children's interests post divorce

Any event that leads to a rift in the family is unpleasant. Also, divorce settlements can lead to complicated estate and succession planning issues centred on protecting the children and, at times, the parents. Some of the recent, well-publicised divorce cases are a testimony to it.

Acrimony between separating spouses, who are co-owners of the business, widens the faith deficit and may impact decision-making that may result in a significant slowdown in the business. A subsequent divorce makes succession planning a must-do activity, keeping in mind the financial security of the children. In some cases, especially in the case of a start-up, one of the founders may choose to exit the business by selling his/her shares. In such an unfortunate situation, the ownership of the company also needs to be managed without impacting the day-to-day working of the company.

A divorce settlement can get complicated if the couple has children for the latter's long-term financial needs must be planned as well. Similarly, in case of a second marriage, protecting the financial well-being of children from the first marriage must be addressed without any ambiguity.  

Succession planning in the backdrop of such a divorce hinges on two key concerns - ensuring the children's long-term welfare and avoiding fragmentation of shareholdings of the business, which has joint holdings.

Section 125 of Code of Criminal Procedure requires the father to provide maintenance for his family. The court, while determining the quantum, considers the needs of the children, their medical requirements, higher education and so on. In most cases, the parent with custodial right proposes a lump sum amount or yearly/monthly cash support. However, due to the bitterness caused by the separation, there is a trust deficit between the estranged spouses. Apprehensions that the maintenance amount would not be put to proper use or would not benefit the children often come up. While the divorce decree may award a certain amount for children's maintenance, more often than not, the children concerned may be young adults. In fact, they could be majors in a strictly legal sense but may not be mature enough to handle wealth all at once. A private trust can ensure that the children of such separating couples receive the required financial support in multiple tranches at various stages of their lives.

In the recent past, the formation of private family trusts, where key beneficiaries are the children, has been used to address the concerns of both sides. Couples agree upon the assets that the children must receive and the same is transferred to the trust. Predetermined estimates are earmarked for various purposes such as health, education, maintenance and marriage of the children. These are determinate trusts, which come to an end when the child reaches a pre-defined age of 30, 35, 40 and so on.

In a private trust, it is the documentation of the trust deed that drives the execution. The settlor (a person transferring the assets to the trust) can define a framework and provide guidelines within which the trustee must operate. For instance, the settlor may address the finer details by specifying monthly or quarterly expenses to be paid for maintenance and education of the children. Letter of wishes, which is a document accompanying the trust deed, also comes in handy for giving such advice to the trustee. Families often appoint an independent professional trustee to manage the trust.

Formation of family trusts is emerging as one of the most efficient ways to protect the 'interests of children' in a less-than-optimal family scenario. It largely insulates the children from any future acrimony between the spouses and ensures long-term financial security for them.

Author is MD and CEO of Warmond