The modern family structure in India, largely dominated by nuclear families, does not differentiate between a son and a daughter. Children are brought up on par, whether it is in terms of education or financial benefits. Daughters in an Indian family are expected to get married once they attain marriageable age. However, a daughter is still not expected to actively participate in the family business after they get married, The involvement of the son-in-law is also a taboo. There may be exceptions to this rule in cases where the family has only a daughter. The rules may change as a compulsion in such cases.
In spite of this general belief, business families want to protect their daughters and provide for them and their children, which is praiseworthy. With a view to building an effective asset protection mechanism, families are increasingly creating private trusts with daughters as beneficiaries. The general norm is to have a separate trust for each daughter which comes into effect either immediately, or when the parents’ Will is executed. Identified assets are, thus, transferred to the trust to be used for various purposes like covering the costs of education, medical expenses, marriage, or the setting up of a new business.
The trusts also make sure that the wealth thus provisioned is brought back to the family if the daughter dies without any legal heir. If the daughter is survived by her children, the assets will be used for their benefit. In most cases, the son-in-law is excluded from the benefits of the assets under the trust. This stems from the general fear or even from precedents that the son-in-law or his family may compel the daughter to part with the funds and she may be left without a safety net. This has led to families making arrangements to secure the assets originally provisioned for the daughter to ensure they are not abused in any form.
But in many cases, daughters are given a share in the family businesses by way of transferring the shares to a separate trust. This ensures that beneficial rights of daughters in the family business and its growth are duly protected.
While daughters may not be part of management and operations, their beneficial rights in the business are protected to meet the lifestyle and wealth creation needs. At the same time, families may not wish to provide absolute rights to daughters to sell their shares to third parties or strangers. As a preventive measure, it is recorded in the trust that if a daughter wishes to sell or transfer her shares, the other family members will have the first right of refusal. Trustees are often empowered to take a decision on the sale of shares to ensure that any disinvestment is for the purposes of the trust.
When it comes to transferring assets to a trust for the daughter, the valuation of assets is done, which includes the business, and the beneficial interest is determined accordingly. Each family may have a different perspective on what share of the assets should be apportioned to the daughters. In some cases, especially in businesses run by brothers and their families, it is an unsaid rule that after marriage, the daughter and son-in-law will not have any say in the operation of the business.
Let us understand the complexities of the topic through a case study. A large family business was inherited by three brothers and one sister, who lives in the US, with each having a 25% share in the business. Though the sister has never participated in business activities in the last 20 years, she continues to retain the share and enjoys the benefits without any significant contribution. Anticipating windfalls, each of the sister’s children are making claims for a board seat, leading to disputes. The children of the brothers have also joined the business, triggering fresh troubles. But the issue was finally resolved amicably with the trusts playing a key role.
As we witness structural changes in business families, new issues are cropping up, necessitating more involvement of trusts and proper family constitution. Family estate planning has become significant now more than ever before, in order to safeguard the interests of daughters in both letter and spirit.