Succession Through Private Trust Under FEMA: NRI Beneficiaries, Inheritance, & RBI Approval

A private trust is a legal arrangement in which one party, known as the settlor, transfers property to another party, the trustee, to be held and managed for the benefit of specific individuals or entities referred to as beneficiaries. In India, understanding of a private trust under FEMA is essential for families undertaking wealth transfer, inheritance planning, and NRI succession planning.

While trusts are well recognised under Indian trust law, their treatment under the Foreign Exchange Management Act, 1999 (FEMA) carries certain complexities particularly when cross-border elements are involved. These continue to be a gray area in our professional circles and opinions are divided here.

Treatment of Trusts under FEMA

Section 2(u) of FEMA defines a “person” to include an individual, Hindu Undivided Family (HUF), company, firm, association of persons (AOP) or body of individuals (incorporated or not), every artificial juridical person not covered above, and any agency, office, or branch owned or controlled by such person. Notably, a trust is not expressly included within the definition of a “person” under FEMA.

While a trust is not expressly defined as a “person” under FEMA, it may fall within the scope of an AOP or an artificial juridical person, since it represents a collective arrangement where trustees hold and manage property for beneficiaries pursuant to a trust deed.

Under Indian trust law, a trust is not a separate legal entity but rather a contractual or fiduciary arrangement between the settlor, trustee, and beneficiaries. Consequently, it becomes difficult to determine the independent residential status of a trust under FEMA, as residency is determined only for persons as defined under the Act.

As a result, FEMA compliance in relation to trusts is generally examined by looking through the trust structure and analysing:

• The residential status of the settlor
• The residential status and powers of the trustees
• The identity and residency of the beneficiaries
• The nature of the assets contributed or acquired

FEMA Recognition of Trust Structures

FEMA recognises certain trust-based structures only in a limited and specific context. Under Section 6 of the Foreign Exchange Management Act, 1999 (FEMA), transactions that result in the creation, acquisition, or transfer of an asset or interest outside India are classified as capital account transactions. Contribution or settlement of assets into a trust involves creation of a capital interest in favour of the beneficiaries and, therefore, falls within the scope of a capital account transaction.

Consequently, such transactions require prior approval of the Reserve Bank of India (RBI) unless they are expressly permitted under FEMA or the relevant rules and regulations issued thereunder, or allowed under the automatic route.

Before we examine specific issues dealing with NRI beneficiaries in a private Trust, let’s examine broad types of trusts existing in India -

Types of Private Trusts

Revocable Trust

A revocable trust is one where the settlor retains the right to modify, revoke, or dissolve the trust during their lifetime. Since control effectively remains with the settlor, such trusts are often viewed as tax-transparent and offer limited asset protection.

Irrevocable Trust

An irrevocable trust cannot be altered or revoked once created, except in limited circumstances prescribed by law. The settlor relinquishes control over the assets, making this structure more suitable for succession planning, estate protection, and long-term wealth transfer.

Discretionary Trust

In a discretionary trust, the trustee has discretion over whether, when, and how much income or capital is distributed among the beneficiaries. Beneficiaries do not have a fixed entitlement, allowing flexibility but increase regulatory and tax scrutiny.

Determinate (Specific) Trust

In a determinate trust, the shares of beneficiaries are clearly defined in the trust deed. Each beneficiary has a fixed and identifiable interest, providing certainty and typically simpler tax and regulatory treatment.

Can secondary beneficiaries in an Indian Trust be NRIs?

Let’s examine a specific trust through an interesting case study with following contours-

• Settlor -Resident Indian
• Trustees - Resident Indians
• Primary beneficiaries - resident Indians.
• Secondary beneficiaries (who will become primary beneficiaries in case of death of primary beneficiary) -  Non-resident Indians and they are legal heirs of primary beneficiary.

Whether RBI approval is required at the time of formation of the Trust?

If the primary beneficiaries of the trust are resident individuals and the secondary beneficiaries are non-resident individuals, the rights of the secondary beneficiary enter into the picture only on death of the primary beneficiaries.

Accordingly, the mere inclusion of non-resident secondary beneficiaries does not, in itself, trigger a requirement for prior RBI approval at the stage of formation of the trust.

Hence, a view can be taken that prior approval of the RBI is not required at the time of formation of the trust whether trust has residents as settlors and primary beneficiaries are also Resident Indians.

Is RBI permission required on secondary beneficiaries becoming primary?

Here the situation is that assets passing on to secondary beneficiaries are now wearing the facade of ‘inheritance’ since secondary beneficiary are legal heirs of primary beneficiaries. The secondary beneficiary becoming primary beneficiary is basically nothing else but an event of ‘inheritance’.

For such transactions, prior approval of the RBI is also not required since under Section 6(5) of FEMA states that a person resident outside India is permitted to acquire currency, security and property from a person resident India by way of inheritance. However, it will be advisable for the primary beneficiary to mention in their WILL that the rights under this trust are being passed on to the secondary beneficiary.

Conclusion

While private trusts are widely used as a succession planning tool for Indian families, their interface with FEMA remains restrictive and a matter of debate amongst professional circles. Unlike regulated investment vehicles, private trusts do not enjoy automatic recognition under FEMA, making RBI approval a preferred route where non-resident elements are involved.

In cases where non-resident individuals are included as secondary beneficiaries, their mere inclusion does not necessarily trigger RBI approval at the stage of trust formation.

Careful structuring, detailed documentation, and proactive engagement with the AD bank and RBI are essential to ensure regulatory compliance and avoid future complications.

At KDP Accountants, we assist individuals, NRIs, and global families with FEMA advisory, succession planning, trust structuring, and cross-border tax matters. Reach out to us at enquire@kdpaccountants.com, Our team of professionals will ensure smooth succession and estate planning outcomes for both resident and non-resident family members.

FAQs

Can an NRI be a beneficiary of an Indian private trust?

Yes, however FEMA implications should be evaluated based on the structure of the trust and the nature of assets involved.

What is a private trust under FEMA?

A private trust is a legal arrangement where trustees hold assets for the benefit of beneficiaries. Under FEMA, trusts are not specifically defined as a separate person, making FEMA compliance dependent on the residential status of settlors, trustees, and beneficiaries.

Are private trusts recognized under FEMA?

FEMA does not define a trust as a separate person, trusts are recognized indirectly through the application of FEMA provisions.

Is RBI approval mandatory to create trust with NRI beneficiaries?

RBI approval is not required because an NRI is named as a secondary beneficiary. The requirement depends on the rights granted and the timing of asset transfer. 

 

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Palak Shah is a CA Finalist currently pursuing her articleship with a focus on Foreign Exchange Management Act (FEMA) regulations and Direct Tax. She has gained practical experience in advising on Overseas Direct Investment (ODI), FEMA compliances, and structuring Indian entities and their overseas subsidiaries in alignment with regulatory requirements. Her work involves assisting businesses with in navigating cross-border transaction, regulatory reporting, and international taxation matters. With strong analytical and communication skills, she is particularly interested in simplifying complex regulatory frameworks and providing practical insights on FEMA and taxation for businesses and professionals. Palak aims to contribute to the evolving discourse on FEMA and cross-border regulatory frameworks by sharing practical perspectives and insights from her professional experience.