Rites of succession

Ensuring that your assets benefit desired members of the family after your death is neither a complex nor an expensive exercise.

Centuries ago, Victorian fathers may have threatened to exclude recalcitrant sons from their wills, but the theatrics continue till date, mostly in corporate boardrooms and TV soaps. Thanks to the much publicised case of the late Priyamvada Birla and the various TV serials spun around tycoons bequeathing their empires to secretaries or chauffeurs, estate planning in India is still largely the stuff of fiction.

However, estate planning is not just for the rich and famous. It is simply a process for an individual to arrange the transfer of his assets in the event of his death or incapacitation, says Vikas Agnihotri, CEO, Religare Macquarie Private Wealth. As this process is legally binding, it is important to do so in a timely manner in order to provide for the family. In fact, as soon as you acquire some assets or have dependants, you should start planning for your succession. However, Devang Shah, financial planner, Right Returns, sounds out a warning: “Prior to estate planning, your financial plan should be in place to meet your goals.”

The key objective of a comprehensive estate plan is to preserve assets and ensure timely transfer to the desired beneficiaries by paying the least amount of taxes, says Agnihotri. To do this, you need to realise what your assets and goals are, which translates to a financial plan. “Fortunately, unlike the rest of the world, we do not pay estate tax or estate duty, which is typically levied on the value of estate passed on to the next generation,” says Zankhana Shah, Mumbai-based financial planner. However, tax efficiency is only one of the considerations for estate planning, she adds.

So, what does it take to make an efficient estate plan? Your starting point should be to draw up a comprehensive list of assets. Then figure out how you want to bequeath these assets, ideally in consultation with your family members. “It is absolutely essential that you hire an attorney as well,” adds Shah. There are many legal issues involved in planning the estate and a competent lawyer will be best suited to help you understand the complexities. Once your needs and objectives are identified, select the tool you need to plan your estate.

Will: A will is a simple tool that allows you to pass on your wealth. There is no legally prescribed format, so even handwritten instructions on a plain paper will serve. To make it legally binding, it needs to be attested by two witnesses and should also include the provision for the appointment of an executor, who will ensure that the assets are transferred according to the will.

The will can be challenged in a court of law and goes through probate. To make things easier, especially if you have substantial property, get your will registered. Although this is not mandatory, registration helps when the execution is disputed, as the law recognises a registered will.

Trust: If your bequests are more complex, you might be better served by a trust. A trust allows you to transfer your assets (property, bank accounts, securities, real estate) to a holding vehicle, which is registered under the Indian Trusts Act. An appointed trustee manages it and carries out the directions, as specified. A trust essentially allows you to access all these assets while you are alive and decide who controls and benefits from them. For instance, you can time the distribution, determine how the income arising from the asset should be used or keep money aside for your spouse for her maintenance and, thereafter, pass it on to your children, says Shah.

A trust protects your assets from probate, keeps it out of the creditors’ clutches and provides confidentiality, since the names of the beneficiaries are not disclosed, nor are the assets listed. However, if your goal is to save taxes, a trust might not work to your benefit. “A trust is taxed in the highest bracket and adds to administrative issues as well,” says Shah.

The HUF: The head of a joint family can form a Hindu Undivided Family for passing on the inheritance in the HUF accounts to his sons. The HUF is basically a legal entity, which includes inherited assets (and income) from ancestors, and all members (part of the family) have a collective right to the same. The karta or male head of the family is accountable for the management of assets, pooling family income and paying taxes. Previously, when families were large and joint, creating a HUF offered tax advantages. However, given the predominance of nuclear families and no estate taxes, there are no major tax advantages, says Agnihotri. The HUF is liable to pay tax as per the individual tax bracket and is also eligible for deductions under Section 80C.

Other tools: “There are secondary tools like power of attorneys, gifts, etc. However, these are not recognised as being efficient for estate planning,” says Agnihotri. A power of attorney, for instance, helps in the efficient management of assets if you are incapacitated. You can choose anyone to act as a trustee, but as this method only assists in preserving your assets, it cannot be used exclusively.

Some people believe that nomination alone can serve, but later, one should make a will. This could lead to confusion about the bequest as the nominee might not end up as the beneficiary.

Then there are those who give away their wealth as gifts. However, this could be a tax-inefficient method. Since 2007-8, any gift of over Rs 50,000 received by an individual or HUF from an unrelated donor is taxable for the receiver.

Insurance is commonly used for succession planning as the proceeds do not attract any tax and the premium paid qualifies for a tax rebate. The death benefit also provides for immediate expenses needed by your dependants. Additionally, if a man buys the policy under the Married Woman Property Act, the proceeds cannot be attached by creditors. However, insurance is not highly recommended due to the costs attached, says Shah.

This brings us to the important question: how much does it cost to create an efficient estate plan? If you opt for a basic will, even a handwritten one, it could cost nothing at all. However, if your bequests are complex, you will need to pay professionals like financial planners and lawyers. You will also have to pay for registration of documents like your will, trust agreement, power of attorney, etc. To avoid additional financial duress on your family, it may be better for you to settle any outstanding liabilities and take insurance on the outstanding mortgage or any other high- value loans.

Finally, remember that you can always revoke bequests, change the terms of a trust, modify wills and change beneficiaries. And like those Victorian fathers, you can keep your family in line just by mentioning your will.

Commonly Used Estate Planning Tools

  1. Will is a legal document, which allows the testator to distribute his estate in a specified manner after his death.
  2. Private Trust is a legal entity, which holds the title to the estate and is managed by a trustee. A trust can be created and administered while the settlor is still alive.
  3. Hindu Undivided Family is a legal entity created and registered under the Hindu Act, which includes assets inherited from ancestors and the resulting income. All members have a collective right to this.
  4. Power of Attorney allows an individual to appoint a person to manage the assets on his behalf and take financial decisions if he is unable to do so.
  5. Gift is the distribution of assets during one’s lifetime by a simple transfer.
  6. Insurance allows a person to leave a legacy by passing on his investment along with death benefits to the beneficiaries when he passes away.
  7. Nomination allows an investor to appoint a person to look after and manage his assets. It does not confer any ownership right on the nominee, who simply passes it on to the heir.