Gift vs Will: What is better for passing assets to children during your lifetime?

I am planning to pass on some of my investments and property to my children during my lifetime, Is gifting them now better than transferring the assets through a Will, and what legal and tax implications should I consider? 

Parents looking to pass on investments and property to their children have two commonly used succession-planning options: gifting assets during their lifetime or transferring them through a Will. However, the better route depends on several factors, including control over assets, tax and stamp duty implications, the possibility of disputes and the children’s place of residence.

According to Bijal Ajinkya, Partner at Khaitan & Co, both Wills and gifts are effective tools for succession and passing on a legacy. The appropriate option depends on the individual’s intent, the likelihood of a Will being contested, the need to retain access to assets and the technical implications of tax, stamp duty and family residency.

For Indian residents with assets in India, gifts to close relatives are generally not subject to income tax, although stamp duty may apply. Assets inherited under a Will are also not subject to income tax or stamp duty. However, once the assets are transferred, any income generated from them would be subject to tax in the hands of the children.

Gift deed required for immovable property

A gift of immovable property requires a gift deed, while movable assets can be gifted without one. The gift deed must be appropriately stamped and registered under applicable state laws.

Certain states provide concessional stamp duty rates when residential or agricultural property is gifted to close relatives. By contrast, there is no stamp duty on assets transferred through a Will.

Lifetime gift means giving up ownership

One of the biggest considerations is whether the parent needs continued access to the asset. Once a lifetime gift is made, the children become the legal owners and the parent may no longer be able to benefit from or access the property.

A Will, on the other hand, transfers the assets only after the parent’s lifetime, allowing the individual to retain ownership and control during their lifetime. A conditional gift could also be considered, with the gift deed specifying arrangements for retaining access to or benefiting from the property.

Children living abroad need additional consideration

The children’s residential status is another important factor. Indian foreign exchange control regulations impose rules on transfers of assets between residents and non-residents, meaning gifts must comply with the applicable requirements.

A Will does not face the same consideration, as an Indian resident can bequeath assets to both residents and non-residents. The tax rules in the child’s country of residence must also be examined, particularly on income generated by the inherited or gifted assets.

Private trusts may offer greater control

Instead of transferring assets directly, families may consider gifting or bequeathing them to a private trust established for the children. According to Khaitan & Co, trusts can provide asset protection from matrimonial or creditor claims, safeguard assets against potential estate taxes and allow staggered access and control.

The firm noted that disputes and prolonged litigation around contested Wills are common, contributing to trusts becoming an increasingly preferred succession and estate-planning tool.

Ultimately, there is no single best method. Families need to balance ownership, access, taxation, stamp duty, residency and asset-protection considerations before deciding how assets should be passed on.