Estate Planning – Not Just For The Old And The Rich (Indian Context)

Estate Planning word cloud on white background

It may sound quite insensitive; but the fact is that financial matters crop up right after the demise of a loved one. Death in the absence of a well-executed succession plan can bring untold agony to the dependents. They may suddenly feel deprived of regular flow of income and access to financial assets. If a person dies intestate, that is, without making a will or creating a trust, then things can become very difficult as there is no record or list of the assets the person owns and the biggest difficulty faced by their heirs is in consolidating assets. As people don’t always reveal everything in their Form 16 or when they file income-tax returns, hence consolidating the assets becomes a very important and difficult step, especially if the deceased was managing everything on his own. Moreover, nobody ever wants that the assets they carefully built over a lifetime for their loved ones become the bone of contention among them after their death, therefore it can be said that, just the way it is important to create wealth, it is equally important to secure its transition to your loved ones without any legal hassles after you are gone.

In India, if a person dies intestate, then the assets are distributed in accordance with the succession laws of the religion the person belonged to and if there is more than one heir, distribution of assets can lead to bitter battles, given that some assets are more lucrative than others.

The intestate succession is governed by the following laws, depending upon the religion, the deceased belonged to.

  • Hindus, Buddhists, Sikhs and Jains: Hindu Succession Act, 1956
  • Muslim: Vast majority of Muslims in India follow Hanafi doctrines of Sunni law. Courts presume that Muslims are governed by Hanafi law unless it is established to be the contrary. A Muslim can bequeath only one-third of his estate.
  • Christian/Parsi: Indian Succession Act, 1925

“ESTATE PLANNING”- THE CONCEPT

Estate planning is the process of arranging and planning for succession with respect to an individual’s Estate; which comprises of everything the individual possesses including movable and immovable assets (“Estate”). It is, therefore, advisable to have a structured plan in advance, in order to ensure that the Estate is properly taken care of in the possible event of disability, incapacitation, death, or at the choice of the individual. Estate planning has become an important route in the present scenario for having a planned succession and to avoid lengthy court proceedings. It plays a vital role in accomplishing the objectives mentioned below:

Ø  Harmonious and planned succession, which helps to ensure that an individual’s Estate reaches those whom s/he chooses;

Ø  To take care of unforeseen contingencies in the future; and

Ø  Effective and efficient management of accumulations during the individual’s lifetime.

WHO SHOULD MAKE AN ESTATE PLAN?

Estate planning is not just for retired individuals or for the wealthy. It is for anyone who recognizes the need to efficiently manage their Estate. There are various modes to conduct estate planning.

MODES OF ESTATE PLANNING

Primarily, there are two modes of Estate Planning i.e. either:

(1)    by writing a Will; or

(2)    by creating a Trust.

There are other modes an individual can look to while planning for their Estate such as Gift. Unlike a Will, a condition attached with a Gift is, that the Gift needs to be made during the lifetime of the individual and can be executed [i]only if the person you are gifting it to accepts it (the recipient has an option to accept or reject the gift). Moreover, Gift Deeds cannot be conditional, i.e. one cannot say that the assets can be used by the beneficiary after one dies. Also, it can be disputed, therefore, it is not advised. In comparison, a will works better.

Will:

Writing a Will has been the traditional way of passing on all what a person has earned and what he has inherited from his ancestors to his descendants.

For valid execution of the Will:

(1)    It is to be in written form, and

(2)    It must be signed by the testator in presence of two competent witnesses.

A Will may be revoked any number of times by the testator during his lifetime.

The Indian Succession Act, 1925 requires Wills in certain Indian cities (Kolkata, Chennai and Mumbai) to be probated before the distribution under the Will can be effected by the executor.[1] The executor may be appointed expressly or by necessary implication. Section 213 of the Indian Succession Act, 1925 provides that that an executor or legatee cannot establish his right under a Will in any court unless a probate of Will is obtained. In the absence of an executor, the inheritors apply to the court for the appointment of an executor.

Before the concept of a Trust emerged, Will was considered to be the most appropriate and effectively adopted method for estate planning. But with families going to courts on disputes arising out of Wills either on the question of its authenticity, mental soundness of the person making the Will or alleged forgery, the Trust route, wherein the Trust created during the lifetime of the individual is emerging as a more viable solution to estate planning. Legally speaking there are numerous grounds on which a Will can be challenged in a court of law and it may take up to several years to obtain a probate in case the Will is contested, which may ultimately turn out to be an expensive process.

Further the necessity to obtain a probate of the Wills in most of the cases entails the Will being made public and going to courts for obtaining a Probate. A public document, a will is subject to scrutiny by anyone who wishes to know its contents. If someone feels they’ve been treated unfairly, they can contest the will. Such challenges can tie up assets for months or even years, and cost ones estate a huge amount of money.

Trust:

A trust deals with transferring one’s estate to a trustee for the benefit of a beneficiary, which may include the person creating the trust who is termed as a “Settlor”.

A Trust may be public or private in nature. Creating a private trust can be an efficient mode of planning one’s Estate. Private Trusts in India are governed by the Indian Trusts Act, 1882 (“Act“).

A Will can only be executed after the demise of the testator but the same is not the case with a Trust. An individual can either set up a family trust either while he is alive (by a declaration of trust contained in a trust deed) or when he dies by the terms of his will. Many trusts are created as an alternative to or in conjunction with a will and other elements of estate planning. By adopting the Trust route, an individual can avoid court proceedings, which are extremely time consuming.

The Trust has the following components:

(1)    Author of the Trust/ Settlor is the person who settles the Trust and reposes or declares the confidence;

(2)    Trustee is the person who accepts the confidence and is appointed by the Settlor to administer the Trust.

(3)    Beneficiary is the person for whose benefit the confidence is accepted i.e. the person for whose benefit the Trust is created; and

(4)    Trust-property or Trust money is the subject matter of the trust. Trust property can be in the form movable or immovable property viz. cash, jewellery, land, investment instruments etc.  

(5)    Protector: Sometimes a Settlor also appoints a ‘Protector’ or an ‘Advisor’ to the trust. The role of these people is to oversee the decisions taken by the Trustee so that the wishes of the Settlor are duly followed.

In India, a trust is not a separate legal entity but is an obligation. Under the Trusts Act, the trustee of an Indian trust is the legal owner of the trust property. The beneficiaries (regardless of whether they are Indian residents) to such a trust only have a beneficial interest in such trust property.

The property held in a trust is not transferred directly to the beneficiary but is put in control of the trustee for the benefit of the beneficiary. The trustee depending upon the nature of the trust either transfers the property or its earnings to the transferee at the happening of certain events or applies the property and /or its gains for the benefit of the transferee.

There are few conditions which need to fulfilled for creating a trust:

  • Certainty of an action to create a trust.
  • Certainty of the purpose for the same.
  • Certainty of the beneficiaries.
  • Certainty of the trust property.

A trust provides the flexibility to be set up in more than one form or in hybrid forms as per the requirement.

Trust can be structured as revocable or irrevocable. A revocable trust can enable the settlor to exercise control over the property but can be prone to clubbing provisions under the tax laws. An irrevocable trust can provide safeguard against future creditor claims on the assets in case of bankruptcy, since the settlor ceases to have the title to the trust property, yet at the same time enable indirect control over the property through terms of the trust deed.

A trust can be further set up either as discretionary, where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent, or as determinate, where entitlement of beneficiaries is fixed by the settlor through the trust deed, the trustees having little or no discretion.

ESTATE PLANNING THROUGH A TRUST: BENEFITS

Trusts are viewed as a more effective and secure tool in estate planning since a Will comes with a lot of legal issues and takes time to become operational due to the requirement of probate. Further, as India does not have the concept of a living will, trusts are preferred as they provide for the management of an individual’s property during his/her lifetime.

Following are the benefits of creating a private trust:

Ø  Provides financial security for the individual’s family, especially in the case of family members with disabilities and providing for the future administration of assets to protect against future incapacity and for incapable beneficiaries;

Ø  Helps in retaining confidentiality, as obtaining a Probate is not necessary.

Ø  Provides estate protection in certain cases as an irrevocable Trust is a bankruptcy remote structure.

Ø  Provides an option to nominate oneself as a Beneficiary, as the person who creates the Trust can himself be one of the beneficiaries and enjoy the benefit of his own estate during his lifetime.

Ø  Provides for management of all types of assets through expert advisors.

Ø  Helps in avoiding family disputes leading to disintegration of family businesses.

Ø  Causes efficient management of the Estate as a trust can be made operational during the lifetime and post death of the settlor.

Ø  Enables making provisions for religious or charitable purposes.

Ø  Has lower contestability as compared to a Will.

Though planning one’s estate may feel like a herculean task and some people may feel put off by the belief that estate planning will be complicated, time consuming and costly but setting up an estate plan is not as complex and complicated as it sounds and by having a well-executed Estate Plan you lose nothing, but gain the assurance that your wishes will be carried out if something happens to you, without the time or hassles of probate through the hands of competent and professional Trustees. Hence, Estate planning is the foremost judicious step in securing your family’s future and fulfilling your desires during your life and after you depart from the world.

 

Authors: Swati Sharma Sulalit & Nikita Sayam

The authors of this article are working with Kaden Boriss, Lawyers as Partner and Associate respectively. The views expressed here are personal, and do not necessarily represent that of the organization. 


 

[1] Probate is the official evidence of the executor’s right to represent and dispose of the testator’s estate as per the terms of the Will. Under the Indian Succession Act, 1925, probate can be granted only to an executor appointed under a Will, who must apply to the relevant court for the probate.