Why One Must never Neglect Estate Planning
07 January 2014, Tuesday
One of the most common reason for family feuds in India as in the rest of the World is faulty estate planning. Estate planning is a neglected topic in India mainly because of the emotions attached to it. A common reason people neglect to make a will or indulge in estate planning in their younger years is that they believe that this is a job for their latter years neglecting the vagaries of life. One believes that if he makes a will for the inheritance of his property among his heirs when he is young he is giving up on life. Even in ones old age he postpones making the will as he fears his children will neglect him once his property is in their name. Proper estate planning has a dual role to play. It ensures lesser family feuds and the costly court visits and litigation. In the event of a sudden and unexpected death of the breadwinner of the family financial security is assured for his spouse and children. Can one build a case to neglect his estate planning?
What is estate planning?
During the course of one’s life he builds and accumulates wealth with the sole aim of distributing this among his heirs which could be his spouse or children. Estate planning is a wealth bequeathing process to ones legal heirs or beneficiaries in a hassle free manner ensuring that the right people enjoy this wealth. So what is the meaning of the word “estate” .One might believe that estate planning is a task only to be indulged by the rich but he is sadly mistaken. Almost everyone has an estate is some form or the other. This might be land agricultural or residential or even ones home. The assets one owns after deducting the liabilities need to be handed over to ones heirs and estate planning helps achieve this. Estate planning is basically a process ensuring that one’s wealth reaches the people one would like to bestow his wealth on rather than any individual who is related to him and is allocated in proportions as wished by him for the purpose of his choice. It also helps for a business succession plan.
Is it necessary to indulge in estate planning?
In any endeavor it is very necessary to look at the opposite side mainly the what if factor. What if one does not make a will? What if one has not made a plan to distribute his wealth among his heirs and what could be the implication of such a failure?
- Ours is a nation where wars over property is common among siblings, cousins and even unrelated parties.
- Succession and right over business assets has divided many a family.
- Litigation and court battles are a lengthy process and can damage business relationships and family ties.
- Greed and an uncompromising attitude among family members can lead to loss of family assets to unrelated parties.
One looks at the above reasons and comes to a conclusion that these are events which can very much occur and he could be severely impacted. Estate planning is not merely a wealth transfer process but could also have an emotional aspect. Above all estate planning is not a complex process and with having the right documents in the right place and with a plan put in place as early in one’s life as possible estate planning is a hassle free process.
How is estate planning done?
The making of the will:
One of the most important steps in estate planning is making a will. A will is a legal document which gives one complete control over how one would like to distribute his wealth or property as well as to whom it is bestowed. It clearly states who gets how much. If one does not make a will it is called dying intestate and this leaves a chance of the property going to people one might not wish to bestow the property on. The first right over the property might go to one’s children or relatives and if there are no claimants it might even go to the State. All this uncertainty can be avoided by making a simple will. One needs to appoint a representative which could even be ones lawyer as an executor of the will after ones death. If one is making a will he becomes the testator and the will needs to be made in writing. It has no specific format and can be written by the testator on a paper. The will needs to be signed by the testator or signed by a person as directed by the testator in his presence. The will needs to be attested mainly signed by at least two witnesses and the beneficiaries of the will cannot attest it. One cannot right any technical terms in the will. One might appoint an executor for the will which is extremely necessary if the will is challenged in a court of law. The property or asset rests under the care of the executor until the validity of the will is established .The process of ascertaining the genuinely of a will is called a probate. The executor of the will may be given a general power of attorney or a specific power of attorney to execute the will. The contents of the will are disclosed after the death of the testator.
The main focus of Estate planning is in executing the actions of the will. Banks offer this service for a fee mainly to HNI. Safe keeping of the will becomes the responsibility of the bank .If one is a HNI then banks offer a number of high end services to the testator mainly the writer of the will. This might include a video shoot of the entire will writing process to avoid complications in the future. The making of the will with the bank could cost INR 5000-7000.The safekeeping and execution of the will could cost INR 20000-30000.
The importance of a trust:
One must have surely heard of another popular method of estate planning known as a trust. A trust is created by appointing a trustee who is a person who holds nominal ownership of a property to protect the interest of the beneficiaries so that it can be handed over to the beneficiaries in a hassle free manner. In India private trusts are governed by the Indian Trusts Act 1882. The trust enables one to keep the family assets within the family across generations. Any person who is competent to contract under the Indian Contract Act can act as a settlor mainly one who forms a trust .The settlor needs to have the title to the property which is being put into the trust. There also needs to be a beneficiary who benefits from the trust. If a trust is for an immovable property a written document is necessary to create it. Private Companies are known to provide trust services to HNI for a fee .Many times delays occur if the will is subject to a probate mainly for business assets during which the assets are frozen and confidential information passes on to the public domain which might be detrimental to the cause of the business. In a trust ownership passes on to the trustees and confidentiality of the business assets can be maintained.
What happens if the settlor wants to change the trust?
Let us consider the settlor mainly one who forms the trust has a change of heart and wants to bestow his wealth on another beneficiary. One might have left his youngest child out of the will due to some family dispute and would want to include him as a beneficiary. Technically he cannot do so as the control of the assets seizes to be in his hands but there is a way out of this predicament.
- Section 78 of the Indian Trust Act allows that if one has created a trust then such a person can in his lifetime revoke a trust if all beneficiaries are in agreement over this.
- If the trust deed clearly allows one to revoke the trust. According to the Section 77 of the Indian Trust Act if one avails a trust which can be revoked and it is revoked the trust will be finished.
- If the trust has a revocable clause and the settlor retains the power to revoke the trust then the trustee can be directed to give back the trust property to the settlor.
Can life insurance be used as a tool for estate planning?
Use of term life insurance in estate planning
If one dies at a young age or at the start of his career wealth transfer to his spouse or children is very less. One would not have the time to earn wealth and this would lead to a paucity of funds for his spouse to manage the daily family expenses in these inflationary times. A term insurance plan is a must have if one is the breadwinner of the family and at the start of his career. This is mainly a life insurance policy which provides one coverage for a fixed rate of payments called the premium for a fixed duration or a time period. This is the least expensive way to provide for substantial death benefits at a young age. The most common term periods are ten, fifteen, twenty and thirty years. Premium paid under this policy is tax exempt under Section 80C and maturity proceeds obtained by the nominee after ones demise are tax exempt under Section 10 (10D).These policies can be procured with a rider benefit which basically means one pays a slightly higher premium for certain extra benefits. One can take a critical illness rider in the term insurance plan on paying an additional premium called critical illness rider premium. These policies cover heart attack, kidney failure, stroke, coronary artery bypass and other critical ailments.
Use of whole life insurance in estate planning
One can opt for a single premium or regular premiums which has to be paid lifelong in a whole life insurance policy. This policy is valid for ones whole lifetime .Money is accumulated and the bonus accrued is paid to the beneficiary on ones death. One is not entitled to any money during his own lifetime.
- If one wants to leave a huge legacy for a disabled child he must take up a whole life insurance policy where on his death, the disabled child (beneficiary) gets the sum assured as well as the accrued bonus.
- HNI’s can use whole life in their estate planning by setting up an insurance trust that will pay their estate taxes from the proceeds of the policy.
- If one has a genetic disorder which has a high chance of being passed on to ones child and one could die at a young age then he can opt for a whole life policy where death benefits and an accrued bonus mean a large sum at maturity.
Taxation of one’s inheritance:
- If one receives an immovable property as an inheritance no tax is charged on it. However a debate is on for a possible reintroduction of inheritance tax called by the finance minister.
- If one has his own residence and he does not rent his residence and receives immovable property as an inheritance one of the immovable properties can be chosen as self occupied which is not taxed .The other is deemed to be let out even if not given on rent and taxed as per its gross annual value even if this property is inherited. Wealth tax might also have to be paid on the specified value of this property even though it might be inherited provided its value exceeds INR 30 Lakhs.
- If one receives inherited property and sells it he incurs capital gains tax on it.
I would like to end this article stating that the negligence of estate planning can have serious consequences and one cannot afford to neglect this aspect if one wants to avoid any hassles and family disputes after his demise.