BASICS OF ESTATE PLANNING

BASICS OF ESTATE PLANNING (Part 1)

• Definition: Estate planning is a process that deals with the accumulation, conservation, and distribution of an estate. It determines how an individual wants to distribute their estate, including rights and interest in property owned, when they die.
• Importance: Estate planning is essential for anyone who holds property and wishes to transfer it to specific heirs in a specific manner after their death. It provides financial security for their family and helps address various issues, such as:
  • How to distribute property
  • Who should manage care if the individual becomes physically disabled or mentally incompetent
  • How to repay liabilities
  • How to provide for charity
• Misconceptions: Estate planning is not only for the wealthy; it is for anyone who wants to ensure their assets are distributed according to their wishes.
• Areas requiring effective estate planning:
  • Family with minor children
  • Individuals with high liabilities
  • Properties in multiple states
  • Owning a small business
  • Estate taxes
  • Addressing uncertainty of permanent disability
• Estate Planning Goals: The objectives of estate planning include:
  1. Preserving assets for loved ones
  2. Appointing a guardian for minors
  3. Addressing concerns arising from an individual's disability
  4. Ensuring availability of funds to pay liabilities after death
  5. Giving loved ones specific assets
  6. Provisioning for protection and care of special needs children
  7. Protection for financial security of minor children till they turn 18
  8. Streamlining an efficient method to collect and distribute assets
• Estate Planning & Succession Planning: Estate planning is often misconceived to be equivalent to succession planning. However, these two are distinct with different objectives. Succession planning is planning for one's business, which takes effect within one's lifetime, whereas estate planning involves one's personal assets and is necessary for every individual, regardless of whether they have a succession plan for their business or not.
• Constituents of Estate: An estate consists of all properties an individual owns or controls, including:
  1. Gross Estate: Real estate properties, bank accounts, investments, businesses, retirement accounts, life insurance, etc.
  2. Residue Estate: Personal estate property, such as cars, jewelry, furniture, clothes, and any other item found at one's home
  3. Estate Debt: All debt and obligations owed to others, including housing loans, car loans, credit card payments, business outstanding, tax liabilities, and legal cases
• Consequences of dying Intestate: When an individual dies without a Will, the property devolves upon the heirs as per the laws of inheritance applicable to them. The law of inheritance varies depending on the individual's religion and community.
• Elements of Estate Planning: A good estate plan consists of many different components, including:
  1. Will: A document that specifies who will inherit one's assets and in what manner
  2. Trust: A legal arrangement that holds assets on behalf of a beneficiary or beneficiaries
  3. Power of Attorney: A legal arrangement where an individual designates someone to manage their finances in case they become incapacitated
  4. Living Will: An advance directive written primarily for physicians, stating one's wishes for end-of-life care and unable to communicate their decisions
  5. Nomination and Beneficiary Designations: Appointing nominees and beneficial nominees for smooth transfer of financial assets after one's demise

BASICS OF ESTATE PLANNING (Part 2)

• Introduction to Estate Planning: It is essential to periodically review nominations and beneficiary designations, as the legal beneficiaries can change in situations like marriage.
• Applicable Laws: The Indian Succession Act, 1925, and the Hindu Succession Act, 1956, are crucial laws governing estate planning in India.

Key Concepts in Estate Planning

• Indian Succession Act, 1925: This act deals with testamentary and intestate succession. For Hindus, the act applies to testamentary succession, while the Hindu Succession Act, 1956, applies to intestate succession.
• Hindu Succession Act, 1956: This act extends to the whole of India and governs the succession of property of a Hindu who dies intestate. The act categorizes heirs into Class I and Class II.
• Class I Heirs: Include the son, daughter, widow, mother, and other specified relatives of the deceased.
• Class II Heirs: Include the father, brother, sister, and other specified relatives of the deceased.
• Agnates and Cognates: Agnates are related by blood or adoption wholly through males, while cognates are related by blood or adoption but not wholly through males.

Succession Laws for Different Religions

• Hindus: Governed by the Indian Succession Act, 1925, for testamentary succession, and the Hindu Succession Act, 1956, for intestate succession.
• Muslims: Governed by the Muslim Personal Law, which is a combination of the Holy Quran, Sunna, Ijma, and Qiya.
• Christians: Governed by the Indian Succession Act, 1925, for both testamentary and intestate succession.
• Jains, Sikhs, and Buddhists: Governed by the same laws as Hindus, with some exceptions.

Key Provisions of the Hindu Succession Act, 1956

• Section 8: General rules of succession in case of males, which prioritize Class I heirs, followed by Class II heirs, agnates, and cognates.
• Section 14: Property of a Hindu female to be her absolute property, not limited by any restrictions.
• Section 15: General rules of succession in case of Hindu females, which prioritize the sons, daughters, and husband, followed by the heirs of the husband, mother, and father.

BASICS OF ESTATE PLANNING (Part 3)

• Sharers: are the ones who are entitled to a certain share of the deceased property.
• Residuary: are the ones who take up the share in the property that are left after sharers have taken their part.

Succession of Muslim Male

• There are 12 sharers in Muslims:
  1. Husband
  2. Wife
  3. Daughter
  4. Daughter of a son (or son’s son and so on)
  5. Father
  6. Paternal Grandfather
  7. Mother
  8. Grandmother on male line
  9. Full sister
  10. Consanguine sister
  11. Uterine sister
  12. Uterine brother
• The share taken by each sharer is decided by various factors, such as:
  • A wife takes 1/4th of share in a case where the couple is without lineal descendants, and a one-eighth share otherwise.
  • A husband (in the case of succession to the wife's estate) takes a half share in a case where the couple is without lineal descendants, and a one-fourth share otherwise.
  • A sole daughter takes a half share.
  • Where the deceased has left behind more than one daughter, all daughters jointly take two-thirds.

Non-Testamentary and Testamentary Succession under Muslim Law

• Non-Testamentary succession: governed by the Muslim Personal Law (Shariat) Application Act, 1937.
• Testamentary succession: governed by the relevant Muslim Sharia Law as applicable to the Shias and the Sunnis.
• Exception: in cases where the subject matter of property is an immovable property, situated in the state of West Bengal or comes within the jurisdiction of Madras or Bombay High Court, the Muslims shall be bound by the Indian Succession Act, 1925.

Birth Right

• No concept of ancestor property rights by birth in the case of Muslim succession.
• Rights of a Muslim heir are fixed and determined with certainty on the date of the ancestor's death.
• If an heir lives even after the death of the ancestor, he becomes a legal heir and is entitled to a share in the property.

Rule of Distribution for Inheritance

• Per capita distribution method: used in the Sunni law, where the estate is equally distributed among the heirs.
• Per strip distribution method: recognized in the Shia law, where the property is distributed among the heirs according to the strip they belong to.

Distribution of Joint or Ancestral Property

• No provision of distinction between individual and ancestral property.
• Every property that remains within the ownership of an individual can be inherited by his successors.

Rights of Females

• No distinction between the rights of men and women.
• Quantum of the share of a female heir is half of that of the male heirs.

Succession Rights of a Widow

• A childless Muslim widow is entitled to one-fourth of the property of the deceased husband.
• A widow who has children or grandchildren is entitled to one-eighth of the deceased husband's property.

Succession Rights of a Child in the Womb

• A child in the womb shall only be entitled to the share in property if he or she is born alive.

Escheat

• When a deceased Muslim has no legal heir, the Government inherits his properties through the process of escheat.

Wasiyat

• A will is referred to as ‘Wasiyat’ in Muslim law.
• Any person who is major (15 years and above) and is of sound mind can make a will.
• A Muslim cannot dispose off more than one-third of his net assets by will.

Married Women’s Property Act, 1874

• Enacted to protect the properties of women against creditors.
• Applies to any woman who at the time of her marriage professed the Hindu, Muhammadan, Buddhist, Sikh or Jain religion.
• Married women's earnings are deemed to be their separate property.
• A married woman may effect a policy of insurance on her own behalf and independently of her husband.

Mutation

• A process whereby a property is transferred from one person’s name to another.
• Carried out as per the state specified laws.
• Records are maintained to prove the rightful owner of the property.

BASICS OF ESTATE PLANNING (Part 4)

• Mutation: The process of updating the records of the revenue department to reflect the rightful owner of a property, handled by state governments, to collect taxes and fix tax liabilities.
• Importance of Mutation: Although mutation is crucial for revenue collection, it is not considered as proof to confer title of the property in the name of the person in whose name the property is mutated.
• Objective of Mutation: The sole objective of mutation is to collect revenue from the person in whose possession the property is, and not to establish the title of the property.
• Procedure for Mutation: The present owner of the property must clear all dues, and the development authority will record the mutation and grant a no-objection certificate or sanction the building plan.

Inheritance under Hindu Succession Act

• Intestate Succession: When a person dies without leaving a Will, the distribution of assets is as per the Indian Succession Act 1925, and for Hindus, the Hindu Succession Act, 1956 applies.
• Class II Heirs: In the absence of Class I heirs, the assets are distributed among Class II heirs, with preferences given to those in the first entry, then the second entry, and so on.
• Equal Inheritance: In the case of Mr. XYZ, his brother and two sisters equally qualify to inherit his estate, as they fall under Class II heirs of the Hindu Succession Act.

Key Takeaways

• Mutation is not a proof of title: It is essential to understand that mutation is not a proof of title, but rather a process to update revenue records.
• Hindu Succession Act applies: The Hindu Succession Act, 1956 applies to Hindus who die without a Will, and the distribution of assets is as per the Act.
• Class II heirs inherit equally: In the absence of Class I heirs, Class II heirs inherit the assets, with equal distribution among them.