TOOLS FOR ESTATE PLANNING

TOOLS FOR ESTATE PLANNING (Part 1)

• Estate Planning Tools: Classified into those that take effect during a person's lifetime and after death, including Will, Nomination, Family Settlement, Trust, Guardianship, Joint Holding, Gift, Power of Attorney, and Mutation.
• Tools used post death:
  • Will: A legal declaration of a person's intention regarding their property after death.
  • Nomination: A process of appointing a person to receive a portion of the deceased person's estate.
• Tools used during lifetime:
  • Family Settlement: An agreement among family members to distribute property.
  • Trust: A legal arrangement where a person (trustee) manages property for the benefit of another person (beneficiary).
  • Guardianship: The appointment of a person to manage the property of a minor or incapacitated person.
  • Joint Holding: Ownership of property by two or more persons.
  • Gift: The transfer of property from one person to another without consideration.
  • Power of Attorney: A document that grants authority to another person to manage one's property.
  • Mutation: The process of changing the ownership of property in official records.

Key Concept 1: Concept of Wills

• Definition: A Will is a legal declaration of a person's intention regarding their property after death, as defined in Section 2(h) of the Indian Succession Act, 1925.
• Characteristics and Content: A Will comes into effect only after the death of the testator and should be made by a person of sound mind.
• Types of Wills:
  • Conditional or Contingent Will: A Will that takes effect only if a certain condition is met.
  • Joint and Mutual Will: A Will made by two or more persons, which can be recognized as two separate Wills.
  • Duplicate Will: A copy of a Will kept with the testator or executor.
  • Holograph Will: A Will entirely in the handwriting of the testator.
  • Concurrent Will: Two or more Wills made by the same testator, which can be treated as independent Wills.
  • Sham Will: A document that is not intended to be a genuine Will.
  • Privileged and Unprivileged Will: A Will made by a person in a special situation, such as a soldier or mariner, which may not require written formalities.

Key Concept 2: Legal Requirements and Testamentary Capacity

• Essentials for Making a Will:
  • Testamentary Capacity: The ability to make a Will, which requires a sound mind.
  • Knowledge of Contents: The testator should be aware of the contents of the Will.
  • Free from Undue Influence: The testator should not be under any undue influence or coercion.
  • Voluntary Act: The Will should be made voluntarily.
• Eligibility to Make a Will:
  • A person of sound mind who is not a minor.
  • A married woman who can alienate property during her lifetime.
  • Deaf, dumb, or blind persons who can understand what they are doing.
  • An ordinary insane person during an interval of sound mind.

Key Concept 3: Registration of Wills

• Registration Process: A Will can be registered at the Registrar/Sub-registrar office, which provides safe custody and prevents tampering or destruction.
• Advantages of Registration:
  • The Will cannot be tampered with or destroyed.
  • A certified copy of the Will can be obtained only by the testator or their agent.
  • The Will is kept in safe custody at the registrar office.
• How to Register a Will: The testator and witnesses should attest the Will in front of the Registrar/Sub-registrar, and a copy will be given to the testator while the others are kept in safe custody.
• Exemptions from Attending Registrar's Office:
  • A person with bodily infirmity who cannot attend without risk or serious inconvenience.
  • A person in jail under civil or criminal process.
  • A Muslim pardanashin woman.

TOOLS FOR ESTATE PLANNING (Part 2)

• Will Registration: The registrar holds the original copy of the Will till any competent court asks them to produce it. All expenses in this process are borne by the applicant.
• Revocation of Will: A Will is revocable by nature. It can be altered or revoked by the testator at any time when they are competent to dispose of their property through a Will.
• Modes of Revocation: There are four modes of revocation of a Will:
  • Through a later Will or codicil duly executed
  • Through written declaration of an intention to revoke the Will and duly executed as a Will
  • By burning, tearing, or otherwise destroying the Will by the testator or someone in their presence and by their direction, with the intention of revoking the Will
  • By a subsequent marriage (except for Hindus, as per Section 57 of the Indian Succession Act)
• Codicil: A codicil is a supplementary document to a Will, used to make minor alterations. It has to be executed and attested just like the Will.
• Succession Certificate: A succession certificate is a document issued by a court to the legal heirs, authorizing them to represent the deceased for collecting debts, securities, and other assets.
• Difference between Succession Certificate and Legal Heir Certificate:
  • Succession Certificate: issued by a civil court, authorizes a person to succeed over the deceased, and is used to gain authority to obtain debts and securities.
  • Legal Heir Certificate: issued by the Tehsildar of a district, identifies and establishes living heirs of a deceased person, and is used to stake a claim as a rightful heir to the estate.
• Role of the Executor:
  • Definition: An executor is a person appointed by the testator to execute the Will.
  • Functions: The executor's responsibilities include collating all assets of the deceased, paying off liabilities, distributing the legacy as per the Will, and managing the execution of the Will.
  • Powers and Duties: The executor has the power to analyze the Will, locate assets, determine their value, pay off debts and taxes, and disburse the estate to the legal heirs as per the Will.

TOOLS FOR ESTATE PLANNING (Part 3)

• The Will: A crucial document in estate planning, the Will outlines how a person's assets will be distributed after their death. It is essential to remember that if the executor mismanages any assets, they can be held liable.
• Executor:
  • Definition: The executor is the person responsible for carrying out the instructions in the Will.
  • Details: Any person capable of executing a Will can be an executor, including family members, friends, relatives, or companies. A beneficiary can also be named as an executor.
• Number of Executors:
  • Definition: There is no restriction on the number of executors a testator may appoint in the Will.
  • Details: The testator can appoint multiple executors, but it is essential to ensure that they can work together effectively.
• Administrator:
  • Definition: If there is no executor appointed in the Will, the court can appoint an administrator to oversee the distribution of the estate.
  • Details: The administrator's role is to manage the estate and ensure that the assets are distributed according to the Will or the laws of succession.
• Probate:
  • Definition: Probate is the legal process of verifying the Will and granting the executor the authority to manage the estate.
  • Details: Probate is mandatory in certain cities, and it is required to establish the legal character of the person to whom the grant is made. It also validates the Will and ensures that the executor has the authority to manage the estate.
• Probate Fees:
  • Definition: The probate process involves a court fee, which is a fixed or percentage of the total value of assets going in for probate.
  • Details: The probate fee varies across states, and some states have a limit on the maximum fee charged by the court for probate.
• Gifts:
  • Definition: A gift is a transfer of movable or immovable property made voluntarily and without consideration.
  • Details: Gifts are taxable as income from other sources, subject to exemptions provided under the Income Tax Act. Gifts received from relatives, such as spouses, siblings, parents, grandparents, children, and grandchildren, are exempt from tax.
• Joint Holding:
  • Definition: Joint holding means that the property is held by more than one person and can be accessed by such joint holders subject to the mode of operations.
  • Details: Joint holding can be used to transfer wealth from one person to another, and it can be done for various types of assets, including bank accounts, property, demat accounts, shares, mutual funds, and specific saving schemes.
• Nomination:
  • Definition: Nomination is the right conferred upon the holder of an investment product to appoint the person entitled to receive the monies in case of death.
  • Details: Nomination can be done either at the time of making the investment or subsequently at any time. Nominations can be modified, and multiple nominees are allowed with a defined percentage of interest for each nominee.

TOOLS FOR ESTATE PLANNING

• Nomination: An effective method for bequeathing assets to specified legal heirs after the demise of the investor. SEBI has introduced changes in nomination, allowing up to 10 nominees to be registered.
• Successive Nomination: A proposed amendment to banking laws, allowing for the appointment of alternate nominees if the first nominee is not alive or unable to accept.
• Family Settlement: An instrument used to achieve peace and harmony in the family when there is a dispute or rival claims to property. It must be entered into voluntarily and in good faith.

Key Concepts in Family Settlement

• Advantages: Family arrangements are not treated as transfers, and hence capital gains tax will not arise. It is not treated as a gift, and the clubbing provision will not be applicable.
• Intra-family Business and Property Transfer: Transferring property among family members is common in India, but it may have tax implications. Issues like mortgage liability and other problems may arise during property transfer.
• Forms of Property Transfer: Common forms include joint ownership, gifting, and will/inheritance. Each has its own tax implications and requirements.

Estate Planning for Family Business

• Importance: Estate planning for family business is crucial, as only 70% of family businesses survive to the next generation. Effective estate planning can sustain a family business across generations.
• Strategies: Strategies include ownership transfer, partial sale, creation of a trust, and others. Each has its own advantages and challenges.

Forms of Family Business Ownership

• Types: There are five basic ownership structures in family business: owner-operator, partnership, distributed, nested, and public. Each has its own implications and trade-offs.
• Challenges: Choosing the right business model is important, as each has its own challenges and requirements. Families can move between models based on their business requirements.

Valuation of Family Business

• Importance: Valuing the business is crucial, especially when it gets transitioned to the next generation. It can be a significant asset of the owner's estate.
• Equitable Solution: Every business owner desires an equitable solution for the future succession of the business. However, equal does not necessarily mean 50-50, and valuation is necessary to ensure a fair distribution.

TOOLS FOR ESTATE PLANNING

• Estate Planning: A process of managing and distributing one's assets after death, considering the interests of beneficiaries and minimizing tax liabilities.
• Valuation of Business: A challenging process that involves determining the worth of a family business, considering factors such as cash flow, profitability, and capital needs.

Valuation Methods

• Capitalizing of Earnings: Values a business based on its cash flow and profitability.
• Projected Earnings: Uses the discounted cash flow method to value a business based on anticipated earnings.
• Market Approach: Analyzes the value of similar businesses in the market to determine a fair value.
• Net Asset Value: Considers the value of assets such as real estate or machinery in valuing a business.

Inter-Generational Wealth Transfer

• Challenges: Includes long court battles, sustainability of wealth, and tax liabilities.
• Tools: Succession laws, wills, gifts, and trusts can be used for inter-generational wealth transfer.
• Tax Efficiency: Gifts are a highly tax-efficient way to transfer immovable assets, with no tax liability within blood relatives.

Joint Tenancy and Tenancy-in-Common

• Joint Tenancy: A form of ownership where joint tenants have a right of survivorship, and the interest of the deceased tenant passes to the surviving tenant.
• Tenancy-in-Common: A form of ownership where there is no right of survivorship, and the interest of the deceased tenant passes according to their will or succession act.

Asset Protection

• Definition: A set of strategies, techniques, and laws used to protect assets from creditors.
• Factors: Identity of the debtor, identity of the creditor, nature of the claim, and nature of the asset determine the degree of asset protection required.
• Strategies: Using corporations, limited liability partnerships, asset protection trusts, and transferring property rights can protect assets from creditors.

Creditor Protection Period

• Importance: Enacted to expedite cases of creditor recovery and enforcement of security, reducing the time and complexity of civil court proceedings.
• Laws: Winding and liquidation under the Companies Act, and other laws related to creditor rights, aim to protect creditors from defaulting companies.

TOOLS FOR ESTATE PLANNING (Part 6)

• Introduction to Estate Planning: Estate planning involves the use of various tools to manage and distribute one's assets after death. This section discusses the key concepts and regulations related to estate planning in India.
• Evolution of Creditors' Rights: The evolution of creditors' rights in India has led to the establishment of various laws and tribunals, including the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and the Insolvency and Bankruptcy Code (IBC), 2016.

Key Concepts in Estate Planning

• Trusts: A trust is an obligation annexed to the ownership of property, arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another or for another and the owner.
• Indian Trust Act, 1882: The Indian Trust Act, 1882 is the governing law of trusts in India and is widely accepted internationally.
• Characteristics of Trusts: The key characteristics of trusts include:
  • Author or Settlor: The person who creates the trust.
  • Trustee: The person who manages the trust property for the benefit of the beneficiaries.
  • Beneficiary: The person for whose benefit the trust is created.
  • Trust Property: The subject matter of the trust.
  • Object of the Trust: The specific purpose for which the trust is created.

Types of Trusts

• Public Trust: A public trust is created for the benefit of the general public or a particular section of the public.
• Private Trust: A private trust is created for the benefit of specific individuals or families.
• Revocable Trust: A revocable trust allows the settlor to retain control over the trust assets and modify or terminate the trust during their lifetime.
• Irrevocable Trust: An irrevocable trust is one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed.
• Simple Trust: A simple trust is one in which the property is vested in one person upon trust for the benefit of another, and the nature of the trust is left to the construction of the law.
• Specific Trust: A specific trust is formed for the execution of some special purpose, and the trustee is required to exert himself in the execution of the settlor's intention.

Advantages and Disadvantages of Trusts

• Advantages:
  • A trust can be formed for the welfare of family members and relatives dependent on the settlor.
  • A trust can reduce the probabilities of litigations.
  • A trust can administer income to accommodate the settlor's wishes with respect to charitable distributions.
  • A trust can preserve wealth over a lifetime by providing a plan for accumulation and orderly distribution among heirs.
• Disadvantages:
  • The structure may be complex.
  • The trust can be expensive to establish and maintain.
  • The high cost of transfer in case of immovable properties, with variation in the rate of stamp duty payable across states.
  • There is no control of settlor over the properties transferred to the trust or gifted.
  • The powers of trustees are restricted by the trust deed.

Taxation of Trusts

• Discretionary Trust: A discretionary trust is a trust where the trustees have full discretion over the application of income and corpus of the trust to the benefit of the beneficiaries.
• Taxation: Discretionary trusts are taxed at the maximum marginal rate, subject to certain exceptions.

TOOLS FOR ESTATE PLANNING (Part 7)

• Definition: Estate planning tools include trusts, wills, and other instruments used to manage and distribute assets after one's death.
• Details: These tools help individuals plan for the distribution of their assets, ensuring that their wishes are respected and their loved ones are taken care of.

Exceptions to the Rule of Charging Income of a Discretionary Trust

• Exception 1: None of the beneficiaries has any other income above the threshold limit or is chargeable at a rate more than the maximum marginal rate (MMR).
• Exception 2: The trust is the sole trust created under a will for the support and maintenance of dependent relatives.

Determinate Trust

• Definition: A determinate trust is one where the beneficiary or beneficiaries are clearly specified in the trust deed, along with their specific or ascertained share in the property and income of the trust.
• Details: In a determinate trust, the trustees do not have discretion over the distribution of the income of the trust, and the distributions are made as per the specific ratio defined in the trust deed.

Types of Family Trust

• Public Trust: A public trust is one that is constituted wholly or partially for the benefit of the public at large.
• Private Trust: A private trust is one where the beneficiaries are defined and ascertained individuals.
• Public cum Private Trust: A public cum private trust is a trust where a part of the income is applied for public purposes and a part goes to private persons.

Family Trust versus Will

• Key Differences:
  • A will goes into effect only when one dies, while a trust is effective as soon as it is created.
  • A will directs who will receive property at death, while a trust can be used to begin distribution of property at death, before death, or after death.
  • A will covers property that is in one's name and is subject to probate, while a trust covers properties that are transferred to the trust and is not subject to probate.

Parties to a Trust

• Author or Settlor: The person who settles certain property upon trust for the benefit of the beneficiary.
• Trustee: The person in charge of managing the trust.
• Beneficiary: The person for whose benefit the confidence is reposed by the settlor and accepted by the trustee.

Hybrid Trust

• Definition: A hybrid trust has the features of both determinate and discretionary trusts.
• Details: In a hybrid trust, the trustee pays a certain amount of the trust property to the beneficiary as provisioned by the settlor in the trust document, and the remaining property is distributed at the discretion of the trustee.

Cancellation and Revocation of a Private Trust

• Revocation: A trust can be revoked by the settlor, and in some cases, by the beneficiaries with their consent.
• Extinction: A trust becomes extinct when its purpose has been fulfilled, or it has become unlawful, or it has become impossible to carry on its purpose.

Trust Structure for Tax Efficiency

• Public Trust: The taxation of a charitable trust is governed by Chapter III of the Income Tax Act.
• Private Trust: The income of a private trust is taxed at the income tax slab rate or at the maximum marginal tax rate, based on the structure of the trust.
• Taxation of Revocable Trust: The income of a revocable trust is taxable in the hands of the transferor, unless the trust is not revocable during the lifetime of the beneficiary and the transferor derives no direct or indirect benefit from the income.

Assessment of Business Income of Trust

• Section 161-1(A): Deals with the business income of a trust, which is taxed at the maximum marginal rate, unless certain conditions are met.
• Exemptions: Available for trusts declared by a person by will, exclusively for the benefit of a relative dependent on them for support and maintenance.

Clubbing of Minor Income

• Section 64: Deals with the clubbing of income of a minor child with the parents, unless certain exceptions apply.

TOOLS FOR ESTATE PLANNING (Part 8)

• Introduction to Estate Planning: Estate planning involves the transfer of assets to beneficiaries, and trusts are a key tool in this process. Income from a minor child is taxable as per their income tax slab rate, unless the child has a disability specified under section 80U.
• Taxation of Trusts:
  • Discretionary Trust: A discretionary trust is chargeable to income tax at the maximum marginal rate (MMR), with some exemptions available.
  • Trust for Deity: A trust can be made for the benefit of a deity, and the deity is considered the legal owner of the estate.
• Trust Structure:
  • Role of Settlor: The settlor has a limited but fundamental role in creating a trust, and their role is limited to creating the trust and setting its objectives.
  • Objectives of Creating a Trust: A settlor may create a trust to exercise control over assets, safeguard assets from creditors, create a legal framework for family assets, bypass the probate process, or explore offshore business opportunities.
• Trust Perpetuities:
  • Restrictions on Perpetuity: The Indian law restricts the perpetuity period within which gifts in a trust must vest, or the period during which trust income can be accumulated.
  • Exceptions: There are exceptions to this rule for transfers of property for the benefit of the public, such as charitable bequests.
• Trust as a Pass-through Entity:
  • Definition: A pass-through entity is a medium through which income or transactions flow, and a trust structure fits into this definition.
  • Taxation: In a private trust, the receipts by the trust/trustee on behalf of the beneficiary are not taxable, and the income of the beneficiary is taxable.
• Stamp Duty and Capital Gains Tax:
  • Stamp Duty: Stamp duty is levied on the instrument of transfer, and the actual stamp duty is decided by the state Stamp Act.
  • Capital Gains Tax: The trust being a pass-through entity enjoys the benefit of no capital gains in certain situations, such as the transfer of assets to an irrevocable trust.
• Offshore Trusts:
  • Definition: An offshore trust is a trust formed outside India and under the laws of another country.
  • Taxation: The residency of an offshore trust is determined by the trust law under which it comes into existence, and the taxation of an offshore trust depends on the type of trust and the residency of the beneficiaries.
• Distributable Net Income (DNI):
  • Definition: DNI is the portion of the income that is allotted to the beneficiaries, and it is considered as the income of the beneficiary and is taxable.
  • Calculation: The formula to calculate DNI is: DNI = Taxable Income - Capital Gains + Tax Exemptions.

TOOLS FOR ESTATE PLANNING (Part 9)

• Taxable Income Calculation: To calculate taxable income, add interest income, dividends, and capital gains, then subtract fees and tax exemptions.
• Distributable Net Income (DNI) Calculation: Use the taxable income figure to calculate DNI by subtracting capital gains and adding exemptions.

Guardianship

• Definition: A legal process establishing who will care for a person unable to care for themselves or others.
• Types of Guardians:
  • Guardian of the Person: Responsible for the person's custody and care.
  • Guardian of the Estate: Responsible for managing the person's financial affairs.
• Responsibilities: A guardian has fiduciary duties, including making decisions on healthcare, legal matters, and financial issues, always acting in the best interest of the person under guardianship.
• Types of Legal Guardianship:
  • Natural Guardian: Parents are natural guardians of their child until the child reaches 18 years of age.
  • Guardian appointed by Court: The court appoints a guardian for individuals who are incapacitated and unable to make responsible decisions.
  • Testamentary Guardian: A guardian appointed under the provisions of a Will, often for minor children.

Powers of Attorney

• Definition: A legal document granting one person (the agent or attorney-in-fact) the power to act on behalf of another person (the principal).
• Parties to Power of Attorney:
  • Donor (Principal): The person granting the power.
  • Donee (Agent): The person receiving the power.
• Types of Power of Attorney:
  • General Power of Attorney: Broad authorization for the agent to act on behalf of the principal.
  • Special Power of Attorney: Narrow authorization for the agent to act only for a specific transaction or matter.
  • Special Power of Attorney for Registration: Authorization for the agent to present a document for registration.
• Revocation of Power of Attorney: A principal can revoke a power of attorney, with conditions specified in the Indian Contract Act, 1872.
• Limits of Power of Attorney Holder: The agent's power is limited to the terms of the document and can be held liable for fraud or negligence if they act outside these terms.

TOOLS FOR ESTATE PLANNING (Part 10)

• Power of Attorney (POA): A legal document that grants an agent the authority to act on behalf of the principal in financial or personal matters. The agent's powers can be limited or unlimited, and the principal should carefully consider these limitations when creating the POA.
• Risks Involved in POA: The agent may make poor financial decisions, choose undesirable medical care, or terminate the agreement at any time, highlighting the importance of carefully selecting an agent.
• POA Executed Abroad: Non-resident Indians (NRIs) can execute a POA for matters related to banking, property, or other issues in India without being physically present in the country. The POA must be authenticated by the Indian Embassy, Consulate, or notarized where it was executed.
• Authentication and Embossing: The POA must be authenticated and embossed by the concerned lawful authority in India, with necessary charges paid, before it can be used.

Caselets

• Case 1: Contesting a Will: Any living brother, sister, spouse, or children of deceased brothers or sisters can contest a Will during the probate process. The court will issue notices to all legal heirs, and they can object to the grant of probate.
• Case 2: Taxation of Trust Income: The trustee is responsible for paying taxes on the trust income. The tax payable is calculated based on the net annual value of the trust property, and the tax rates applicable to the beneficiaries.

Module-end Questions

• Taxation of House Property: The rent received from a house property transferred to a daughter-in-law by her father-in-law is taxable in the hands of the daughter-in-law.
• Dying Intestate: A person is deemed to die intestate if they have not made a valid Will or have not disposed of their property through a testamentary disposition.
• Relationships: Two persons related by blood or adoption, wholly through females, are considered cognates.
• Class I Heir: According to the Hindu Succession Act, a son of a predeceased daughter is a Class I heir.
• Married Woman Property Act: The beneficiaries of life insurance bought under this act can be the wife alone, the child/children alone, or the wife and children together.
• Basic Legal Instrument: A Will is the most basic legal instrument of all estate plans.
• Testator: The person who prepares a Will is called the testator.
• Revoking or Altering a Will: A Will can be revoked or altered by the testator through a codicil.
• Probate: Probate is the process of registering a Will, which involves verifying the Will's authenticity and granting permission to the executor to carry out the testator's wishes.
• Forming a Trust: A trust requires a minimum of two parties: the settlor (who creates the trust) and the beneficiary (who receives the benefits of the trust).