When it comes to estate planning in India, people are of the notion that it is meant for only the rich and the wealthy, who own huge assets or have a big family business in place. Well, this is not true!
Estate planning is needed by each and every person who owns any asset (even liability) and wants to distribute it as per his/her wish. It doesn’t matter what the quantum of assets is.
Others believe that they do not need estate planning because they have already done the nomination in all the assets. After all, the nominees would be the beneficiaries of the assets, in their absence. Well, this is again not true!
Nominees are not the owners of the assets. They are only the trustees of your assets whose responsibility is to distribute them to the legal heirs according to your Will or as per the succession laws, in the absence of a Will. (Also Read: How Nominations and Will can help in estate distribution)
People mostly ignore or postpone estate planning, with the thought that it is a daunting exercise or considering it as a job for the later part of life.
In this article, we will discuss the basics of estate planning in detail. We will look at estate planning meaning, the importance of estate planning, methods, benefits of having an estate plan in place, and some other frequently asked questions.
What is Estate Planning?
Simply put, estate planning is the process of clearly defining how you want your estate to be distributed after you are no longer around or become incapacitated and are unable to handle things on your own.
It is basically the process of passing on the accumulated wealth of an individual to the next generation as desired by him/her. It involves estate protection, management, distribution, and legacy.
The estate includes all the assets and liabilities that you possess. For instance, jewelry, car(s), property, financial assets like- bank deposits, mutual funds, shares, PF corpus, life insurance proceeds, or any other valuables for that matter.
The main tools to carry out this process are – Will, Trust, Power of Attorney, etc.
Why is estate planning important?
In the event of intestate death or death without any will, the estate of the concerned person would be distributed to his/her legal heirs as per the Indian succession laws applicable. (Read: How wealth is distributed in case the person dies without writing a Will)
Distribution this way may not be happily acceptable to every family member. This might lead to disputes among them and other legal complications. It will not only deteriorate the family name but hamper the peace and harmony among the family members as well.
To avoid such a horrible situation, it is imperative for you to have a well-drafted estate plan in place. This will ensure that each and every family member will get his or her respective share out of your estate as desired by you. And this would be legally binding on them to follow.
Not only death, but estate planning will also help you prepare for unforeseen exigencies like- incapacitation, etc. It is the situation when you are incapable of making decisions due to any physical or mental condition.
Your estate plan can help communicate the way you want your estate to be managed, the persons who would be responsible for its management, etc. to the family members. In addition, it can also make known to them the desired health care, or the persons responsible for making health-related decisions for you.
So, it is advisable to start thinking of estate planning when you are young and capable rather than waiting until old age.
How to do Estate Planning in India?
Estate planning in India is a process carried out primarily using two ways:
By Writing a Will:
A Will is a legal document stating the intention of the testator (the person who is writing the will) to distribute his/her assets as per his/her desire after his/her death.
Any person above 18 years of age in India can write a Will. You can write your Will on plain paper and there is no specific format to it. However, it is important to note that it should be written in a simple, clear, and unambiguous language to avoid any confusion. The objective of the Will should be clearly stated. (Read: How to write a Will in India- step-by-step guide)
Once the writing of the Will is complete, the testator needs to sign it and mention the date and place of writing the Will. Apart from this, the Will should also be signed by two witnesses confirming that it is signed in their presence. These could be anyone other than the Will beneficiaries. Without Witnesses, a Will would have no legal meaning. It will be considered VOID.
The video of the testator reading his Will himself may also be recorded. It will serve as additional proof of the validity of the contents of the Will.
Upon the death of the testator, the executor (the person appointed by the testator to execute his/her Will) will divide the assets between the beneficiaries as mentioned in the Will.
Also check- Role of Will in Estate Planning and Benefits
By Creating a Trust:
No doubt, writing a Will is a good tool for estate planning in India. But, many instances of the Will getting challenged in the court came to light. To avoid such a situation, creating a trust can be beneficial.
In this, the assets are transferred by the person who creates the trust (settlor or the author), into a Trust that is managed by the trustees for the benefit of the beneficiaries. The document through which the trust is created is called a trust deed.
A trust created for the benefit of family or friends is called private trust and the trust created for the benefit of the general public is called public trust. (Read: How private trust can help in the protection, management, and distribution of the estate)
The author of the trust should clearly state the objectives of the formation of the trust, the beneficiaries, and the way the assets need to be managed.
Trust created within the lifetime of the author (living trust) helps him/her retain the control of the assets and ensure that these are not only managed well but would also be transferred to the beneficiaries as per his/her desire.
Creating trust will not only help in the management and distribution of assets but in the protection of assets too. Assets lying in the private or family trust cannot be held by creditors towards the settlement of the debts or loans, thereby safeguarding them from the claims. (Also Read: Creditor proof instruments)
Unlike in Will, there is no requirement of obtaining probate in a trust. So, it would also help in cost and time savings avoiding the hassles of visiting the courts.
A trust can also be formed through a Will which comes into effect after the demise of the settlor (testamentary trust). This can be undertaken from a tax planning perspective by creating different tax files in the name of family members.
Estate Planning Checklist – Essentials before Writing a Will:
Before writing a Will, make sure that you have ticked all the items in the below mentioned Estate Planning Checklist:
✔ Identifying the person responsible for executing the Will (executor). He/she can be any of the beneficiaries or a third person. In the case of a minor child- identify the guardian(s).
✔ Identify the two witnesses who agree to sign the Will. They should be persons other than the beneficiaries.
✔ Make a list of all the beneficiaries or legal heirs with their age and date of birth.
✔ List down all the moveable and immoveable i.e., physical and financial assets along with all the available details.
✔ Enlist the loans and advances taken with outstanding amounts, on which asset, and the bank account from which the EMI is deducted.
✔ You should be clear in your mind about how you want to distribute all the assets and the manner you want the liabilities to be disposed of.
Also Check- Ensure your family’s secure future- write a Will
Benefits of Estate Planning:
Estate planning in India is an important aspect of the financial planning process. Doing it the right way will not only help in distributing your assets as per your wish but curb family disputes as well. The benefits of estate planning are listed below:
- Estate planning helps in the hassle-free distribution of your estate as per your wish. You may choose whom you want your assets to be distributed and in what proportion, when you are not there. In the absence of an estate plan, your estate might get distributed among your legal heirs as per the applicable succession laws in a manner not desired by you.
- Estate planning reduces the chances of family drifts and disputes after your demise. A clearly stated estate plan would ensure what each family member is entitled out of your estate, lowering the sense of dissatisfaction among them. Also, they may not have to face any legal challenges, court cases, or indulge in tedious paperwork to get their entitled share.
- Through proper estate planning, you can make provisions for the financial security of beneficiaries with special needs, minor children, etc. (Also Read: Why obtaining legal guardianship is important for special needs children?)
- You can also plan for certain unforeseen exigencies like- physical or mental incapacitation in advance stating the desired health care and the person responsible for making health-related decisions on your behalf.
- Tax planning can also be done through estate planning in India. By distributing the assets to your family members, you can create separate tax files and divide the tax outgo accordingly. (Also Read: How family can help you save income tax?)
- Estate planning helps in minimizing the costs of the transfer of assets to the beneficiaries.
10 common FAQs on Estate Planning in India and Wills:
An estate plan, once created, is not a permanent one. You should review it at least once a year and make the necessary changes (if any). In certain specific situations too, it is imperative to review or update your estate plan:
– Changes in family structure- birth, death, marriage, divorce of any of the beneficiaries.
– Acquired a new asset or taken a new loan.
– Substantial changes in the type of assets.
– Started a new business.
– Change in residential status of the testator or any of the beneficiaries.
– Changes in tax or succession laws.
There is no right age to make a Will or do estate planning. The earlier you start thinking about it, the better it is.
Registration of Will is optional. No one can question the genuineness of the Will, even if it is not registered. However, it is recommended to get the Will registered with the Registrar/sub-registrar in a local court to avoid any sort of legal hassles for the family members in the future.
To get the Will registered, the testator along with the two witnesses should visit the registrar/ sub-registrar’s office in a local court. He/she should submit the required documents along with the registration fee. If the registrar/ sub-registrar is satisfied, a certified copy of the Will would be issued and an entry would be made in the registrar’s office regarding the same.
No, the job of the witnesses is not to verify the contents of the Will. They just have to validate that the testator has signed the Will in their presence. They may be called by the court at some later stage to validate the authenticity of the testator’s signature (if required).
Yes, you may mention in the Will whom you want to give the authority to access your online accounts like- email accounts, social media accounts, visual and audio graphics, documents, etc. post demise.
You can change your Will any number of times you want. Ensure that you have mentioned on the new Will that it supersedes the previous one. By default, the latest Will would be considered the final one. All previous Wills would be considered invalid.
The Will should be kept in a safe place preventing it from getting tampered with, stolen, misused, or destroyed. The executor should know where the Will is kept so that he/she may take the appropriate action when the time comes.
There are many companies offering this facility. Online Will writing is a quick, easy, and cost-effective way of writing a Will when the estate is not that complex. But remember, you may not be getting any specific personal touch and any advice here.
Just you need to fill in a predefined format, and the system will generate a document for you. It would be wise to make an informed decision. It is advisable to take professional help if the estate is large and involves complexities.
A Will is always revocable. An irrevocable Will is considered Void.
As I always say, financial planning can never be complete without doing proper estate planning. If you have done the financial planning right, estate planning will not be a very difficult task for you.
So, it would be wise to stop procrastinating and take action. A well-drafted estate plan would be the best gift you may leave for your loved ones. It is essential for your peace of mind too.
After all, financial troubles, legal hassles, and confusion would be the last thing you want for your family in times when they are already in a state of emotional grief.
If you think that it’s a daunting task, involving various complexities and you cannot do it on your own, do not hesitate to take professional help to make sure you have done things correctly.
This Article is written by Mr. Varun Baid, CFP Professional
What is the benefit of creating a family trust (private trust) because all the incomes of the Trust are taxed at the marginal rate whereas the individual may be taxed at the lower slab thereby eroding the wealth and income generation capacity of the Trust. Yes, the Trust is creditor proof and that’s a big advantage to a business person who may have some creditors. But if creditors have a lien on any of the assets of the Trust, then, Trust cannot dispose off that asset.
Dear Mr. Kamal Garg,
The taxaton of a trust depends on the structure you create i.e. specific or determinate. In certain structures like specific trust the income generated by the trust is taxed at beneficiary level while in some at maximum marginal rate. Even then there are certain exmeptions available. The benefits of creating a trust cannot be analyzed based on the taxation of the income generated by the trust. One need to understand the provisions available and then see what structures can be created which can help in reducing tax liability.