By Mehjabeen Haider and Shraddha Ray Menon
Steve Jobs famously stated, “death is the destination we all share, and no one has ever escaped it.”
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In India, succession planning is complex and mostly overlooked, unless your family business(s) is growing and you want to conserve personal assets. But succession planning is for all. Here is a close look at legal tools available. For succession planning, conserving personal asset, eliminating conflict between legal heirs and contributing to growth in the estate- it is imperative.
Succession and Personal Asset planning and why is it important?
Succession and Estate planning arranges for transfer and bequeathing of individual’s self-acquired and inherited property, after death.
This bequeathing and transmissions requires legal documents like Will and/or, Memorandums of Family Arrangement, Trust Deeds etc. prepared. The state intestacy laws apply to these arrangements.
In family succession planning, the movable and immovable property devolves on the legal heirs as per succession laws. Structured succession plans control the manner and extent of benefit the inheritors will receive, provide efficient tax structures preventing loss of estate in transfer.
What constitutes Personal Property?
Personal Property consists of all self-acquired property owned by the deceased which can be distributed through Will, Trust or intestacy laws. An estate may contain both real property (real estate, including houses and investment properties) and personal property (all other property, including bank accounts, securities, jewellery and automobiles). These can include Real Estate, Bank Accounts, Vehicles, Stocks and Bonds, jewellery, Antiques, Paintings; Life Insurance and Retirement Plans, Pension Plans; Wages and Business Interests; Intellectual Property; Debts, Judgments and receivables.
What are the means of securing and structuring personal wealth?
Will
Property of deceased legally devolves in two ways, according to his Will i.e. testamentary, or according to the respective laws of succession, in case of the person dying intestate.
The most common means succession planning is through a Will. A Will[1], provisioned under the Indian Succession Act, 1925 helps ensure one’s property devolves as wished, the correct heirs receive their fair shares and the division does not happen as per law instead happens as per the wishes of the person. Only self-acquired property can be bequeathed by a Will.
Being a legal declaration of the intention of the testator, a Will is an effective tool for distribution of self-acquired property. If a person passes away without a Will, dies intestate, then laws of succession come into play.
Family Trust
A non-charitable, irrevocable and discretionary family Trust formed under the Indian Trust Act, 1882 is efficient to ring fence personal property against misuse, premature liquidation and pilferage.
The disadvantage is, the property is owned by the Trust and even in event of an agreement between the inheritors, the Trust cannot be dissolved. Individual control over the assets is not possible.
A family trust protects vulnerable beneficiaries who may make unwise spending decisions or be prone to unwarranted influence. The Family Trust allows the settlor to progressively transfer his assets to the Trust, whereby legally the settlor can remains the owner of the asset, but through the Trust, beneficiaries get the benefit flowing from the asset.
Family Trusts can be set up during the lifetime of the concerned person (by a declaration of Trust contained in a Trust Deed) or post death, under instructions in a Will.
Gift
A gift under the Transfer of Property Act, 1882 (section 122), is a voluntary transfer of immovable property. Generally, the donor of the gift must intend to gift the property, deliver the gift and the gift must be accepted by the intended recipient, the donee.
Gift of immovable property must be effectuated under a proper document signed by the person gifting and attested by 2 witnesses; register the document with the Sub-registrar; Stamp Duty and registration charges paid; Income tax paid by the person receiving the gift if the total gift received in one year exceeds, INR 50,000/-. But gifts between certain class of close relatives is exempt from any income tax;
Memorandum of Family Arrangement or Settlement Agreement
A Family Compromise Agreement, if adequately stamped, is a legal document recording statement of all family members agreeing on common terms of division of estate and a process to be followed for foreseeable disputes relating to the estate or other matters. Such a document to be leaglly binding and enforceable, requires participation and attestation from all family members of free will and not coerced or created through fraud. If immovable property is being transferred / conveyed through this then it is drafted like a property deed and is required to be stamped and registered with the government authorities[2] as per the Registration Act.
A big dvantage of a Family Arrangement is, it can include a triage for family dispute resolution, it can set up family committees and councils for resolving differences and reduce the chances of legal disputes after the death of the testator.
Is Will a must?
No, there is no law requiring individuals to prepare a Will.
However, if there are more than one inheritor or if there is a specific desire around how the estate/ wealth should be utilised after one’s death then it is advisable to use one of the documentary tools mentioned above for distribution of the wealth. The easiest document is a Will which allows control on division, management and conservation of assets. Without a Will, the wealth will be divided equally to the legal heirs as per law.
Wills, reduce the burden of estate taxes. The amounts that are bequeathed to beneficiaries or heirs is not counted towards final estate tax accounting. In India, registration of Wills is not compulsory registerable document under section 17 of the Registration Act, 1908. But if one chooses to register, it is placed in the safe custody of the Registrar and cannot be tampered with, destroyed, mutilated or stolen.
Wills can be modified and changed multiple times in one’s lifetime, so long as they are signed by the testator and have 2 witnesses, they are considered legally fit. A probate has to be obtained from the applicable courts for administration of a Will.
What are Trusts and what benefits do they offer?
Private family Trusts may be set up either inter vivos i.e., during a person’s lifetime, or under a Will i.e., testamentary Trust, either orally or under a written instrument, where the subject matter of the Trust is immovable property, it requires to be registered as a written instrument.
Trust is a written document that places designated assets into custody of the Trust for benefit of the testator and/ or the beneficiaries on the Testators death. The Trustees are responsible for managing the Trust assets and ensuring the management and transfers as per the desires of the testator.
Trusts do not require probate unless it is created under Will. Probates can be expensive, time-consuming, and extremely public in nature. Administration of a Trust following a decedent’s death allows a faster distribution of assets.
How does Succession planning help?
Succession planning is integral today because it offers prevention of wealth erosion, helps in providing adequately for inheritors in case of adversity, furthers wealth creation, instills sense of having enough, parents are in a better position to see children in equal light and prevent family feuds, offer efficient estate tax management.
In India, the Raymond Saga, where Dr. Singhania gifted his share of holding in the Raymond Group to the youngest son Gautam in 2002. Which led to a publicly humiliating legal duel between the father and the older son. It is an example of not undertaking well-structured succession planning.
What are the laws which impact wealth management?
In intestate succession the person passes away without recording any desires of disposal of his assets post his demise. In such a case, the inheritance is based on the rules of succession as specified in law, depending on the Mitakshara or the Dayabhaga schools in case of Hindu families, a separate legislation governing Hindus including Buddhists, Jains and Sikhs was enacted in the year 1956 namely the Hindu Succession Act, 1956.
Muslims have their own textual law of inheritance as per the Sharia Law while Parsis, Christians and the persons whose marriage is solemnized under the Special Marriage Act, 1954 are covered under the Succession-Act.
A private Trust under the Indian Trusts Act, 1882, and the Companies Act, 2013 can nominate a person who holds importance although the laws of succession have prevalence over it. The provisions of the Income-tax Act, 1961 apply to such planning, taxation benefits would not accrue if the shares are transferred to the legal heirs. India does not impose inheritance tax as on today.
How long does it take?
Structuring the plan
Succession Planning is of utmost significance today but, it can be a time-consuming process involving manifold steps and phases.
- It initiates with the owner of the Personal Property identifying and acknowledging the need for estate planning;
- Appointing legal advisors;
- Structuring the estate planning, an inventory of all the personal property (consider, time to collate all information and documents), identify ownership of personal property;
- Ascertain the proportion of devolution, with inter-generational effects these should not be hasty;
- taxation efficient models and devolving tools.
Execution
Structuring the estate and execution may have a considerable a gap.
- It only begins at the death of the owner of the personal property unless the testator has put the property under a Trust in his lifetime. In which case the Trust creation can be initiated.
- Application for Probate can be made within seven days of the death of the Testator. The law of limitation applies to Probates / Letters of Administration which have to be filed within three years.
- The grant of Probate takes about 9-10 months.
If the Will held a time specific direction around its devolution then that time will act as the duration one has to wait for. Even a Trust, if formed for a specific purpose it will continue to run as a part of the execution of the deceased’s Will.
What are the typical cost heads?
Succession planning requires careful assessment of myriad considerations, such as the nature of estate (composition and location), family type (nuclear, joint or hybrid), and potential cost outlay (taxation, registration fee, court fee, consultancy fee, and stamp duty) in order to achieve the objectives in an efficient manner.
Court fee
- This depends on the jurisdiction where the estate and succession plan takes effect. Typically, it could be the one where the deceased resided or owned immovable property;
- Court fees on probate petitions are computed ad valorem. Therefore, the fees payable are a certain percentage of the value of the estate inheritable under the Will under probate with a maximum cap in a few States.
Stamp Duty
- Transfer of immovable properties to a Trust attract stamp duty, this will have to be added to the cost of such transfer.
- Transfer of property under a Will does not attract stamp duty.
Taxation
- In general, moving to a Trust structure is taxation agnostic, i.e., no tax advantage or an additional tax under the Income-tax Act, 1961. However, income earned by the Trust, a specific Trust’s tax is determined as an aggregate of the tax liability of each of its beneficiaries on their respective shares. If it is taxed once, the income should not be taxed once again when distributed to the beneficiaries.
- Instances of tax planning.
In the proviso to section 56(2)(x)[3], the law grants exemption for sums of money or any property received “from an individual by a Trust created or established solely for the benefit of relative of the individual”.
Gift up to Rs 50,000[4] a year is not assessed to any tax irrespective of who gifts the money.
Consultancy fee
- Fees of legal and financial advisor for creating an efficient plan.
What are the major issues?
Succession and Estate planning have certain conciliation challenges since it includes family and laws of inheritance. Individuals having discrepancies with the division of the estate is always possible.
It can be overwhelming and tiresome process since it involves a lot of legalities and technical aspects, it is advisable to take guidance of lawyers and financial advisors for efficient execution.
Families often may have disputes and may lack alignment and agreement, which sometimes result in challenging the Will, or even challenge the grant of Probate.
The Indian Succession Act, 1925 confers on persons with an “interest” in the estate of the testator right to challenge the validity of the Will, the right to file a caveat against the grant of probate.
This right is available to any individual with a “caveatable interest“. While the Courts have expressed conflicting views on the interpretation of the term, the common understanding is that anyone with even the slightest interest in the estate of the testator, or anyone whose rights are prejudiced by the grant of Probate, is considered to have a caveatable interest and is entitled to oppose such a grant.
However, in Bharat Kumar Amritlal Sayani & Anr. v. Jayantilal Kalidas Sayani & Ors[5], the High Court of Calcutta did recognize that it is legally permissible to waive the right to challenge a Will.
Covid-19 & Succession Planning
COVID-19 is a clear and present danger. However, the outbreak represents a terrifying truth. Human life is fragile and vulnerable to threats. This is our uncomfortable reality.
The pandemic, in no unambiguous terms, has highlighted the importance of succession planning as a risk management imperative. The pandemic will hopefully soon abate, but your succession planning will have multi-generational ramifications.
[1] Indian Succession Act 1925
[2] Section 17 of the Indian Registration Act
[3] Income Tax Act, 1961
[4] Income Tax Act, 1961
[5](2012) 1 CALLT 234 (HC).