Plan the estate you want to protect

What is an estate plan? 

The primary goal of estate plan is to protect, preserve and manage one’s assets during and post one’s life. Harmonious and planned succession of estate helps to ensure that the money and assets go to the people one chooses. Without an estate plan the assets are passed on according to religion based succession laws. While a Trust and Will are important tools to any estate plan, the key is to actually have a coordinated, thought-out plan for ones assets, personal care, and future.  Once an overall plan is developed, then the necessary documents can be drafted to put that plan into action (such as creating a Trust and Will).  Estate Planning is thus a process by which an individual designs a strategy and executes a will, trust or other documents to provide for the administration of his or her assets upon his or her incapacity or death. Tax and liquidity planning are essential parts of this process.

Need for Estate Planning

Creating a proper estate plan may be the most important thing one can do to protect his assets and the family. An estate plan has numerous benefits, both during and after death. First, during the life, the plan provides a predetermined diagram of who will oversee the assets and how such oversight will take place in the event of incapacity. Without such a plan, the well-being of oneself along with the assets would be left to the determination of the Courts.

Additionally, after death, a proper estate plan provides for ones loved ones by setting out in an orderly, predetermined manner how his or her assets will be held, administered and ultimately distributed. Such an estate plan can provide for the family without putting them through costly and time-consuming court intervention. However, time is of the essence, because one must plan during one’s lifetime and while he or she still has the capacitation to do so. Serious accidents or illnesses may occur at any time and when least unexpected, so it is never too late on creating an estate plan to fit your needs. 

Modes of Estate Planning

Power of Attorney

During one’s life time Power of Attorney is a legal arrangement which authorises another person to act on one’s behalf.  There are two types of power of attorney: (i) general or financial power of attorney which enables another to manage assets and money and (ii) specific power of attorney for example medical power of attorney authorising another who will take health care decisions if one is not able to take them by himself /herself.

Will

Is the traditional way of passing assets either earned or inherited from ancestors to one’s future generations according to one’s wish. The term ‘Will’ is defined under Section 2(h) of The Indian Succession Act, 1925 and means the legal declaration of the intention by which a person, the testator, names one or more persons (executors) to manage his estate and provides for the transfer of his property at death to the named persons (beneficiaries). A well drafted Will enables an individual to make bequests to cater to specific need of one’s family for example make extra provision for differently abled child, choose a guardian for his/her minor children or provide for children from previous marriage or bequeath assets to dear friends or faithful servants or give to charity. 

It is imperative to make a properly written and legally binding Will to avoid the risk of contest thereby leaving family with nothing but a legacy eaten away by legal bills or unnecessary bitterness. A Will to be a valid one needs to satisfy the following conditions:

• The will must be in writing made by a person who is a major, of sound mind and with free consent;
• The will must be dated and signed by the testator or by some other person in the testator’s presence and at his direction;
• The will must be attested by two or more persons (preferably one of whom may be a notary public and second one a doctor) provided that the attesting witnesses and their spouse are not beneficiaries under the will;
• The document must be a declaration of intent of the testator with respect to his property;
• The document must specify that his intent should be carried out after the testator’s death;
• There must be a disposition of property under the document. The Will should clearly set out the properties intended to be transferred and should also set out that the document has been executed without coercion or undue influence or importunity;
• Will could be a very personal document and showcase an individual’s love, care opinion and feelings towards loved ones. An individual may even disinherit his or her natural heir. Case laws indicate that where one of the natural heirs is to be disinherited, the testator must set out clear reasons as to why the testator wishes to disinherit such individual;
• Registration of will is optional;
• Will written by hand on plain paper is valid and does not have to be on stamp paper.

Trusts

The trust as a vehicle to conduct business and manage succession is also becoming a preferred choice, since it dispenses with probate or any potential litigation that may arise out of a Will. A trust may be used instead of a Will to transfer assets where direct or immediate transfer is not possible due to certain reasons and the purpose is to protect interest of beneficiaries. It is a potent means of transferring wealth within the family in situations where the transferor has substantial assets or complex family affairs and businesses. It enables business families to manage the business through professional experts to protect the business and at the same time provide for the needs of all the family members.

Besides asset protection, forming trusts is a preferred option (a) for safeguarding the interests of family members, especially those with special needs, of children, grandchildren and great grand children and protect against future incapacity and for incapable beneficiaries, (b) person making the trust can be beneficiary and enjoy benefit of his own estate during his lifetime, (c) management of all types of assets through expert advisors and attaching conditions to gifts, (d) avoiding family disputes over the property, (e) lower contestability as compared to Will by avoiding the probate process while ensuring succession from one generation to another, (f) giving future generation the benefits of family wealth without losing control over key assets,  (g) achieving tax efficiency and (h) bankruptcy remote structure.

Trusts in India are governed by the provisions of the Indian Trusts Act, 1882. A Trust as per the Indian Trusts Act is “an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another, or of another and the owner”

Creating a trust establishes a legal entity that holds property or assets for the person who created it. The person who creates the trust is called a settlor. When the settlor creates the trust he or she appoints a person or entity (like a trustee company) to manage the trust. This person or entity is called a trustee. The settlor also chooses someone who will ultimately benefit from the trust, called a beneficiary.

Trusts can be either as (i) revocable (can be revoked (cancelled) by its settlor at any time during this life); (ii) irrevocable (this trust will not come to an end until the term/ purpose of the trust has been fulfilled); (iii) discretionary (where the trustee may choose, from time to time, who among the beneficiaries is to benefit from the trust, and to what extent); (iv) determinate (where the entitlement of the beneficiaries is fixed).

The choice of the type of trust depends on the objectives that the settlor wants to achieve. For example, an irrevocable discretionary trust is a choice for asset protection; a revocable trust is used when the settlor does not want to give up control on the asset settled. However, the tax implications for each kind of the trust would have to be considered keeping the needs and desire of the testator and his/her family. It may be noted that the revocable trusts don’t receive the same tax shelter benefits as irrevocable ones do.

Gifts

Gift is another mode through which the disposition of wealth can be made to the legal heirs. One of the important conditions, however, to be kept in mind is that the gift has to be made during the lifetime of the donor. Executing a gift deed or release deed instead of Will or trust may be a viable option to pass on immovable property situate in some Indian states taking advantage of reduced stamp duty applicable in case of release or gift to near relatives.

Estate plans are therefore, vital for everyone, whether you have a large or small estate, rich or poor. With proper, judicious and well thought planning, would thus not leave ones’ family members unprotected.

The contents hereof should not be construed as legal opinion. This provides general information existing at the time of preparation. It is recommended that professional advice be taken based on the specific facts and circumstances.