Clipped from: https://economictimes.indiatimes.com/
Many people who undertake estate planning go for a will, but there are other ways beyond writing a will. However, in most cases, a will leads to rivalry among beneficiaries. This can be avoided by setting up a trust.
People, throughout their lives, work hard to create assets for their loved ones. But they don’t plan the way the assets should be passed on to the next generation. What will happen to these assets on your unexpected demise? This is the concern for most people amidst this pandemic. So, estate planning comes to the picture. It is not only meant for the ultra rich but for everyone. This is not a post-retirement or post-demise exercise. Everyone should be ready for contingencies and prepare well in advance. So, with estate planning, devolution is well managed.
An estate is all of the property a person owns or controls. The property in one’s estate may consist of financial assets (e.g., bank accounts, stocks, bonds, or business interests), tangible personal assets (e.g., artwork, collectibles, or vehicles), immovable property (e.g., residential real estate, tea/timber rights), and intellectual property (e.g., royalties). In India, growth of estate planning is moving upwards. More and more people have a well-prepared estate plan. This is due to increased purchasing power, awareness, life expectancy, concerns about retirement, among many others. But the number is still low as compared to most of the developed countries. Nuclear families, procrastination, lack of trust in the financial planner are the main reasons for the low rate of growth. There is a low penetration of portfolio managers and estate planners.
Many people who undertake estate planning go for a will, but there are other ways beyond writing a will. A will is a unilateral legal declaration wherein the testator (creator of the will) declares his/her intention concerning his/her assets. It comes into action after the death of the testator. But changing a Will becomes difficult if the testator becomes physically or mentally challenged. In most cases, a will leads to rivalry among the beneficiaries. This hassle can be avoided by setting up a trust. Trust can be private or public. A Trust is used as a tool to minimize estate tax during transfer. It can also be used as a shield or a firewall which allows us to separate the assets. If the person goes bankrupt or faces other financial crisis, then the lender cannot touch the assets which are held within the Trust. Will requires an attorney and there is a delay in the distribution of estate but with trust, there is no probate process. Will is totally public and court controlled while trust is private and family-controlled. However, the disadvantages of a Trust are that it will allocate the asset only when children attain a particular age, and the trustee can misuse the assets of the Trust. The best way is to use a combination of both Will and Trust.
If a person dies intestate (without a legal will in place), then his/her family can face many complications. The rule of forced heirship (a legal concept) applies in which an individual cannot decide who will inherit the estate on his death. The person is prohibited from disinheriting certain kin, most commonly spouse, children and grandchildren. A country’s legal system can limit the freedom of a testator to dispose of assets as he or she sees appropriate . Forced heirship in civil law countries may reduce or eliminate the need for a will. Forced heirship rules are different for different religions. Hindus are required to follow the Hindu succession act, whereas Muslims have to follow Islamic law. We also have Christian law and Parsi law. But in India, all wills, except Hindu, Mohammedan, Buddhist, Sikh Jaina wills, are governed by the Indian Succession Act 1925. A registered will is a testamentary document and in accordance with the contents of will the succession shall be governed in respect of properties mentioned in the will. The remaining properties not covered by the will shall be governed by the personal law of succession. For example, in the case of a deceased Hindu, Hindu Succession Act will be applicable whereas those deceased not covered by any personal succession law shall be governed by the Indian Succession Act 1925 (Section 4). These rules may not be favorable for your loved ones. With so many acts, complexity arises, and people become more confused.
Indian economy is still in the nascent stage, and the number of HNIs are expected to increase. This will lead to the birth of many companies providing estate planning services. Hence, the prospect of estate planning in India seems to follow north direction. As wealth creation is an art, so is wealth preservation. Unplanned and unstructured estate planning leads to wealth destruction, leading to unhappiness and discontent in our own life as well as in the lives of our loved ones.
(Dr. Neelam Rani is Associate Professor in Finance, Rohit Garg and Tanishka are Post Graduate Programme students 2018-20 at the Indian Institute of Management Shillong.)