SynopsisThis article looks at transferring of assets to legal heirs via three routes: a will, a gift deed, and a private family trust. The article details the pros and cons of each route, as well as the charges and taxes you will incur.
Estate planning involves deciding and naming in advance who your assets will get transferred to after you die. One of the most common methods to lay out who your assets will get transferred to is by means of a will.
This article looks at transferring of assets to legal heirs via these 3 routes: a will, a gift deed, and a private family trust. The article details the pros and cons of each route, as well as the charges and taxes you will incur.
Will vs gift deed vs private family trust
What is a will? It is a legal document that names individual/individuals who would receive the property and possessions of the will-maker after his/her death. The document can be revoked, modified, or substituted by the person making it at any point during his/her lifetime.
A will comes into effect upon the death of the will writer/maker, says Ashok Shah, Partner, NA Shah Associates.
What is a gift deed: A gift deed is a legal document that records the act of giving a gift and is created by the donor (the person giving the gift) and given to the donee (person receiving the gift) along with the gift.
Shah says that the transfer by way of gift deed happens during the lifetime of the donor.
What is a private family trust: A private family trust allows the creator of the trust to have complete control over the trust and freedom to pass on the assets to the beneficiaries, which can be set out in the Trust Deed by the creator/author.
Sudhakar Sethuraman, Partner, Deloitte India says, “For creating a private trust, a trust deed could be executed, or it can be created through a will. Registration of private trust deed may be optional, if created under an executed will.”
“An individual can decide whether to transfer assets via private family trust during his/her lifetime or after his/her death,” says Shah.
Also Read:Estate planning via will or trust
Pros and cons
- Ease of creation/amending
One of the advantages of a will is that it can be handwritten on plain paper and can be amended at any time without any limitations. However, do keep in mind that only the last will is effective for distribution of assets. Also, registration of a will is important but not mandatory so that there are fewer legal challenges when it comes into effect.
In comparison, a gift deed or trust document will have to be legally drafted by a qualified professional. Dr Neelam Rani, Associate Professor (Finance), IIM Shillong and Samarth Saxena, practising advocate, Bombay High Court say, “Once the gift deed is executed and registered, the gift is complete. This gift deed can only be amended for clerical errors that too by means of a duly registered rectification deed executed by all concerned parties. Further, in case of a trust, any modification to the trust deed will have to be done as per the amendment / alteration provision contained in the original trust deed. In case the original trust deed was registered, such an amendment will also have to be registered.”
- Control over assets
If one is transferring one’s assets through a family trust, it is possible for one to retain some control over the assets transferred either by appointing oneself as trustee or appointing a trusted person as a trustee of the trust, explains Shah.
On the other hand, gifting a particular property is never advisable for a person whose primary source of income is the gifted property itself (by renting it out). Here is why: After executing a valid gift deed, the person gifting such property loses his legal right to enjoy the gifted property, say Rani and Saxena.
They added that, “A gift (under the Transfer of Property Act, 1882) must be accepted by the donee within the lifetime of the donor. Failing such acceptance, the gift would be invalid. To put it simply, there can be no gift to an unwilling person.”
In case of assets transferred via will or trust the asset-owner retains control (full or partial) over the asset as long as he/she lives. However, in case of gifting the asset the giver loses control over the asset after gifting.
- Surety of transfer
Clearly the advantage of gifting as a means of transferring assets is that one is 100% sure that the chosen recipient has received the asset (once the recipient has accepted the gift). There can be no dispute about who is entitled to get the asset as may happen in the case of an asset willed to a person.
A will is always open to challenge by persons who may allege that the will is fake or unsound in some way. As a will executed after the death of the will maker he/she is unable to settle any dispute arising over it later on. If a will is held illegal/set aside/ then one’s assets may not get distributed among the persons named in the will or in the manner/proportion laid out in the will.
Rani and Saxena say, “If the trust is created through a will and the will is held illegal/set aside by testamentary courts, then the trust will not take effect.”
They further add, “One needs to remember that all three – gift deed, will and trust deed can be challenged before the courts. Therefore, to avoid future disputes, one needs to ensure that the chosen instrument is structured with due care and caution.”
Will vs Gift Deed vs Private Family Trust
|WILL||GIFT DEED||TRUST FUND|
|Transfer of assets||After death of individual||During lifetime of individual||During Lifetime or after death depending on wish of individual|
|Ease of creation||Can be handwritten; amendable any number of times||Requires gift deed; Owner loses right to the asset during his/her lifetime||Requires trust deed to transfer assets from owner-individual to trust|
|Control over assets||Control is retained if assets are passed via will||Owner loses control over the asset once gifted||Owner has an option to retain control|
|Costs||One-time cost of making a will unless amendments are made in future||Stamp duty is payable||Apart from stamp duty, there might be sundry expenses such as payment of salaries to trustees etc.|
|Taxation||No taxes will be payable by the legal heirs at the time of receiving the assets||Gifts to specified relatives are tax-exempt.||Tax-exempt depending on satisfying various conditions under the Income-tax Act.|
The process of probating a will
Probating is the court-supervised process of authenticating a last will and testament of a deceased person and it provides legal validity to the rights and entitlements of the legal heirs.
It is important to get a will probated, especially if you reside in either Mumbai, Kolkata or Chennai (as probating of will is mandatory in these cities). There are court fees to be paid for probating a will.
Here is the cost of probating a will: In Mumbai, the maximum charges for probation of will is capped at Rs 75,000 irrespective of value of assets. In Kolkata, the maximum fee is capped at 50,000 and, in Chennai the charges are capped at Rs 25,000.
Shah says, “If you gift the assets during the lifetime (either directly or through the family trust), the assets so gifted do not form part of the estate and hence not subjected to probate proceedings. In case transfer happens after the death of an individual where a trust is created under the terms of the will, then will may be required to be probated as per the applicable state laws.”
How much each method will cost
Each method comes with it its own set of charges. For instance, creation and maintenance of a trust requires constant supervision to maintain compliance with the trust deed. Rani and Saxena explained that this invariably leads to additional sundry expenses such as legal, accounting, payment of salaries to trustees etc. “Therefore, creation of a trust is advisable for only high net worth individuals whose assets require greater upkeep and are also capable of supporting such additional expenses,” they said.
They added, “Though wills are open to challenge before courts of law, for most regular families and individuals, a precise will which is free from suspicion or ambiguity still remains the best suited. Apart from incurring one-time costs towards legal counsel, wills do not require any special expenses unless any amendments are made.”
Then comes stamp duty. If the assets are passed either via gift deed or private family trust, stamp duty will be payable depending on the assets. The stamp duty varies between the state and depends on several other factors like type of asset, to whom it is gifted etc.
Shah says, “There is no stamp duty on assets if they are passed through a will. However, if you gift (either via deed or family trust) during the lifetime, then depending upon the nature of the assets, transfer will be subjected to stamp duty. For instance, stamp duty will be payable in case of transfer of immovable property via gift deed. There is no stamp duty on gift of jewellery unless gift deed is made jewellery can be gifted simply by delivery. However, if you make gift deed then 3% stamp duty is there.”
Taxation in case of will, gift deed and family trust
To transfer movable property (high value) to relatives, gift deed is one of the options. “There are no tax implications (on the giver of assets) under the Income-tax Act on gifting immovable or movable property (except cash, subject to limit) to specified relatives during a financial year,” says Sethuraman.
However, gifts are taxable in the hands of the recipient except in certain circumstances. Sethuraman says, “Transfer of existing movable or immovable property to ‘relatives’ defined as per section 56 of the Income-tax Act are exempted under income tax laws. The transfer of immovable property could be executed through a ‘Gift deed’ as per Transfer of Property Act,1882 and stamp duty needs to be paid.”
On the other hand, transfer of assets via will does not attract any tax. Sethuraman says, “Section 47(iii) of the Income-tax Act categorically provides that any transfer of a capital asset under a will is not regarded as a transfer. Thus, the same can be claimed as tax exempt under the Income-tax Act.”
With regard to private trusts, Sethuraman informs that they are governed by the Indian Trust Act, 1882 and taxation is based on various factors viz. type and nature of trust, framework and status (which continues to remain a matter of debate) as per the Income tax Act.
“The transfer of an individual’s assets to a private trust can be claimed tax-exempt subject to fulfilment of the conditions mentioned under the Act. Similarly transfer of an asset and its income, if any, from the trust to the beneficiary (for whom the trust has been created) could be considered as tax-exempt or taxable based on the specific provisions under the Act. Therefore, individuals should carefully evaluate the option of setting up a trust while keeping taxation in mind for both himself and the beneficiary,” says Sethuraman.
Now, what if your gifts are made to non-relatives as mentioned under the Income-tax act, how will that be taxed?
Shah says, “If you give your properties or any other assets to a non-relative (a person not in the list of relatives specified in the Income tax Act) under a will, the value of assets is not liable to income-tax in the hands of the recipient. However, if you transfer the assets during your lifetime (either directly via gift deed or through a trust) and if the recipient is a non-relative, then he/she would be subject to income tax on the value of the assets received.”
“If assets are given via will and the original owner’s creditors, if any, claim these assets as payment for your debts, then your assets can be attached by the creditor. If you have already gifted the assets (subject to certain exception relating to defrauding the creditors), the assets gifted by you cannot be attached by the creditors. Between direct gift to a beneficiary and gift through a trust, the latter is the preferred option as objective of “ring fencing of the assets” is better achieved when you gift through the trust,” explains Shah.
What should you do?
While considering the different options, one must understand that when it comes to estate planning (as it is in the case with financial planning) you cannot take the ‘one size fits all’ approach. Each family is unique with different personalities where each member holds a unique mix of assets.
This is why evaluating each of these three methods of transferring one’s assets before/after one’s death is important. Choose the option that is the most economical, convenient and hassle-free and will allow for the smoothest transfer of assets. For this it is advisable to seek qualified advice.
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