While estate planning is an uncomfortable subject, it is also an unavoidable one for those looking to leave behind an enduring legacy, writes K Satish Kumar, the group chief legal officer of intellect design arena, a provider of financial and insurance services

Most wealthy and successful businesspeople will earn enough to maintain their standard of living for the rest of their lives, yet they continue to work for the good of their next generation. But have they planned out the details of the transfer of their assets? It is a hard reality that most would not have done so.

This article explores the importance of est ate planning and the way to pass on wealth to the next generation. It should be kept in mind, though, that there is no “one size fits all” approach to estate planning and there will be aspects that are different for each family.

An estate can be in the form of properties held, bank accounts, stocks, bonds, business interests, artwork, vehicles, etc. Procrastination and blind faith are two of the main reasons for poor execution of estate planning and this applies to not just the ultra-rich, but to those in the legal profession and those who rely on them for advice. Here are some guidelines.

A WILL AS A MODE OF ESTATE PLANNING

A will is a legal document that sets out one’s wishes as to the distribution of the assets that one will bequeath upon passing. A will ensures that a person’s wishes are carried out and it becomes easier for a person’s legal heirs. Usually there is an executor of the will who helps out with its execution after the demise of the testator (that is, the person writing the will).

WHAT IF A PERSON DIES INTESTATE?

K Satish Kumar
K Satish Kumar
is a keynote speaker and author, and is actively involved in many pro bono activities through Chennai lawyers. The author can be reached at getksk@gmail.com. The views expressed are personal.

If a person dies without creating a will then it is said the person has died intestate. In such a case, the estate is transferred as per the succession act applicable to the religion.

Hinduism, Islam and Christianity are the three major religions in India. The succession act for Hindus is guided by The Hindu Succession Act, 1956 and its subsequent amendments. The Hindu Succession Act mainly deals with how the property of a Hindu who has died intestate is divided between various legal heirs.

Islamic laws of inheritance are derived from the common law of India and are divided into Hanafi law of succession and Shia law of succession. These are derived from the foundations of Sharia law – the Holy Quran, Hadith, Ijma and Qiyas. After reaching the age of maturity, girls and boys have equal rights to hold and dispose of the property inherited.

The Indian Succession Act, 1925, provides for the inheritance laws for all other religions, including Christians. Section 30[8] of the Indian Succession Act defines intestate succession as: “A person is deemed to die intestate in respect of all property of which he has not made a testamentary dispossession which is capable of taking effect.”

In the absence of a will the process becomes complicated, as the legal heirs have to first get the “legal heir certificate”, which is a complicated and costly process, especially if there are disputes with regard to the property between legal heirs if the person dies intestate.

NOMINEE VERSUS LEGAL HEIR

The nominee and legal heir may not be the same person. Section 39 of the Insurance Act states that the appointed nominee will be paid in the event of an individual’s passing, although they may not be the legal heir. Further, section 45ZA (2) of the Banking Regulations Act merely puts the nominee in the shoes of the depositor after their death and gives him/her the exclusive right to receive the money lying in the account. It gives him all the rights of the depositor as far as the depositor’s account is concerned.

However, it is important to note that it does not make the nominee the owner of the money lying in the account. The nominee in turn is supposed to hold the proceeds of money in a trust and the legal heir can claim the money.

PRIVATE TRUST AS MODE OF ESTATE PLANNING

A private trust is a vehicle through which property can be transferred from one person (owner or settlor) to another for the benefit of an individual or a group of individuals. The beneficiaries of the private trust can be identified or easily ascertained. A family trust is the most common form of the private trust. The settlor progressively transfers assets to the trust so that beneficiaries get the benefits of these assets.

The settlor does not own the assets that he/she has transferred to the private trust. A private trust can be in the form of a revocable or irrevocable trust. A revocable trust is one that can be cancelled at any time, while the author is alive. An irrevocable trust is one that cannot be cancelled, once it comes into effect. In spite of the transfer of the asset, the trust owner can exercise his control and power over the property transferred.

To illustrate the difference between, settlor, trustee and beneficiaries, let’s say a trust is created by “X” transferring certain properties to “Y”, instructing “Y” to use the said trust property at the time of “Z’s” marriage. In this case, X is the settlor, Y is the trustee and Z is the beneficiary.

DIFFERENCE BETWEEN PRIVATE, PUBLIC TRUST

When a trust is created for family members, friends etc., it is called a private trust. If the trust is created for charitable or religious purposes with the general public as the beneficiary, then it is a public trust.

WILL VERSUS TRUST

A will and trust overlap in many ways. Both are mediums to establish who will receive the assets or properties owned by the testator or settlor.

Each has its advantages and disadvantages. One big difference is that the will comes into effect after the testator passes away, whereas a trust is in effect during the lifetime of the settlor. To execute a will, one may be required to do a probate after the death of the testator, whereas no such process is required with a trust.

There is no confidentiality or privacy in a will, whereas a trust preserves privacy. Setting up a will is cheaper and simpler than the process of setting up a trust. A will can be contested whereas a trust cannot. The most important difference is that a will does not provide any protection from creditors whereas a trust does.

Once an irrevocable trust is established, one no longer legally owns the assets. The creditors of the beneficiaries (legal heirs) cannot attach the assets held in the trust, which is a great advantage. In a normal will, the creditors can attach the assets for non-payment. This is why an irrevocable trust is always advantageous over the assets held under a will.

Similarly, in case of bankruptcy, the assets held under a will can be attached if the beneficiary of the will is bankrupt. But in case the beneficiary of a trust becomes bankrupt, the assets cannot be attached, since the beneficiary is not the owner of the assets. The assets are held in the trust. This is one more advantage of assets held in trust over assets transferred through a will.

THE WAY AHEAD

Estate planning is essential for all, and most of the time one takes the help of attorneys specialising in this area for assistance. Generally, if the family is large and there are many beneficiaries and assets under management, then a private trust is the best mode for handling these affairs.