One of the greatest misconceptions about estate planning is that it is a matter to be thought of only after retirement or during old age. Another myth surrounding estate planning is that it is a thing meant only for the high net worth individuals. In fact, it is crucial for everyone, irrespective of the amount of wealth and age of the person concerned to ensure that their family gets their rightful ownership, control and possession of the assets after the patriarch or the asset owner ceases to exist. This assumes greater importance when the family members are dependent on income from such assets for their livelihood, growth and prosperity. It is never too late or too early to do estate planning and it is better done early in life to plan and ensure the financial security for one’s family in the event of demise or an unforeseen tragedy or event. The right time to lay out your estate plan in ‘NOW’ as if there is no tomorrow.
Estate planning is a complex task, therefore a well-thought-out plan can make a significant difference in smooth transition of estate for the family members. One of the key considerations while laying out the estate plan is that the same should be cost efficient both for the donor and the donee. Further, varied objectives such as providing financial support for minor children, designating guardians for minor children, planning for medical incapacity of self or family members in future, creation of education fund for the children etc. can be efficiently fulfilled through a comprehensively designed estate plan.
The options commonly available for estate planning is writing a Will or creating a Trust or a combination of both. The decision or choice amongst these options may vary based on the type of the asset, asset size, age of the donor and many other factors.
Where there is a will
Will is a traditional and the most commonly known and widely used estate planning instruments. It is a testamentary document that lays down the wishes of the estate owner regarding the distribution of his assets and possessions after his death. It at time names the Executor of the will i.e. the person who would administer the distribution of the assets as intended in the Will. It is also possible to appoint a guardian for minor children who will be under the guardian’s custody and care until they become adults or making provisions for children and family members with special needs.
With increasing age, the mental and physical capacity of a person may deplete. Therefore a Will must be executed before the onset of old age. Will prepared at a relatively young age or when a person is mentally and physically fit, provides an understanding of the current financial position while retaining the flexibility to improvise the Will with additional assets accumulated during the remaining life span. Further the Will should be executive with an objective and unbiased mindset. With old age, a person may become incapacitated or even lose the ability to comprehend things with an objective and unbiased mindset. Therefore a Will created at very senior age may create misunderstandings, doubts and disputes in the family later.
An important point to consider is that a Will can always be challenged in the Court of law. It is not mandatory to register a Will. However a registered Will has more legal sanctity and a registered Will can certainly serve as an evidence of genuineness of the Will.
Role of a Trust
A Trust is a private agreement or a deed between the settlor and the trustees whereby the legal ownership of assets / property / estate is vested in with the trustee, held for the benefit of the beneficiaries as specified in the trust deed. A Trust typically has four components:
1. Settlor: A settlor is the author of the Trust i.e. one who settles the Trust;
2. Trustee: An individual or an entity appointed by the Settlor to administer and manage the affairs of the Trust and hold the trust assets for the benefit of the beneficiaries;
3. Beneficiary: Person(s) for whose benefit the Trust is created;
4. Trust assets: Trust property represent the subject matter of the Trust and can comprise of any kind of assets; movable, immovable property, cash, jewelry, securities, other instruments etc.
Thus, for planning an effective transmission of assets to the next generation, it is important that the Settlor forms an irrevocable trust, clearly specifying the beneficiaries and outlining the purposes for which the Trust property can be utilised by or manner in which such properties or income arising from such properties shall be distributed amongst the beneficiaries.
Will vs Trust
1. Timing of taking effect: A Will comes into effect only upon the death of the testator. However, a Trust becomes effective as soon as it gets executed i.e. it becomes operational during the lifetime of the estate owner.
2. Flexibility to improvise or make amendments: Both the Will and the Trust deeds can be changed until the time of death of the testator or the donor respectively.
3. Probate process: While a Will takes precedence over the succession laws in force, it does not prevent the Estate from Probate. Simply explained, ‘Probate’ is legal process of proving a Will. The Probate court verifies that the Will is legal and the assets are distributed as per the will or intention of the deceased.
The time to get a probate on a large estate or a contested Will may take several years and can be quite expensive. The grounds on which a Will can be challenged are numerous. It is only at the end of the Probate process that that the legal heirs get ownership and possession of the assets inherited by them through the Will.
However, transmission of a property through a Trust does not require the execution of the probate process. The assets are practically vested into the Trust for the benefit of the relevant family members during the lifetime of the estate owner. Further, upon the demise of the donor, the Trust continues to operate and distribute the trust income / assets to the beneficiaries as per the terms of the deed without the need of any Court approval.
4. Estate tax: A Will does not provide protection to the legal heirs against estate tax. On the other hand, a Trust structure is often used as a tool to minimize estate tax during transfer of assets to the next generation.
5. Privacy: On submission to the Court for probate, Wills become available in public domain. However, a Trust deed is never disclosed to anyone and always remain private.
6. Other Benefits: Adopting a Trust based estate plan enables a person avoid issues associated with a Will such as proving authenticity of the Will, alleged forgery etc. One of the other benefits of the Trust is that once an unencumbered asset has been transferred to a Trust, it ceases to be the property of the donor, therefore no other third party viz. lender etc. can in future lay a claim on those assets for recovery of financial dues of the Donor.
Both the forms of estate planning thus have their own merits and limitations. While a Trust saves the family from the probate process and may provide protection from the estate duty, it also has its own set of limitations. Transfer of immovable property to a Trust can entail significant stamp duty implications varying on the basis of the location of the property. Similarly, the effectiveness of a Trust structure also depends on the right selection of the Trustees.
Accordingly, the best plan is to have a combination of Will and Trust. The decision ultimately boils down to the individual and his objectives, the nature and magnitude of the assets and constitution of the family.
An estate plan is customized to meet an individual’s needs and goals for his / her assets and there is no single plan that can answer everyone’s needs. Unplanned and unstructured estate planning can lead to wealth destruction and family disputes. Accordingly, in addition to a thorough and well thought of estate plan, it is also essential to review it regularly. The best benefit of an Estate plan is the peace of mind it gives to the estate owner and his family!
Suvira Agarwal is executive director and Surabhi Singhal is associate director, at Grant Thornton India LLP.