Preparing a succession plan can often be a tricky affair. Here, we tell you the options available and how to zero in on the correct model.
The story of heirs fighting over is not new neither in the real life nor in fiction. No one would ever want to see their heirs fighting or want wealth to get into the wrong hands or in the right hand and not put up to the right use. Therefore, there are two pertinent question here, do you need it? And, how can this be done?
Sonali Pradhan, Managing Director-Head of Wealth Planning at Royal Bank of Scotland, says, “Anyone with an investment of more than rupee one lakh in securities needs to have a wealth plan because in its absence their heirs may require a succession certificate or a legal heir certificate to inherit such securities.”
A 'succession certificate' is a document issued by a civil court to the legal heirs of a deceased person. It establishes the authenticity of the successor and hence they inherit the securities and other assets, as well as inherit the debt. It is also important to know that a succession certificate though necessary, may not always be sufficient. For these, a death certificate, letter of administration and no-objection certificates will be needed.
Meanwhile a ‘legal heir certificate’ is issued by the government for those individuals whose parent/husband is dead without leaving a will. Generally one can approach the District Thasildar office with the death certificate and produce the form.
“Although the simplest way of transferring wealth is by way of joint ownership, for an example the in Mutual Fund and shares make your prospective heir/beneficiary the second holder or by naming him/her as a nominee and the same be confirmed in a will, but it’s not the only way and may not be the best option in all scenarios,” says Pradhan.
Kanishk Agarwal, Co-Founder and Managing Director of the AGacquisitions Group opines, “This is a very personal decision and depends on a lot of factors such as the quantum of wealth, the type of assets (revenue generating / capital assets) that contribute to the wealth as well as the holding period and taxation associated with holding and selling of such assets.”
Feroze Azeez, Director – Investment Products, Anand Rathi Private Wealth Management says, “In my opinion there are only two ways which are relevant, Wills and Trusts are the ways to transfer wealth.”
“Personally, I am pro company structures as it can offer flexibility in ownership, divestment of assets as well as financing options that can be available using the assets as collateral,” says Agarwal.
With such divergent views among experts we explain all possible way to distribute your wealth, and the pros and cons attached with each one.
Trust
Neha Pathak, Head of Trust & Estate Planning, Motilal Oswal Private Wealth Management Business says, “A ‘Trust’ means vesting or placing property under the control of a person in the confidence that he will hold it for the benefit of a third person and/or himself. “ The Indian Trusts Act, 1882 governs Private Trusts in India.
The person who puts in the money is called the settlor of the trust, the person who gets the money is the beneficiary. The settlor’s wishes are paramount in interpretation of the Trusts. And there are two types of trusts, revocable and irrevocable. If the trust is revocable then as the name suggests its assets can be called back by the settler, whereas in an irrevocable trust the settler’s liability will not get attached to the trust.
Azeez says, “Where ever you need management, you need trust for example, I have an insurance policy of Rs 5 crore and I need management of the money after I am not there anymore then I need a trust. But supposedly I only need to transfer, without management; a ‘Will’ might work.
“So as stated in the previous example, once the money comes then, how will it be managed until the goals arrive? Hence, for the management of the money I need a trust. Now one can form a trust by putting in a minimal amount in it and by making it functional. And simultaneously write a will stating that ‘upon my death’ everything will go to this particular trust.”
Highlighting other aspects of the Trust, Rohit Shah, founder GettingYouRich, says, “The trust can give better control over assets and it can allow the distribution of wealth when the person is living.” Adding a word of caution Shah says, “The trust maintenance is expensive and also needs help from experts to setup. Also it is mandatory to register the trust for immovable assets.”
“Trust is the only vehicle of transferring wealth through which you can transfer your philosophy as well, for example I don’t want the later generation to invest in sin stocks then I can make an instruction in the trust that ‘as long as this trust exists, the heirs too will not invest in the sin stocks.’ So that is my philosophy and I can make it a part of the trust,” says Azeez.
Trust structure on the other hand offer a number of benefits associated with Company structure, however having a professional Trustee (Trust Company ) to administer the trust is very important. “In the past, many families have had to deal with the ill-decision of appointing family members, or persons with conflicting interests as the Trustee, making the realisation of assets and flow of benefits to the beneficiaries problematic,” says Agarwal.
TRUSTS
- Points to ponder before visiting a professional for forming a trust.
- Who will be the trustee? (professional companies, family members)
- Who will be the beneficiaries?
- What will be the proportion of money that each beneficiary will get?
- What is the time frame of the trust?
- Whether it’s revocable or irrevocable?
- How many trusts do you need? What will be the structure of the trust? (sometimes people create more than one trust, maybe one for the spouse, and separate for the children or family in one and charity in other or any other combination as the person may choose)
- How is the trust deed drafted? This requires that there is some amount of flexibility but at the same time it fulfils your goal.
Things to remember
- Register the trust, even if it is not mandatory to register
- Open a bank account
- Obtain a PAN
- How should one choose the Trusteeship?
- Track record of the Trusteeship Company or for how long has the company been in existence in India
- Trusteeship company which have institutional investors
- Cost of Trusteeship
- (Example of Professional Trustees: IL&FS, IDBI, etc.)
Pros:
- Unborn person can be a beneficiary in a trust.
- Control mechanism for the trust corpus can be defined in the trust deed
- No Probate required for the Trust assets
- The beneficiaries can be restricted i.e. only immediate family be the beneficiary of the trust.
- Provides bankruptcy remoteness i.e. separate business assets and personal assets.
Cons:
- Stamp duty- There is a payment of stamp duty that has to be paid at the time of the registration of the immoveable property in the name of the trust.
Will
Pathak of Motilal Oswal opines, “Every individual should write a Will.” She explains that a ‘Will’ is a document that contains the wishes of a person. In case a person dies without forming a Will then his or her property devolves as per the personal succession laws. Further, in case, the deceased had a particular thought about dividing his wealth, the same may not be implemented due to the rules of succession laws.
“A ‘Will’ comes into effect only after one is deceased. If the objective is to just distribute wealth, then will can be a better choice. The size of assets and family conflicts can also be a consideration,” says Shah. Wills are inexpensive, can be created with conditions and come in to force only after one is deceased. “So based on the specific situation, one may prefer Will over a trust,” he says.
The cost of writing a will with an experts help is less compared to setting up a trust or company. Though one can always draft their own will, it would be best to take the help of an expert so that the probability of a contest is less. Hence, an individual’s wish is fulfilled even in their absence. It is not mandatory to register the will, though it is preferred.
Shah cautions, “One problem with ‘Will’ is that since probate is mandatory in certain cities like Delhi, Mumbai, etc., one cannot be 100% sure if assets will get distributed in line with one's wish in the ‘will’. This can particularly be a problem when there are conflicts in the family.”
WILLS
Suggestions
Though the registration is not compulsory but it is advisable to get the will registered so that in the
- By a Will, a Testator can dispose his wealth as per his wishes
- Registration is not compulsory
Cons:
- A Will requires probate. Probate is the legal process where a court oversees the payment of debts and distribution of property under a Will. This can be a slow and costly process if the estate is even moderately large and complicated
- Once a person applies for Probate, all the details of the estate are made public as part of the court proceedings
- The contents of a Will are contestable
- An unborn person cannot be covered in the Will
- In case, any of the successor feels that he has not received his rightful dues, the Will can be contested and this lead to delays. This may result in confusion and could culminate in time consuming and expensive litigation
Types of WILL
- Unprivileged will
A will written by any individual who is not serving in the defence forces engaged in battlefield or expedition. These wills need to be signed by the testator (the person making the will) in the presence of at least two witnesses who also sign the will. These wills can be revoked by writing a new will or destroying the old one.
- Privileged will
If defence personal is in the battlefield or engaged in an expedition, he may make a privileged will. If the person writes the entire will with his own hands, it does not need to be signed by any witness. These wills can also be written by another person. Such wills can be revoked by an unprivileged will.
- Conditional will
An individual can attach certain conditions to his will. For example, one can also leave a property for a person subject to fulfilment of certain condition such as marriage or attaining certain age. However, if one writes a will with illegal or immoral condition, it is not considered a valid one.
- Joint will
A joint will is written by two or more persons together who dispose of their property as a team. Such wills come into effect after the death of all the testators. Any of the testators can revoke the will during their lifetime even after the death of the other.
- Mutual will
Two individuals can write a mutual will giving their wealth to the other in case of their death. For example, a couple can write a mutual will which makes the survivor the sole owner of their wealth.
- Concurrent will
Ideally, one person should leave only one will. For the sake of convenience, individuals who have properties in more than one country execute separate wills for properties in different nations.
- Sham will
If a person writes a will and completes all the formalities only for some hidden objective, it is considered void. However, one needs to prove the intent.
Company
Azeez’s view is that there is no benefit of forming a company as it just give shares to an individual. After the death of the founder there is no smooth transition. He says, “I have a company, hence, I have shares. How is it different from holding my own shares or a listed companies shares? Everybody would be fighting for my shares.”
“The Company structure is more expensive to administer given the increased laws and regulations that have to be adhered. Personally, I am pro company structures as it can offer higher flexibility in ownership, divestment of assets as well as financing options that can be available using the assets as collateral,” says Agarwal
Pathak of Motilal Oswal Private Wealth Management Business says, “A company can be formed by the family where the family members themselves can be the shareholders of the company. However, for an individual, a company may not be the best way for the purpose of passing on of wealth.”
Piyush Shahi of Shahi Hotels & Properties Pvt Ltd., a member of the family where wealth is passed through company shares says there are both merits and demerits in passing on the wealth in this format. Based on his experience, he says, “There are enough checks and balances to ensure there is no malpractices. And the accountability that one can attach to the board of directors and the managers is very high.” Whereas on the demerit, he considers that the biggest problem is that if the majority shareholders are in agreement then the minority shareholders, other family members in this case, can easily be marginalised. Since any special resolution can be passed if only 75% of the shareholders agree. Also part of the property is not transferable, so hence if there are a number of flats and one of the family members would like to own one flat because they are living in it then it cannot happen. The flat always belongs to the company.
COMPANIES
Pros:
- Perpetual succession
- Limited liability in certain cases
- More useful for business rather than estate planning
- Strong checks and balances since the company has to follow the disclosure and norms of company law.
Cons:
- Liable for various secretarial procedures such as appointment of directors, filing of annual returns, maintaining minutes, etc.
- Compulsion for every Director to procure Director Identification Number (DIN)
- Stamp Duty is applicable on transfer of property from any individual to the Company
- Registration of a company is compulsory with ROC.
HUF
Neha Pathak of Motilal Oswal says, “HUF is an entity that can only be formed solely by a married individual who is a ‘Hindu’. Hindu would include any person who is Hindu, Sikh, Jain or Buddhist. All lineal descendants of the karta, their spouses and children automatically become members of his family.”
“HUF is normally more of a tax planning tool though it can help achieve estate planning objective. Setting up a Private Ltd. Company, for example, can be useful to distribute business assets. For Personal Assets, Trust or Will are more suitable,” says Shah.
With the HUF structure, unlimited liability assigned to the Karta, makes the structure less desirable, especially when the assets comprise of business interests that could be prone to losses / liabilities etc. The HUF is simple to setup and would be recommended when the scale of assets are small to moderate and there exists certainty that no liability can be assigned to it.
HUF
Pros:
- HUFs are assessed separately than an individual and taxable at the same rate as an individual.
Cons :
- Income earned from the self acquired assets gifted to HUF is clubbed back in the hands of doner (Karta)
- In an HUF, one cannot include or exclude any specific person. For e.g. upon marriage, wife becomes a member of her husband’s joint family HUF
- Moreover, HUF can only be formed by a Hindu and thus excludes any other race or religion
- One has to be compulsorily be married to have his own HUF unless in case of a partition.
Points to remember in creation of HUF
- Karta- Karta is the person who manages the affairs of the family
- The HUF continues to exist in the hands of the female members after the death of the male member
- The daughter after marriage ceases to be a member of her father's HUF; after marriage she becomes the member of her husband's HUF
- Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax returns
- The same tax slabs are applicable to HUF as to individual assesse
- You cannot transfer your own assets/money into HUF
- If you have ancestral property and earning some income from this property then it is better to transfer this asset to HUF and save tax up to exemption applicable to the individual
- You can transfer the money received on sale of ancestral property / assets in your HUF
- The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc., and will be assessed under HUF
- Any gifts received by the members of HUF can be treated as assets of HUF
How should an individual decide, what would be best for them?
One should look at the size of the assets, wealth planning needs, specific family situation and affordability. Shah says, “For small asset size and simple situations, a Will may be better. If the asset is to be earmarked for a specific person, disputes are expected and estate distribution is needed to be done right now, trust may be a better option. One good way can be to combine Trust & Will.” The movable assets can be transferred via Trust and immovable assets can be distributed through will. This can be helpful to defer or reduce expenses of physical assets transfer.
Another way would be to first ascertain the overall objectives of the family, detail out income and expenses over the next few years and seek the advice of tax experts and family office professionals who would be in the best position to do a qualitative as well as a quantitative analysis of the best structures that would suite the requirements of the individuals. There isn’t a one size fits all solution when it comes to Wealth Succession Planning.
P.S. This is the submission draft. The actual story had appeared in August issue of Money Today. You can read the final version. Click here or copy paste the given below link -http://businesstoday.intoday.in/story/passing-on-wealth-business-property-heir-succession-plan/1/208534.html
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