The subject of Estate Planning has always engaged the kings and the common men alike. Estate planning requires a thoughtful plan weighing various alternatives and deciding “whom” to give, “how much” to give, “when” to give and in “what form” to give one’s estate. Your estate may comprise of immovable properties, shares and securities, financial assets, jewellery and other assets acquired by you by years of hard work and by way of ancestral property.

Estate Planning helps an individual to ensure smooth succession and avoiding disputes, protection and enhancement of estate and providing financial security to your near and dear ones.

Estate Plannng1The two most common ways of succession are:

  • Direct transfer (by way of gift or bequest in the Will)
  • Creation of a Private Trust where beneficiaries’ are ascertained or ascertainable individuals. A private Trust in India is governed by the Indian Trust Act, 1882.

Generally speaking, Direct transfer is simpler and does not require administration and is more appropriate where the Estate is not very significant. Further, in case of immovable property, direct transfer is more tax efficient. The gifts between specified close relatives are tax exempt and transmission of assets on inheritance is also tax exempt. Further, for the successor, the income from one self-occupied house property is not liable to notional tax and until last year, was exempted from wealth tax as well (now abolished). The direct transfer can further be eased by “Nomination” in case of shares, securities, bank accounts and premises in co-operative societies so that one does not have to wait for the Will to be probated for transmission to the nominee.

In cases where the Estate is significant, the Trust structure may present an interesting option. The following persons/ entities are necessary for creation of a trust.

a. Settlor or author of the trust who creates the trust

b. Trustee is the person who holds and administers the property for the benefit of another/others

c. A beneficiary/ies who is/are benefited by the trust. The beneficiaries can have specified shares (called “specific trust”) or undefined shares at the discretion of the trustees (called “discretionary trust”).

Certain benefits which result due to a Trust structure, include (i) Retention of Control over property with Trustee (ii) Enjoyment of benefits from property during lifetime of Settlor, (iii) Protecting assets in case of heavy liabilities or bankruptcy, (iv) Possibility of contesting of Will and litigation substantially reduced (v) Helps avoiding probate procedure resulting into saving in time & costs (vi) Provides greater flexibility in distribution of estate and contingent distribution. As a result, where a large family is involved or some of the beneficiaries are minor or where the underlying asset is incapable of division, the trust may be more appropriate.

Certain aspects which need to be considered before going for the trust model for asset protection include (i) critical to identify competent Trustees with integrity (ii) Title transfer costs – registration fees, stamp duty, etc. (In Maharashtra, stamp duty is 3% in case of movable property and 3% to 5% depending upon the location of immovable property in case of private trust).

From a tax perspective, the tax treatment of the trusts is not very friendly. In India, there is no estate duty or inheritance tax and as a result, one of the greatest reasons for use of trusts globally is not applicable in India. Generally, the transfer of assets under a Will would not be liable to tax in India but transfer made during the lifetime of the person may need to be examined from tax perspective. In case of an irrevocable trust, where shares of beneficiaries are known, income is taxed as per the rates applicable to beneficiaries in the hands of beneficiaries, but where shares of beneficiaries are unknown or where any of the beneficiaries is having taxable income, income is taxed at maximum marginal rate (i.e. 30% plus surcharge and cess) in the hands of Trustee as representative of Trust.

To conclude, Direct transfer is simpler and does not require administration and is more appropriate where the Estate is not very significant. In cases where the Estate is significant, the Trust structure presents enormous flexibility and succession possibilities with estate protection but the same needs to be carefully examined from tax perspective.

(Author is founder of Founder, RSM Astute Consulting Group)

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June 2021