Our last week’s article on Tax Implications of receiving Gifts invited a lot of feedback from our readers, and to be honest we received a total of 108 queries on multifarious aspects of receiving gifts. This was highest feedback we received so far on any of our articles. We have replied to most of them; however some of the queries involve complications and shall be replied in due course.
As I was thinking what should be the topic of current week’s newsletter, I was reminded of one particular client of mine who expired 2 years ago. Mr. Sharma expired at an age of 47, which by far is not old enough. He was survived by his wife and 3 children. He was a regular client of mine and always sought advice on Tax planning, investment and retirement planning. He was an avid reader and understood most of the income tax provisions, I shared with him. On one of our discussions, he sought my advice on estate heritance planning, i.e. how his estate should be divided among his family members after his demise. I advised him to write a Will, which he neglected saying he is still young for it. He died almost 4 months later.
It was a sad loss for his family. For the next almost six months his family struggled hard to access what was rightfully theirs. They were unable to lay hands on the financial assets of Mr. Sharma, who passed away.
The emotional trauma of losing him was followed by despair at not being able to withdraw the money lying in his bank account or access his other investments. This upheaval has been sparked by a single act of omission on the part of Mr. Sharma’s writing a will.
Mr. Sharma didn’t leave a will and had not named a nominee, so, she and her kids have been running from pillar to post to prove that they are the only legal heirs of the deceased. Mr. Sharma had a substantial amount of money in his bank account, but it cannot be withdrawn till the bank is satisfied that there are no other claimants to these funds.
His wife submitted copies of the death certificate and ration card as well as a letter of indemnity, but the bank is demanding more documents.
The point which we wish to make across is timely writing of Will by every family head. Don’t think you will have sufficient time later on. Read on to understand more on this…
Writing a will
Any adult who wants to distribute his assets can write a will. The assets can include property, gold, financial investments, art and artefacts, even hard cash lying at home.
If you think that only the super-rich need to write wills then you should realize that it is not so.
Whether you are a daily wage earner or a tycoon, you have the right to dispose of the assets you own according to your wish, a will is an instrument that allows you to do so.
Contrary to perception, it is not necessary to write it on a stamp paper or even get it registered. You can write a will on plain paper and it will be as legally valid as one prepared by a lawyer. All it should do is identify you as the testator (or the person who is making the will), list out your assets and specify how these are to be distributed among the beneficiaries.
Whether you type it out or write it down, it is a legal document for all practical purposes as long as it is signed by you and attested by two witnesses.
For most people, making a will can be a simple, do-it-yourself exercise. The only requirement is that the will should be legible. If a person is old and frail, he should avoid writing it himself and get it typed to avoid disputes in the future.
However, if there is a complication in the ownership of assets and wealth, you may need the help of a legal professional to draft the will. Such a person will ensure that there are no loopholes or ambiguity in the language that may lead to disputes later on.
More importantly, he will make sure that the distribution is within the ambit of the law. When it comes to making a will, people try to experiment, but the wishes of the testator should be legally enforceable. Therefore, consulting a professional on this matter is important.
A will cannot override the natural succession of ancestral wealth. In other words, a person cannot will away the entire inherited property the way he wants to. He can pass on only his share to anybody he wants, but the remaining property can be willed only to the legal heirs. Suppose a Hindu man inherits Rs 50 lakh from his father. If he has four legal heirs, then he has only a 20% share in that amount. The balance belongs to the four legal heirs. He can will his own share (Rs 10 lakh) as he wants, but cannot distribute the balance Rs 40 lakh to somebody other than the four legal heirs.
In case you want to bequeath certain assets to people other than the natural heirs, you would need to mention the reason for doing so. This would foreclose the chances of any objection from other beneficiaries.
A will has to be attested by at least two witnesses and it is important to choose them carefully. They should be completely reliable and preferably much younger than you are in order to ensure that they are alive when your will is being executed.
In one of the legal dispute related to asset distribution under a will, the deceased had willed everything to one of his children. The other siblings filed an objection but the sole beneficiary could not prove the validity of the will because the witnesses could not be located. The matter was resolved only after the beneficiary agreed to split the assets with the other siblings.
Such cases bring into focus the role of the executor of the will. The executor is supposed to oversee the distribution of your assets according to your will. Here again, you need to be careful while choosing an executor.
Not only should the executor be a reliable person, but someone your heirs will be willing to listen to. If the asset distribution is not equitable, it can lead to squabbles, and unless the executor can resolve the differences, the matter may end up in court.
This is also the reason legal experts advise that the will should be registered. This is not mandatory, but it puts a stamp of authenticity on the document. If you want to get the will registered, you can get it registered with a sub-registrar.
To make it ironclad, use a stamp paper to make the will. One copy of the will is filed in the registrar records and the original is given back to the testator. If a will is drafted properly and subsequently registered, any objections would lack teeth.
Is gifting a better option?
It can be argued that instead of going through the rigmarole of making a will and apportioning assets among one’s heirs, one can simply gift them during one’s lifetime. However, gifting has its own limitations. For one, the process of gifting is irrevocable, that is, once the asset is given, it becomes the property of the receiver. Experts say it is risky for a person to give away all his assets during his lifetime and then be at the mercy of the beneficiaries.
On the other hand, an individual can change his will any number of times, deleting names and adding new ones as per his wish. If there is a minor change, it can be done by filing a codicil instead of rewriting the entire will. A codicil is a supplementary document which specifies the changes in the will. One of the reasons people postpone making a will is the misconception that it cannot be altered. This is not true; you can make any number of changes. The latest will supersede all previous documents.
Appoint a nominee
One seamless option of transferring assets to your heirs is to make them nominees. All financial investments (mutual funds, bank deposits, bonds, etc) offer this facility. However, while a nomination ensures a smooth transfer of assets, it does not make the nominee the sole owner of those assets. The other legal heirs of the individual can stake a claim to those assets.
In a case that came up before the Supreme Court in 1983, a life insurance policyholder died without writing a will, leaving behind his mother, wife and son. His wife was the nominee of the insurance policy, but his mother and his son filed petitions, both demanding a one-third share in the insurance amount. The court ruled in their favour, stating that the nomination only indicates that the person is authorised to receive the amount but is not the sole owner of that sum. Few people are aware of this fact. Most believe that the nominee will also be owner of the assets.
What if you still don’t write a Will.
If there is no will, the estate of the deceased is distributed in accordance with the law of succession. However, such cases usually end up in court or are settled after acrimonious negotiations between the legal heirs. There is also a cost attached. If you apply for a succession certificate from the court because there’s no will, you need to pay up to 3% of the value of the assets. This is why you should settle these issues during your lifetime.
A will is a legal document that clearly demarcates what should go to whom and bypasses all succession laws. It reduces the chances of dispute and lessens emotional distress. So, in case you have not thought about succession, it’s time to stop procrastinating and start penning your legacy.
(Author- XPERT Consulting – Tax Consultants, E: firstname.lastname@example.org, www.xpertconsulting.biz)