1. Introduction
Estate Planning or Succession Planning refers to the process of selecting how your property, which consists of everything you own, will get distribute, preserved or managed following their death. It is a plan used to establish who will receive your assets following your demise. Estate Planning can be further complicated due to the application of various community specific succession laws. These personal laws intersect with other laws present in India creating a complex web of legislation and statues which need to be adhered to, making the role of a legal advisor important. The presence of these laws, makes it more important to plan your estate, as it becomes difficult for your loved ones to navigate the waters that are, interstate property disputes.
Importance of Estate Planning
It is imperative to have your estate planned as it will be your loved ones who will have to deal with your assets in the aftermath, in addition to the shock and grief of your death. Moreover, estate planning enables you to address important matters such as minimizing taxes, designating guardianship for minor children, and outlining healthcare directives. Through strategic planning, you can mitigate tax liabilities, provide for the care of your children, and communicate your preferences for medical treatment in case of incapacitation. Ultimately, estate planning offers peace of mind knowing that your affairs are in order, your loved ones are taken care of, and your legacy is preserved in accordance with your wishes.
Overview of Common Mistakes
Despite the importance of estate planning, there are common misconceptions, including the notion that it's only for the ultra-wealthy or those with complex assets. However, the truth is that everyone, regardless of their wealth, can benefit from having a well-thought-out estate plan. You do not have to own a couple of Van Gogh's to go ahead with estate planning.
Succession Vs Nomination
Succession refers to a situation where the legal heir of the deceased inherits the property either through testamentary succession, like wills, trusts etc or interstate succession, through the application of personal laws. A Nomination is quite different from this, a nominee is a person who is granted with temporary responsibility of taking care of the assets in question until the successor is finalized. It is merely a means to an end. The establishment of a nominee can lead to a reduction of several processes. It is similar to the relationship between a settlor and a trustee.
2. Understanding Key Estate Planning Instruments
Will
Definition and Essential Elements
A Will is a legal document that outlines how your estate will be divided or distributed following your demise. To create a Will in India one must be of a sound mind and should have achieved the age of majority. Any part of the will which has been draw up under coercion or undue influence is rendered void.1 A good and strong Will has a proper listing of assets, which in clear language directs how it should be distributed and managed. It does not have to adhere to strict from requirements or a set structure. Hence, it need not be a stamped or registered document, making it a cheaper instrument of estate planning. An interesting point to note would be in case a Will has been made by a Hindu, Buddhist, Sikh or Jain, the beneficiaries of the Will can serve as witnesses as well.2
Probate is a process provided for under the Succession Act that validates the contents of a Will. It is not necessary to get a probate, unless it relates to any immoveable property located in the cities of Kolkata, Chennai or Mumbai and was executed in those cities. A probate can be applied in one of the jurisdiction, where the Testator's assets are present, which will be given effect throughout India.
Common Mistakes
Failure to Update Will
Many times, after the formulation of a Will, individuals forget about it, and acquire new assets or liabilities which are not reflected in the Will. This makes it difficult for it to be executed.
Ambiguous & Complex Language
While drafting the will it is important that the individual's wishes are reflected in simple words. Considering it as a legal document, prospective drafters end up incorporating complex terms which make it unnecessarily ambiguous, making its execution difficult.
Proof of Medical Fitness
While it is not a compulsory requirement under law as long as the Testator was of sound mind during the formulation of the Will. Yet it is better to attach medical certificate from general family physician , as it proves that the testator was medically fit and of sound mind. This increases the credibility of the Will, if it were to be contested.
Family Arrangement
Definition and Purpose
A Family Arrangement is seen as a way to overcome the problems created by lengthy and costly litigation. These are in fact supported by the court of law in consideration of continued harmony in the family. It is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed right or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour. While there is no proper definition of a family arrangement it has been recognized by the Hon'ble Supreme Court.3
Common Mistakes
Informality leading to disputes
The absence of formal documentation leaves room for ambiguity and potential future conflicts. Without clear terms and conditions outlined in a legally enforceable document, misunderstandings may arise, leading to disputes that could have been prevented with proper legal documentation. Moreover, informal family arrangements may not adequately protect the interests of all family members including siblings.
Lack of Registration
A written family arrangement should always be registered4, as it is the proof of the arrangement reached between the family members. In case of a written agreement, which is intended to serve as a proof for a particular arrangement or the transfer or distribution of immovable property is involved, the document needs to be mandatorily registered.
Trusts
Definition and Purpose
A Trust is when someone gives their property to someone else for the benefit of a third person, with or without themselves being involved, or when someone declares that property should be held by another person, not for themselves, but for someone else.
Essentially, it's an agreement between the creator of the Trust, Settlor and the trustees to transfer ownership of assets to the trustee, with the understanding that these assets should be used for the benefit of specific beneficiaries outlined in the Trust deed. This leads to an establishment of a fiduciary relationship between the Settlor and the Trustees, as they get powers like ability to manage investments, settle accounts of the Trust and so on.
The registration of a Trust is imperative for it to be recognized under the Indian Trusts Act. For the purpose of registration a copy of the trust deed needs to be submitted to the local sub-registrar's office with relevant jurisdiction. After a Trust is registered, it becomes a legal entity.
Common Mistakes
Inadequate Planning
The complexities involved in the formation of a Trust Deed, which is very different from the formulation of a Will. Inadequate planning and improper guidance for the formulation of a Trust may defeat the entire purpose of creation of Trust. Many times, the purpose of trust , revocation of trust , dissolution of trust, and role of trustees if not well defined, it may add to complexity at later date.
Ignoring Costs and Tax Implications
Creating and managing a trust can be expensive including on-going fees for trustee services. A proper tax advice is quintessential before formation of Trust and not after. Clients do consider creating Trust overseas also, so they should also take into consideration Foreign Exchange Indian laws in addition to foreign laws of the relevant country.
Gift Deed
Definition and Purpose
A Gift Deed is used to transfer property from one person, namely the donor to another, donee during the donor's lifetime without the exchange of any money. It is used as a tool of estate planning donor's assets are distributed according to their wishes during their lifetime.
In cases of application of a Gift deed to a Hindu Undivided Family or HUF, gifts received by the HUF are exempt from Income Tax and the Stamp Duty limit of Rs. 50,000 in case of an immovable property being gifted is not applicable.
Common Mistakes
Non-Registration of Gift deed
A registered Gift Deed is a legally binding document that formalises the transfer of ownership. This registration process being mandatory in nature not only ensures the document's credibility but also helps avoid future disputes and challenges to the validity of the gift.
Number of witness
In order for a Gift Deed to be valid in India, the gift deed must be signed in the presence of at least two witnesses, who must be of sound mind and have achieved the age of majority.
III. Planning for Incapacity
Power of Attorney
Definition and Purpose
The uncomfortable topic, of us losing our mental and physical facilities, where we may not be able to take decisions for ourselves leads us to ignore the concept of power of attorney. It is critical for us to have a contingency plan in place for such a scenario, and setting up a power of attorney is an essential part of it. A Power of Attorney is a legal document that authorizes someone else to act on behalf of the person granting the power. This authority can vary in scope and can include handling financial, legal, or property matters. The person authorized to act on behalf of the principal is called the agent.
It is important to note that POA is only restricted to the lifetime of a person and is not valid following, the death of the Principal. This applies irrespective of it being a revocable power of attorney or an irrevocable power of attorney.
Common Mistakes
Choosing an Inappropriate Agent
Choosing the wrong person as your attorney is one of the lethal mistakes. Giving a Power of Attorney is not advisable in the absence of a responsible and trustworthy person to act on your behalf. If you do not have anyone who you trust, it is highly recommended that you make arrangements to take care of your affairs personally. Complex legal situations arise out of instances where an attorney has taken advantage of their powers.
Failing to Specify Powers Clearly
A power of attorney can either be springing or current. It if is springing it becomes effective on your incapacity. In other cases, your power of attorney can be used right away. You will need to consider the purpose of the power of attorney to determine if a springing or a current power of attorney is appropriate for you. Most people chose to use springing powers of attorney to limit the control their agent has over their assets and limit their exposure but there are times when a current power of attorney are appropriate.
Advance Medical Directive
Definition and Purpose
An Advance Medical Directive5 is a document prescribing an individual's wishes regarding the medial treatment the person would want if they are not in a position to make an informed decision. The process for getting an AMD has been relaxed by a recent judgement of the Supreme Court, which allows it to be registered before a notary or a gazetted officer, instead of a judicial magistrate. It just needs to be clear that the ADM is being entered into on a voluntary basis.
Common Mistakes:
Inadequate Communication with Healthcare Proxy
One common mistake is insufficient communication with the designated healthcare proxy or agent regarding the contents of the AMD. Without clear communication, the proxy may not fully understand the individual's wishes and preferences for medical treatment. This lack of understanding can lead to decisions that do not align with the individual's intentions.
Conclusion
In conclusion, estate planning is a vital aspect of financial and personal well-being that should not be overlooked or underestimated. It's not just about distributing assets but also about preserving harmony within your family, avoiding unnecessary disputes, and securing your legacy. By understanding the key instruments and seeking professional guidance, you can create a robust estate plan that provides peace of mind and ensures your wishes are honoured, both during your lifetime and after your demise. Remember, estate planning is a proactive step toward safeguarding your future and the future of your loved ones.
Footnotes
1. S. 57, Indian Succession Act, 1925.
2. S. 68, Indian Succession Act, 1925.
3. Kale & Ors. V. Deputy Director of Consolidation & Ors., (1976) 3 SCC 119.
4. S. 17, Registrations Act, 1908.
5. Recognized by the Hon'ble Supreme Court in Common Cause v. Union of India, (2018)10 SCC 1.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
