Most of us plan a lot about various aspects of our life, say, buying a house, children’s education, their wedding, retirement life, medical and even household expenses. One aspect which usually gets overlooked is estate planning. Most of the people are either not aware about estate planning or do not fully understand the importance of it. There is a misconception that estate planning is only for the wealthy, while it is not so. Estate planning is not just building up a business empire and creating various types of assets, it is about how the assets/savings you leave behind reach the right hands hassle-free, whatever little it may be.
Those who are aware of estate planning know about having a Will written and registering/probating it with the help of a lawyer to do it. Here, we will discuss various other options available for planning your estate.
Estate is everything that one owns viz. assets & owes viz. liabilities and responsibilities. Estate planning is the act of preparing for the transfer of a person’s wealth and assets after his or her death. Assets, life insurance, pensions, real estate, cars, personal belongings, and debts are all part of one’s estate. Estate plans must be written, signed, and notarized by the person who owns the estate.
The theoretical explanation of estate planning is “Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximise the value of the estate by reducing taxes and other expenses.”
Different types of Estate Planning
A will is final declaration of a person’s intentions with respect to his property which the courts endorse only after his death. Thus, a Will cannot take care of unforeseen eventualities like any disability or illness as it is towards disposition of property of the deceased rather than management. Most rampant issue that crops up in a Will is contestation on various grounds which may lead to family disputes after the death of the testator. A Probate which is necessary for establishing the rights of the executor or the beneficiaries under the Will in certain cases may take 6 months to 1 year and until such time, the beneficiaries would not be able to use the assets.
HUF (Hindu Undivided Family)
In India, a traditional way of estate planning has been setting up Hindu Undivided Family (HUF) which is a distinct unit for tax policy as per the provisions of section 2 (31) of the Indian Income Tax Act. However, it may be noted that after a property gets apportioned to an HUF, every coparcener has equal right to it and partition of HUF land has often led to clashes and court cases. Therefore, while the HUF with its archaic tax treatment and confused entity fails to cater to the requirements of present-day wealthy the Will is posed with un-certainties and the rigmarole of a Probate.
A trust is formed for various purposes and can prove to be an effective vehicle for succession and estate planning. A trust is a legal document that can be created during a person’s lifetime and survive the person’s death. A trust can also be created by a will and formed after death. Once assets are put into the trust, they belong to the trust itself, not the trustee, and remain subject to the rules and instructions of the trust contract. Most basically, a trust is a right in property, which is held in a fiduciary relationship by one party for the benefit of another. The trustee is the one who holds title to the trust property, and the beneficiary is the person who receives the benefits of the trust. The beneficiaries may be definite and ascertained individuals (in a private trust) or the unascertained individuals (in a public trust).
A Private Trust can be bifurcated into two,
Revocable Trust: When the settlor establishes a trust and retains the right to amend, modify or revoke the trust at any time, however if the author is deceased before the expiry of tenure of the trust – the status of the trust automatically changes to irrevocable.
Irrevocable Trust: When the settlor establishes a trust and the settlor effectively gives up his control over the assets – the trust is irrevocable in nature. A trust can also be set up as a Specific Trust (beneficiary has specific share in the assets of trust) or Discretionary Trust (no individual shares of the beneficiaries are mentioned in the deed and income is distributed to them on the ‘discretion’ of the trustee).
Incorporating or forming an LLC
You can incorporate a business to more easily pass it on to the next generation because a corporation creates a separate identity for the company. You can also create a Family Limited Liability Company (LLC) to facilitate the transfer of assets. The LLC can own the assets, its creator can be a managing member, and other family members can be given an ownership interest in the LLC.
Power of attorney (PoA)
A power of attorney allows you to give someone else authority to make certain decisions for you and to act on your behalf. A general power of attorney gives broad authority to a person you designate as your agent. Your agent, for example, will have the right to control your bank account and to pay bills with your funds. A healthcare power of attorney is a more limited power of attorney that only gives someone control over health choices. A general power of attorney and a healthcare power of attorney are both useful in case of your incapacity because the court won’t have to appoint someone to make decisions for you, and it will be clear to all your loved ones who you wanted to put in charge.
You may wish to structure the ownership of certain assets, such as real estate, as jointly owned property with rights of survivorship. If you do, your jointly owned asset will pass automatically to your co-owner(s) upon your death without the property having to pass through probate. Be aware that if property is jointly owned, the joint ownership takes precedence over any other instructions you may provide.
So, in absence of estate planning, if one dies intestate (in absence of will), assets are than distributed amongst the family members (legal heirs) as per succession laws of the religion that the person belongs to. Example of succession laws applicable as per religion are Hindu Succession Act, Muslim Shariat Laws, Parsi Succession Act amongst others.