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personal finance | IST

Here's how you should plan your succession

Life is uncertain and unfortunate circumstances can strike at any time. Such events leave not just an emotional but also a financial impact on those left behind, which is why having a will and a proper plan with respect to your estate and properties is a must.
CNBC-TV18 caught up with Neha Pathak, senior vice president at Motilal Oswal Wealth Management to discuss how to plan your succession and why it's important to have a legal will.
Edited Excerpts:
Do you look at all aspects relating to estate planning, what all does it sort of comprise? Is it just about creating a will, is that the bedrock of the succession plan?
It would not be only a creation of a will, we would also look at what your assets are and how best you can transfer it in case something happens to you. To give you an example, if I have a client who wants to transfer everything to his son to take care of his wife, however, if he holds everything jointly along with his wife the transmission may get a little more difficult because the joint holding is with the wife.
So, that is why we have to go through each and every asset. Making a will and stating that in case something happens to me everything goes to my wife can get a little difficult. So, you have to go through each and every asset, asset class and the holding pattern to decide how the asset will go from one person to the other.
Let me understand how the law works in case there is no will. If you simply pass away without any sort of documentation, any statement of your intent then in that case, what would the rights of the wife be or if it is the lady passing away who has substantial assets in her name, what would the rights of the spouse be and what would be the rights of the children?
In India, we have something called personal succession law, unlike other countries where there are uniform codes. In India, we are trying to implement uniform codes but it is still in the process. Here, we have something like Hindu Succession Act or a Sharia Law, every caste or religion has their own laws.
So, in case a Hindu male passes away then the asset is divided equally between his wife, his children and his mother will be forming a part of that. It depends which caste you belong to, which personal religion you follow and accordingly one would decide how it will happen.
As far as Hindu male is concerned, you said his mother also has a certain right, is it equally divided, what does the Hindu law say?
It is basically the mother has to be maintained. Since the old age thing has continued that son is supposed to take care of the mother, the same thing continues over here also in the law.
There is nothing stipulated in terms of a ratio or a proportion in the law?
A: For the wife and for the kids, it is of equal proportion. If we move to the Muslim law, it is absolutely as per the Sharia law, there are percentages divided, so depending on the number of children, your wife, your brother, there are a lot of relatives that are defined over there and accordingly the percentages are divided over there.
So, Hindu law or the Muslim law as the case might be that will prevail if there is no will?
Yes. However, in Muslim law by will you can only bequeath one-third of the estate, not 100 percent. The remainder will have to go as per the Sharia laws. In Hindu law you can deal with 100 percent of the estate.
For the sake of the discussion, we will look at the way the Hindu law is worded and what that allows you to do. If there is no will then as we discussed there is the children's right, the mother also has a stake and of course the wife. Now if there is a will that should make the whole process a little more amicable and easier perhaps. What are the first steps? People also have this notion of really do I have that much of savings, I just have some Rs 50-60 lakh across deposits, maybe some shares, how I really need a will, so is there a threshold you advice clients above which a will is important?
You should not look at a threshold for a will. A will should be formed irrespective of your quantum of wealth that you hold. I hold one property, I have a bank account, I have a job, I have PPF, I have gratuity, I better have a will in place because I might have done some errors somewhere. I might not have changed nomination as simple as that and nominee gets everything when we talk about the financial assets, at least for the financial bit.
When you start working, most of the people were not married. It happens that nominee is still your sister or father or your mother, in which case if something happens to you, the asset goes to them and it doesn't go to your wife or your children whom you actually intend to give. That is why it is always advisable that have a will in place.
The will is going to override any previous nominations that you may have with respect to these assets whether physical assets or financial assets?
There is a back and forth that keeps going between law and what the will says and what the law says.
My understanding is that you can actually write your will on a piece of paper and get two witnesses to look at it and it will hold water, is that right?
That is absolutely correct? You can pretty much write the will saying that I am so and so and I am fully conscious of what I am doing and my assets go to whoever I wish or intend to give it to, sign it, get it signed by two witnesses and that is a proper valid will.
However, if you make this, you are not securing everything 100 percent. You might as well secure it properly by saying that the assets will go to such and such person in case something happens to me and detail the assets.
As you said this does hold legal muster but there is also the question of probate - making the will absolutely legal and getting a court seal on it. Do explain that process to us and its importance? Is it necessary to get this probate?
Probate is a process where there is an executor who is mentioned in the will. An executor is a person who will take the will to the court and accordingly execute it and does have the assets transferred from the deceased person's name to the people who are mentioned in the will who are the beneficiaries.
The executor is like an administrator of a will. He will go to the court, get an order if the order comes in their favour it is known as probate decree. If it is contested, this time people can go ahead and contest the will, they can say that this will is not legal or the assets which are mentioned should come to me or he owes me money so creditors can come forward, all these things can happen while an executor goes to the court to probate the will.
So, probate is an order from the court saying that the assets which are mentioned should go to the rightful beneficiaries who are mentioned in the will.
So, this is when there is no challenge or challenges have been put to rest and a favourable order is granted to the executor of the will by the court?
Yes.
One of the things that always comes up or many times comes up is this question of sound mind and we hear of stories where the soundness of the person's mind is being questioned. How does law define sound mind and what can you do as a person who is writing your own will to ensure that it is less prone to a legal challenge from different parts of the family etc?
We generally recommend this that have a doctor's certificate put in place. So, whoever is your general physician or a family doctor, the onus is upon them to give a certificate saying that the person is of sound mind and physical health and can go ahead and make the will. So, you attach that to your will.
So, that will make it a little more watertight and less prone to litigation and challenges?
Yes absolutely.
Any other things that you would have seen in your experience where will get contested and it ends up getting into a long drawn fight and stuff that people can try and avoid?
A lot of people actually in India think a will is a taboo subject to talk about in the family. They think that talking about a will is talking about a death. Thus they do not talk about it or if they form it they hide it in some cupboard or give it to a relative to safe keep and never ever talk about it.
So, in case the relative shifts the house or the relative is not there anymore, that will which was made by the actual person that is also not there. In that case, people don't know, the expectations are different from what reality is. That is where people would want to contest the will, they may want a different part of the asset and actually what might have been given to them would be a totally different part.
So, it is important to have a clear discussion and at least let the main family members know that there is a will in place?
Absolutely.
Can all kinds of properties, financial assets- can anything be put in a will and what happens to assets which are not residing in India? For the rich and wealthy who may have UK house that needs to be part of the planning the process, or property elsewhere. So, how are those assets dealt with?
Every jurisdiction has to be dealt with in a separate manner. So, if you have a will in India then you can include every kind of asset you have in India in that will.
You can actually mention the assets which are there outside of India also in the will but the way it should go would be as per that particular country's law.
For example, a country like UAE has got a uniform code, which means that Sharia law would apply on each and every person who is residing in that country.
So, if a person passes away and if he has assets such as land or bank account or has business interests over there then in that case, the assets would go as per Sharia law and would not go as per what he has mentioned in his will in India.
This is when a person passes away in UAE or that jurisdiction?
Even if he passes away in India and has assets in UAE then even on those assets, the law of land would apply. In which case, one has to go to that country, make a proper will over there, they have to convert it into Arabic and register it with the concerned authority over there.
So, it is not as easy as saying my UK house is going to this family member or my property in Singapore will go to another member the family - so it doesn't work like that. You have to work with jurisdiction by jurisdiction?
Yes.
Talking about type of assets - will property, financial assets, art, and valuables anything can be included in the will?
Anything and everything can be included in the will - be it collection of stamps, collection of swords, arms, jewellery, specific jewellery all those things can be mentioned in the will.
To touch on issues that NRI's face - Is it little more difficult for those Indians residing outside the country to go through this process of will and then going and getting a probate - how can they look at these things?
What happens is an NRI when he is actually residing outside of India, he cannot take care of the property as if he was over here. For example, if one has a simple piece of land and want to grow something, I don't want people to encroach upon that land then how do I protect that - an NIR cannot keep coming back to India to check on that because they have their own work over there.
Plus there are certain investments which are open to NRIs and if he wants to make those investments, how does he go about doing that. If there is a flat/house that we want to put on rent - most NRIs take investments in India in form of residential assets and they want to put it on rent and then sell at some point of time.
For doing anyone of these things like put it on rent or sell it or purchase a new property, he would have to be physically present over here.
Are these assets that NRIs have inherited?
Inherited or acquired over the years.
Which eventually they want to pass on to the next generation?
Yes. Since they have to be there physically present it gets difficult for them to handle these things - How are you supposed to stop an encroachment when you are sitting in the US or Nairobi. How do you put a flat on rent? These are problems which NRIs face.
In these cases, we tell them that instead of holding these assets in your personal name, you hold it in a trust name and these are private family trust.
The private family trust are formed under the Indian Trust Act and nothing like a charitable trust, so there is no 80G requirement over there or no registration with the charity commissioner, it is a simple private trust formed by family members, for the family members as recognised by the Section 56, which talks about relatives in Income Tax.
Now, when you keep an asset in a trust what happens is you do not require probate. So if somebody is inheriting a property from an individual then they have to apply for probate. If you are benefiting from a property which is forming a part of a trust, in that case, you do not need to go through the probate process, a trust is not subjected to probate.
For example, if I have created a trust which has all my properties financial, physical etc and then I need to do my succession planning for children, relatives later on, the trust creates a will, what about member trustees? How does it work?
When you are creating the trust, you are making a trust deed, in which you are going to be putting down what are the objectives of the trust. So, the objectives can be to provide for your children, for their marriage, for their education or to provide for your grandchildren, to make sure that assets are not given out on lease or loan or there is no borrowing or lending in the trust.
There are a lot of clauses that are there at the time of the formation of the trust. The job of the trustee is to adhere to these clauses. Those will be his guidelines and he has to follow those.
The beneficiaries can directly benefit from the income of the trust or you can put a period over there - say after 50 years the property will get transferred in to my son's or daughter's name and in that case, the property would get transferred from the trust into the beneficiary's name.
But people generally prefer that the benefits keeps going to the beneficiary rather than the property or the asset itself. So the corpus keeps building up and he benefits keep going to the beneficiary.
That is food for thought for those who do want to look at the slightly more evolved process of approaching their estate planning, they can look at the trust route as well. Now coming to the very important issue of taxation - right now in our country there is no concept of an estate duty or inheritance tax - what are the other kind of taxes you still need to keep in mind when you are looking at creating your will?
You have to keep in mind inheritance tax of estate duty because at this point in time we do not have it in our country but at a later date, it may be introduced. Also one needs to keep in mind that in other countries also this kind of tax already exists.
Is it as high as 40-50 percent in certain countries?
Yes, Japan has it at 55 percent.
So if you are getting an asset worth Rs 1 crore, Rs 55 lakh goes to the tax man. What else from a tax point of view should one consider?
From a tax point of view, one should consider these taxes at least and one should also keep in mind that if tomorrow your children want to plan their estate - so you have made certain capital during your life, your children will also make capital and so together it makes a very large chunk.
So tax wise one has to wonder that would it come under the land ceiling act, would capital gains come into play. So, while creating any kind of thing be it a will, be it a trust, any kind of estate plan - so you have to talk about all the income tax rules, capital gains short-term, long-term.
You also have to think about land ceiling acts and there are various other acts one needs to keep in mind before you go ahead and implement an estate plan.
For instance when capital gains come into the picture then it will be capital gains over the entire period. You could have held that asset for 30 years and it's inherited by your child, who holds it for another five years - eventually whenever that asset is going to be sold of it is going to be that entire period over which the taxation would apply, right?
Absolutely.
Does the trust structure help in anyway whatsoever when it comes to smarter tax planning?
For the inheritance tax bit it is the best structure, worldwide it is used for saving against inheritance tax. The trust has to be formed in a particular method and in a particular way, so that the person who is forming the trust his assets do not come under the inheritance tax purview.
So, there is a certain limit or threshold beyond which there would be estate tax that would be applicable.
So going back to our central point - that is the creation of a will and getting a probate from the court. How long does the process typically take what are the typical legal costs?
If we are lucky it will take anywhere between 3-6 months but if contested then no body know how many years it would take.
The fee would be different, the Bombay High Court has a fee of Rs 70,000 for the admission of a testamentary petition, which means applying for probate and after that court fee and other ancillary charges.
It can become an expensive affair if you look at it from a long-term point of view. It has been a very long time that the court has not revised the fees, so there is a possibility that there might be a revision of the fee and for sure the advocates fees is much more than the court fee.
So, final advice, or tips as they start looking at this process of planning for the future?
I can suggest that let us not make ourselves the lawyers, let the lawyers do their job. Though people can make a will on their own, they should engage a lawyer who can create a proper will for them or get a proper advisor who can do it for them and same would apply for the creation of any kind of estate.