Financial Planning

Basic Guide To Estate Planning

Friday, May 22 2020
Source/Contribution by : NJ Publications

Scope of financial planning and awareness about personal finance have gone up considerably in last one decade or so with well traveled average Indian and increasing earning/savings capacity. But the challenge that remains both for clients and planners is that we all prefer to plan something which we can foresee for our future or something which comes out of compulsion like planning for buying a car or house, savings for kid's higher education and marriage or even planning for a vacation abroad. Distribution of wealth is as important as creating of wealth and that is why despite complexity involved, one can not ignore the most important aspect of 'Estate Planning'.

Estate Planning is nothing but legal arrangement for transfer/distribution of one's assets when he/she is not around or simply to protect or preserve assets during their lives. Common misperception among individuals is that estate planning is only for rich people but this is not true. It is a fact that importance increases manifold for rich and successful people, but even for a common individual the need for estate planning can not be ignored. In fact I would like to put it in a way that if large corporate houses like Tatas, Birlas or Mahindras of the world require a well defined estate planning then a common individual who has limited wealth to distribute must have a well defined estate plan in place in order to avoid any conflict among his/her family members. Regardless of the amount of wealth you have generated, it is important to understand and prepare a estate plan in order to make sure that your financial & philanthropic goals are met even when you are not alive.

It is an accepted fact that the need and importance of estate planning depends on life stage and situation of every individual but it is also an accepted fact that this is something which should not be ignored.

The importance of 'Estate Planning' has gained momentum among corporates recently after much highlighted legal battle of Ambani brothers after the death of Reliance patriarch Shri Dhirubhai Ambani. Here we will try to understand how individual investor can benefit from estate planning.

Estate Planning For Everyone:
Estate Planning is required for everyone who has estate and who wants this estate to be distributed as per his/her wish rather than simply getting passed as per succession laws. Estate is nothing but the difference between your assets and liabilities, irrespective of its size or value.

The most common idea that comes to our mind when we talk about estate planning matters related to property and preparing a Will. But estate planning in totality is much beyond just making a legal will and matters involved beyond just property. The fact of the matter is, detailed estate planning includes every asset that an individual owns from property, investments, business, jewelery, bank accounts or any other asset that an individual owns.

Mode of Estate Planning:

Writing a Will:
This is the most common way estate planning is done in India. A Will is a legal document in which an individual can mention the way he/she wants his/her estate to be distributed after his/her death. Thus a Will comes into effect only after the death of testator/creator of the Will.

The Indian Succession Act, 1925 defines a will as : A will is a legal declaration of the intention of the testator, with respect to his property which he desires to be carried into effect after his death.

A Will can be made by any person who is above 18 years of age and is of sound mind. Registration of a Will is optional but has to be attested by two or more witnesses, each one of them should have seen the testator signing the Will. However it is always advisable to register the Will. However registration does not affect validity of the Will. Whether registered or not , a Will must be proved as duly and validly executed as required by the Indian Succession Act.

Validity of Will : A Will becomes 'Void' , becomes not enforceable in following situation:

  • If a person making a Will is of unsound mind or not capable to contract (below 18 years of age)
  • A Will, obtained by force, coercion or undue influence is void.
  • A Will made under influence of intoxication or in such a state of mind is a void will.

Traditionally creating a Will has been preferred way of estate planning in India. But a Will can be challenged on numerous grounds with more and more cases of Will being challenged in court or family disputes arising on validity/authenticity of Will, creating Trust is more preferred mode of estate planning.

Estate Planning through Trust:
The basic objective of estate planning is to protect interest of family members or beneficiaries. Due to possibility of legal dispute among family members with regard to legality of will and to protect interest of minor family members, creation of trust can prove to be a better and smoother way of estate planning.

Any person who is a major and capable of entering into a contract can create trust. A trust is a contract in which property/estate is managed by one person or persons (trustees) on behalf of beneficiaries. The main objective of estate planning is to take care of interest of spouse, children and objective of philanthropy. This can be taken care of best by creating a private trust.

Advantages of doing Estate Planning by Creating Trust:

  • In business there can be huge loss but assets that are put into trust remain safe because Trust is a bankruptcy remote structure.
  • The person who creates the Trust can put himself as one of the beneficiaries and hence can enjoy the benefits during his lifetime whereas a will comes into effect only after death of the creator.
  • A person can avoid family dispute as trust does not require probate.
  • The person can make provisions for philanthropic work or charitable purpose by creating charitable trust.
  • Administrator/Protector of the Trust can be appointed which ensures that activities of the trustee are conducted under supervision of administrator/protector.
  • The trustee has power and duty as assigned to him under trust deed for which he is accountable to perform his duty, manage Trust property as per the deed. There is a fiduciary relationship between trustees and beneficiaries. Best suited to protect interest of minor children in the family.

Creation of Trust or Will, both have their own advantages and disadvantages. But Trust scores over Will in a sense that Trust does not require probate and an individual can remain in control of his assets even after transferring them to Trust. Estate planning is best controlled and executed through trust because a Will gets executed only after one's death.

Whether to do estate planning through creation of Will or Trust is an individual's choice but what is important is to put a plan in order to avoid any kind of family dispute and to protect the interest of your spouse and child/children. Also to be considered is to consult a legal expert who can guide you with legality of creation of Will or Trust.


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