Wills and Estate Planning

Well-designed estate plan still makes a lot of sense to make sure that your assets are passed on in the most efficient way to your beneficiaries and avoid conflicts among your heirs and to minimize court costs and proceedings (probate or administration).

At the same time, I believe that a well-designed estate plan must take into account the financial risks of health care that may be needed, especially long-term care. Otherwise, you could wind up with no assets in the estate, and it won’t matter how good your estate plan was.

Some of the major estate planning tasks include:

  • Creating a will
  • Limiting estate taxes by setting up trust accounts in the name of beneficiaries
  • Establishing a guardian for living dependents
  • Naming an executor of the estate to oversee the terms of the will
  • Creating/updating beneficiaries on plans such as life insurance, Retirement plans, Mutual funds, demate accounts.
  • Setting up funeral arrangements
  • Establishing annual gifting to reduce the taxable estate
  • Setting up durable power of attorney (POA) to direct other assets and investments

What is a Trust? A Trust is used as an instrument to hold property for dependents and family members (intended beneficiaries), and alongside reducing the burden of tax. The law governing Trust in India is codified and contained in the Indian Trust Act, 1882.

A Trust is one of the ways through which an individual can plan for his/her Estate*. The other ways of Estate Planning are Wills, Insurance, Gift, Power of Attorney, transfer of property and partition. It can be used for family tax planning purpose also.

[*Estate is the process through which one arranges legal transfer of assets (in anticipation of death or incapacitation) with an intention to preserve the maximum amount of wealth possible for the intended beneficiaries].

Common examples of Trusts are Children specific Trusts – where the Trust corpus is handed over to them upon their attaining a specified age or upon their marriage. Another example is Retirement Trusts – they are set up by employers to provide retirement benefits to employees in the future (such as an EPF Trust).

Who can form a Trust? A Trust can be formed –

  • By any person competent to contract – (i) above 18 years of age; (ii) of sound mind; (iii) not disqualified from entering into any contract by any law; or
  • On behalf of a minor (only with the permission of a principal civil court of original jurisdiction).

Requisites to a Trust –

(i) Author of the Trust – someone at whose instance the trust comes into existence (also called as Settlor);
(ii) Purpose to form a Trust – to divest the ownership of the Author/Settlor of the Trust in favour of the Beneficiary/Trustee;
(iii) Trustee – every person capable of holding property can become a Trustee;
(iv) Beneficiary – to whom the Trust income/corpus is intended for;
(v) Subject matter of Trust – any asset capable of being transferred can be a subject matter of a trust.
All these requisites are required for a Trust to legally come into existence.

Following are the types of Trusts and their tax implications, explained in a simplified manner:

What is the process of creating a Trust? Following are the steps to create a Trust in India.

STEP-1: prepare a family Trust Deed – A Trust Deed includes name of the Author, Trustees, Beneficiaries, purpose of the Trust, administration of the Trust, and other important clauses.

STEP-2: Transfer of Immovable Property to Trust – A registered (in writing) document is necessary to set up a trust if immovable property is being transferred to it. The trust deed should be made on stamp paper and registered with the Registrar of Assurances (under the Registration Act). The written document should contain complete description of the property so as to clearly identify the property; the title of property should be clear (free from mortgage and litigation) in order to be transferable to the Trust.

Transfer of Movable Property to Trust – For movable property, no written document or registration is necessary. A movable property can be transferred to a Trust by mere change of ownership of the property (by physically handing over the possession of the property) to the Trustee, with a direction that the property be held under Trust for the benefit of the Beneficiaries. For example, handing over the fixed deposit certificate of a bank to the Trust.

STEP-3: Once a Trust is set up, the settlor (for example, the parent) can contribute more funds to it as and when he/she wants to. Even the trustees (both parents) and also friends and relatives can gift funds to the trust. You can contribute more funds to it as and when you want to and there is no limit specified to it.

Note: The trust stands dissolved once the corpus has been distributed

A written trust-deed is always desirable even if not required statutorily as it is an evidence of existence of a Trust, specifies the Trust-objectives, helps to control, regulate and manage the working and operations of the Trust, and lays down the procedure for appointment, rights, duties and removal of the Trustees.

Gift, Will or Trust – Which one to choose? Gift, Will and Trust are unique instruments through which you can pass on assets to your loved ones. A Gift is used when you want to gift (assets) to your loved ones while you are alive; a Will is used to transfer the ownership of assets to the Beneficiaries after you are no more; A Trust is used when you would like to transfer ownership of assets to the Beneficiaries at a specific date in the future.

A Will has its own pros & cons – the con being that the execution of the Will is time consuming and can be contested in a court. However, a Will can be changed (modified) any number of times during your life, unlike a Trust Deed which cannot be revoked once made; that means it would be difficult to re-claim assets that have already moved to the Trust in case you need them back in the future.

Also, in a Trust, there is the possibility of the Trustees turning unfaithful. Therefore, it is important to appoint Trustees who are trustworthy. In case of Gifting, although it is much easier to just gift the assets to your loved ones, any income arising from such gifts will be clubbed with your income and taxed as per your income tax slab rate.

In India, although there is no inheritance tax, which takes some appeal off from forming a Trust (as a Trust reduces your tax liability but does not make you completely tax exempt), a person in the higher income tax slab can create a Trust if he/she is looking to transfer assets to their loved ones in distant time. This way, it helps one have control of their assets, create wealth for the Beneficiaries and also aid in saving taxes.