Not so long ago, it seemed that it was all right to verbally let one’s heirs know what they would inherit once you were gone. Recent high-profile cases (think the Ambani brothers) have focused attention on the estate division battles of the super-rich, but it isn’t just wealthy families which are running into disputes over inheritance. With soaring real-estate values, the question of how to divide up an estate, especially if it involves property, could cause major dispute.
“People find themselves so busy these days that they only have vague succession plans with no documentation. But irrespective of age (everyone) needs to keep his or her succession planning ready as death always comes unannounced,” says Hemant Batra, advocate and senior partner at the law firm of Kaden Boriss. It therefore does seem like a no–brainer that it helps to have a clearly articulated will or succession plan. And we mean clearly articulated.
Take one recent case described by Subash Lakhotia, a Delhi-based tax consultant. Before his death, this client had equally distributed his property between his sons in a written will. The will also said: “My wife will have the right to stay in the house owned by me.” Guess where his wife ended up: in a small garage that was part of the house, thus technically meeting the requirements laid down by her husband.
It goes to show that having a will is not enough unless it clearly spells out what the person has in mind. In this instance, the wording should have been— “My wife would be permitted to stay at the same place occupied by me that includes my bedroom, drawing room, kitchen, lobby and garden.”
This is not to suggest that everyone should necessarily pay for an expert lawyer or a wealth manager to write up a will. You can always make your own will, as long as you are clear about what you are doing.
“A will is the most widely used method of succession planning in India,” notes Lakhotia. “It doesn’t tell you what the format should be for preparing what would be considered a legal will. But the actual job of writing a will could be simple. It can be as short as a few words—‘All to wife’—or you can detail it over several pages. You can write it on plain paper in whatever manner you want. Some are even allowed to make oral wills like armed forces personnel.”
Even registration of a will is not compulsory, though it does give authenticity, notes Lakhotia. However, if some changes are made in the future, the updated will needs to be registered again so the first one isn’t considered as the last valid will.
Here’s a short primer to help you make out an effective succession plan. It is not a substitute for thoroughness but will at least give you an idea of what you ought to do.
The will remains the most popular method of passing on property and wealth in India. But joint families on the decline and growth wealth, especially in terms of non-land assets, and other options, such as private trusts, have come to fore. Then there is the Married Women’s Property Act, which can also play a key role in estate planning.
Making a will
Under section 2(h), of the 1925 Indian Succession Act, a will is the legal declaration of the intention of a testator, who makes the will, with respect to that person’s property, to be carried into effect after the death of the testator. The provisions of this act govern wills in the case of Hindus, Sikhs, Jains, Buddhists and Christians. For Muslims, the Muslim Personal Law typically governs the wills.
Here are some points to remember while making a will:
A will must be signed or marked by a thumb impression of the testator.
Must be attested by at least two witnesses.
It would help to keep the language unambiguous and the details of the property spelt out, such as the six shawls, each worth Rs6 lakh, that one of Lakhotia’s clients owned and wanted to distribute to specific heirs.
The law doesn’t give you complete freedom in deciding the heirs yourself. Under the Hindu Adoption & Maintenance Act, 1956, for example, the specified dependants of a Hindu testator—widow, minor children, unmarried daughters and parents—are permitted to claim maintenance allowance from the property.
Because of these nuances, it might help to have a lawyer draft the will or at least make suggestions on how to avoid future pitfalls.
A big potential problem with wills could simply be not disclosing it, say experts. This often puts family members at loggerheads after the death of the testator because someone might believe they were promised an asset but it doesn’t show up in the written will.
This doesn’t mean there won’t be trouble when the will is disclosed. But at least then you have the choice of either modifying it or putting your foot down so the heirs are clear on what they will get. In one recent New Delhi situation, described by Batra, a father with two sons, the elder one in the UK and the younger one in India, ran into a situation where both sons rejected the will. The disagreement between the sons stemmed from the division that the father proposed for his two properties, a farmhouse outside Delhi and a bungalow in South Delhi. Because his younger son was already living in the South Delhi house, the father thought he would like to continue living on the same property while he assumed the older son, having lived abroad, would prefer the farmhouse.
When he read out his will at the friendly insistence of his lawyer, he was quite surprised to find both the sons wanted the opposite of what they had been given, thus allowing the father an opportunity to amicably sort out the situation while he was still alive.
Despite India’s preference for the will as a way to distribute property, the trust structure is quite popular overseas when it comes to passing on property. The Oxford dictionary defines a trust as an agreement whereby a person (a trustee) holds property as its nominal owner for the good of one or more beneficiaries.
A “trust is also viable to keep your assets together through generations in large families if one doesn’t want the fragmentation of property”, says Adrish Ghosh, vice-president, IL&FS Trust Company.
“People are now gradually getting sensitized towards succession planning and it’s no more limited to (just) wills. Currently 60% of our clients go for trust structure and gradually insurance under Married Women’s Property (MWP) Act is also picking up pace as it keeps your property encumbrance free,” says Himanshu Kohli, director at Client Associates, a wealth management firm.
Some basic guidelines:
Any person can act as a grantor/settler (who forms a trust) provided he or she is competent to contract in terms of the Indian Contract Act.
The grantor must have title to the property that is being put into a trust
There must be a beneficiary (who benefits from the trust) or a class of persons as beneficiaries.
There must be a trustee (executor) or there could be a number of trustees. Any person capable of holding a property can be trustee but in case the trust requires the trustee to use his or her discretion, then the trustee must also be competent to contract in terms of the Indian Contract Act.
Trusts involving immovable property can only be created through a written document.
There are companies now that have begun providing trust services to high net–worth individuals, such as IL&FS Trust Company Ltd, DSP Merrill Lynch Trust Services and Kotak Mahindra, among others. Private trusts are being billed as a way to avoid the delays that come with a will where there are certain legal procedures to follow to get it probated, during which the assets are frozen and public might have access to the list of assets. In a trust, the ownership is typically passed on to the trustees and it tends to be a bit more confidential when it comes to public access to information about private assets. Trusts can also go into effect during the life of the settler and specific conditions can be imposed on the trust’s beneficiaries in terms of when a block of money can be distributed.
Married Women’s Property Act
Life insurance remains a very widely recognized way of creating wealth for dependents. While the insurance provision under this act is not a substitute for a will or a trust, it has been recognized as an efficient way of succession planning. Under Section 6 of the MWP Act, an insurance policy assigned by a husband to his wife, becomes her absolute property, thereby making the proceeds from this policy encumbrance free.
Like a will or a trust, it can also be started by individuals. All that is required, while signing an insurance policy, is for the insured to sign an additional document to assign the policy under the act to his wife or children. A notional trust is created to hold the money and then pass it on to the beneficiaries. But this cannot be done with existing policies. This law is only applicable to new insurance policies and it cannot be reversed under any condition. With the tax returns season coming around, perhaps this is a good time for you to start thinking long-term. After all, where there is a will, there is a way.
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