WEALTH MANAGEMENT

UNIT 9 : ESTATE PLANNING

9.3. Estate Planning

Estate planning refers to the organized approach to managing the accumulated assets of a person in
the interest of the intended beneficiaries. Wealth may be accumulated with a specific purpose of
being passed on to heirs, to charity, or to any other intended purpose. Without formal structures
that ensure that these purposes are met, there could be disputes, conflicting claims, legal battles,
avoidable taxes and unstructured pay-offs that may not be in the best interest of the beneficiaries.
Estate planning covers the structural, financial, legal and tax aspects of managing wealth in the
interest of the intended beneficiaries.

9.3.1 What constitutes estate?

The term ‘estate’ includes all assets and liabilities belonging to a person at the time of their death.
This may include assets as well as claims a deceased is entitled to receive or pay. The term estate is
used for assets whose legal owner has deceased, but have not been passed on to the beneficiaries
and other claimants. Once transferred, the estate becomes the assets of the beneficiary who has
received the legal ownership. Estate can also be passed on to a trust and managed by trustees, in
which case ownership is with a distinct entity, but periodical benefits from the estate is passed on
to beneficiaries.

9. 3.2 Consequences of dying Intestate

If person dies without making a will, he is said to have died “intestate” and in such case his property
will be inherited by his heirs in accordance with laws of succession applicable to him. The end result
may not be what the person would have intended. If the dependents include minor or incapacitated
children, more than one spouse, elderly parents or in-laws, or siblings and siblings-in-law, there may
be disputes in distribution of property. Distribution of estate may also suffer due to lengthy legal
procedures and administration costs. This could add both inconvenience and financial burden to the
family. Succession is governed by personal laws, which will apply in the case of intestate death.

Different personal laws apply as follows:

The Hindu Succession Act, 1956
(Applicable to Hindus, Buddhists, Jains and Sikhs)
Indian Succession Act, 1925
(Applicable to Christians, Jews and Parsis)
Mohammedan Personal laws
(Governing inheritance of Muslims)
The prolonged dispute, legal battles and costs can be avoided, if intestate death is prevented
through timely estate planning.

9.3.3 Elements of Estate Planning

Estate planning involves the following broad set of activities:
Identifying the beneficiaries and their claim to the estate through a comprehensive
documentation such as the legal Will.
Creating tax-efficient structures such as trusts to manage the estate and make periodic payouts to
beneficiaries.

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Creating organizational structures including trustees, executors, guardians, power of attorney to
perform identified functions in administering, protecting and managing the estate.

9.3.4 Tools for Estate Planning

Estate planning tools can be classified as
 those that take effect during the life of a person and
 after death of a person.

a. During the lifetime of the individual:

Trust
Joint Holding
Gift
Family Settlement
Power of attorney
Mutation

b. After the death of the individual

Will
Nomination

9.3.5 Wills
“Will” is defined in Section 2(h) of the Indian Succession Act 1925 to mean the “legal declaration of
the intention of the testator with respect to his property, which he desires to be carried into
effect after his death.”
The person making the will is the testator, and his rights extend to what are legally his own.
The will comes into effect only after the death of the testator.
The person who is named in a will to receive a portion of the deceased person’s estate is known as a
legatee.
The person named in the will to administer the estate of the deceased person is termed as an
Executor.

a. Essential Features of a Will

A testator can only dispose-off what he owns and what is essentially legally transferable.
Example: Arvind and his wife are joint owners of their house, funded by a joint loan. Arvind wills
the house to his only son, who asks his mother to vacate the house after Arvind’s death. Arvind’s
wife can contest this will on the grounds that she is the joint legal owner of the house, having paid
valid consideration. Arvind cannot bequeath to his son, what he does not own.
A testator can change the contents of the will any number of times, before his death. Such
changes to the will are called ‘Codicils’. A will can also be revoked by the testator at any time before
his death.
A will can only be made by a person competent to make it. A minor or a person of unsound mind
cannot make a will.
Only using the words ‘will’ without making reference to disposal of property upon death of
testator is not a will.
A will has to be written and signed in the presence of two witnesses. However, subject to certain
conditions, persons working in the armed forces can make an oral Will.

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b. Contents of a Will: A will must have the name and address of the testator and a statement
that the will is being made voluntarily. The beneficiaries under the will must be clearly listed as
must the property that is being bequeathed. The will have an executor. It must be signed by the
testator and attested by two witnesses. A will has to be unambiguous and certain as to its intent to
bequeath. To avoid disputes only a single copy of latest valid will should be in existence, witnesses
should sign in the presence of each other, a residuary clause that leaves all assets that remain
uncovered in the bequests to an identified beneficiary should be included in the will and a
statement stating that the current will revokes all previous bequests of any nature should be
included in the will.

c. Registration of Wills: It is not compulsory to register a will. However, it is usually a good

practice to register a will. A registered will cannot ordinarily be tampered with, destroyed,
mutilated, lost or stolen. If a will is registered, no person can examine the will and copy the contents
without an express permission in writing of the testator.

d. Probate: Probate is defined in section 2 (f) of the Indian Succession Act to mean the copy of a
will certified under the seal of a court or competent jurisdiction. A probate certifies that a particular
will was proved on a certain date and is given attaching copy of the will of which probate has been
granted.

9.3.6 Gifts, Joint Holding and Nomination

a. Gifts
A gift is a transfer of movable or immovable property made voluntarily and without consideration.
The person making the gift is called donor; the person receiving a gift is called the donee. Any
person capable of making a contract can make a gift. A gift is usually an irrevocable transfer, but it
can however be revoked if the donee agrees to do so. Gifts are taxable as income from other
source, subject to exemptions provided u/s Sec 56 (2) (vii) of the Income Tax Act. This includes gifts
received from relatives such as spouse, siblings of self and spouse, parents, grandparents, children,
grandchildren, among others. Any gift received on the occasion of marriage or inherited under a will
is exempt from tax. Gifts are routinely used to transfer wealth from donor to donee; especially
where the exemptions mentioned above would apply, thereby exempting the gift from tax in the
hands of the donee. However, any income earned from the gift after such transfer will be subject
to tax routinely in the hands of the donee.

b. Joint Holding
It may be procedurally easy to enable specific family members, such as the spouse or children,
easily access assets through the simple method of joint holding. Joint holding means the property is
held by more than one person and can be accessed by such joint holders subject to the mode of
operations. Bank accounts, property, demat accounts, hares, mutual funds and specific saving
schemes can all be held jointly. The operation of a joint account can be jointly, where all joint
holders have to approve all transactions, or on either of survivor, or anyone or survivor basis. The
specific procedural aspects for joint holding, with respect to how many joint holders are permitted,
what kind of operational choices are available, and what type of transactions need all joint holders’
assent, can vary across different types of assets. It is usually the case that the first holder would be
the registered holder of the asset and entitled to receive information and benefits of holding the
asset. The joint holders can, subject to terms of holding, access the asset after the death of the first
holder. The procedures for accessing the asset are simpler in the case of a joint holding. However, it

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should be remembered that if there is a legal contest among the heirs, joint holders right to the
asset can be superseded by laws of succession as they may apply.

c. Nomination
Nomination is the right conferred upon the holder of an investment product to appoint the person
entitled to receive the monies in case of the death. A nomination is seen as a formal bequest
authorized by the holder of the asset, though in the event of a dispute the nominee’s position is
reduced to being the trustee of the bequest, the final owners being decided according to the
applicable laws of succession. Only an individual can nominate. Non-individuals including corporate
bodies, partnership firms, trusts, Karta’s of Hindu Undivided Families (HUFs) and power of attorney
holders, cannot nominate. Nomination can be done either at the time of making the investment or
entering into an insurance contract or subsequently at any time. Nominations can be modified any
number of times. Nominee can be an individual, company or trust, depending on the terms of
investment or asset. A minor can be a nominee, but a guardian will have to be named. Nominations
to NRIs will be honoured subject to repatriation rules. Multiple nominees may be allowed, with
percentage of interest defined for each nominee.

Different rules for nomination apply for different types of assets.

The purpose of nomination is simplification of payment process in the event of the death of the
holder and not the equitable distribution of estate. Payment to nominee is valid discharge in case of
all financial products. The onus of proving any rights to legacy of the investment so transmitted is
on those that contest such transmission. A will supersedes a nomination, but the company or
mutual fund can still make payment of proceeds to the nominees. The nominee is not a legatee or
beneficiary under the Indian Succession Act. The nominee takes the amount subject to any claim or
right of the owners/heirs or other persons. The nominee may only receive the proceeds, but title to
the assets is not absolute.

9.3.7 Family Settlement and Trusts

a. Family Settlement
A family settlement is an instrument used to achieve peace and harmony in the family when there is
a dispute or rival claims to property that can lead to a long drawn out litigation. The dispute must
be between members of the same family and a settlement entered must be between persons
having title, claim or interest in the property. It must be entered into voluntarily and in good faith
and with the purpose of accomplishing tranquillity and accord in the family.

The advantages of a family settlement are

Family arrangements are not treated as transfer and hence capital gains tax will not arise.
It is not treated as a gift.
The clubbing provision will not be applicable.
A family settlement agreement may be oral or in writing. It may be stamped and registered,
if required.

b. Trusts
“A trust” is an obligation annexed to the ownership of property, and arising out of a confidence
reposed in and accepted by the owners, or declared and accepted by him, for the benefit of another
or of another and the owner. The trust is managed by trustees. The person(s) for whose benefit the
trust is created is the beneficiary. The trustee holds the legal title and exercises control over the

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trust property in the interest of the beneficiary. The trust deed defines the purpose of the trust, the
beneficiaries, the property of the trust and power of the trustees, among others. The trustees sign
the trust deed to indicate their willingness to accept the responsibility for the trust.
Based on the constitution, trusts can be classified as public trust or private trust. Private trusts are
increasingly used as a tool for estate planning to benefit the dependents of the settler of the trust
as well to plan taxes. No probate is required for assets transferred through a trust. Private trust is a
private document as compared to a Will which gets published in the newspapers when executed.
Private trust does not require any registration unless it involves any immovable property. Private
Trust offers an insolvency protection, provided it is an irrevocable trust and assets are transferred to
a trust 2 years prior to insolvency and the trust is formed with a genuine objective. Private trust
offers stepwise access to the family legacy.
The property of the trust may be movable or immovable property. The ownership of the property
has to be transferred to the trust when the trust is created.

9.3.8 Power of Attorney and Mutation

a. Power of Attorney
A Power of Attorney (POA) is an instrument by which a person may formally authorize another
person to act on his behalf or as his agent on all matter or for a specific transaction or particular
types of transactions. There are two parties to a POA – Donor and the Donee. Both the parties to
the POA should have attained majority, be of sound mind and competent to contract.

Types of POA:
General POA: Enables the donee to act on all matters for the donor. The general list of matters
covered in this category includes management of bank accounts, sale of property, attending
dealings in court, etc.
Specific POA: Restricts the donee’s authority to act only on a specific transaction,
e.g. POA granted to a person to deal with the renting out of an apartment only.

b. Mutation
A property when acquired by a person and on becoming the rightful owner of the property should
ensure that all the titles of the property are transferred in his name. Mutation refers to a significant
alteration or substitution of the name of a person by the name of another in relation to the record
showing the right or title to the property. Mutation helps in proper updation of the revenue records
to ensure proper collection of revenue from the person who is in possession of the property.

Review Questions
1. Commission received from business forms part of income from ___________.
a. Business and profession
b. Capital Gains
c. Salary
d. Other sources

2. Long term capital gain from sale of shares is ____________________.

a. Taxed at 10%
b. Exempt from tax
c. Taxed at 20%
d. Taxed at 15% with indexation

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3. The Rajiv Gandhi Equity Savings Scheme, 2012 allows exemption up to _______ for
investments made in eligible securities up to Rs. 50,000.
a. 100%
b. 50%
c. 40%
d. 60%

4. For a person to be qualified as a NRI, he must have stayed outside India for more
than _____ days in a previous financial year.
a. 365
b. 280
c. 182
d. 150