ESTATE PLANNING
People are often so taken up in acquiring wealth and assets, that they forget the very fact that these assets need management and planning to ensure that maximum benefit to be obtained. Asset management is an exhaustive task, however the importance of it must not be understated at all. One of such wealth management system is ‘Estate Planning’ which contributes in seamless transfer of wealth from one generation to the next.
Estate refers to the total value of a person’s assets and liability, e.g., Home, Car, Business, Investment, Jewelelry, Debts etc. The planning for distribution and allocation of such estate after a person’s demise is called ‘Estate Planning’. It is multi-step process which involves close evaluation of the total estate of a person along with crucial thinking regarding the person who is to receive such estate.
Why Estate Planning?
The importance of estate planning is often overlooked and its initiation is often postponed leading to adverse consequences when its very late. Estate planning allows an individual to make thoughtful decision in relation to the management and distribution of their assets and liabilities during their lifetime or after their death. It comprises of drafting of legal document such as wills, trusts, power of attorney etc. It is important to understand that Estate holds so much significance as without such planning the allocation and distribution of a deceased’s asset falls into the hands of the law of the land which might be in contradiction to one’s personal desire.
Estate planning gives oneself liberty to choose the person to vest guardianship rights for their minor child, establish care for dependents with special needs, and ensure the protection and willful utilization of the estate. For Instance, Setting up trusts, formation of will, Registration of Nominees etc. It also holds a special value for the benefit of the young or financially inexperienced heirs. In addition to this, estate planning helps to minimize the severe impact of estate taxes, which may help in maintaining the value of the inherited estate.
However, estate planning is not restricted to financial matters, it also comes in useful when there is need of medical decision and one is incapacitated. With the help of living will or healthcare proxy, one can delegate their medical decision-making power to someone else, avoiding further stress to the family in difficult time. A similar approach can be seen in the matters pertaining to finances and legal affairs.
Tools and Instruments of Estate Planning
In India a person can successfully execute the estate planning with the several options available to them, some of them are briefly discussed below,
1. Will
A will can be simply referred as a last will and testament, it is a legal document in which a person, called as a testator, for the management of their estate after their demise. The will is executed by an executor who ensures that the testator’s will is executed as per his wishes. The executor can be designated as guardians in case of will involving minor and dependents.
For a will to become operative the demise of the testator is necessary. A will can be revoked or changed by a testator before his demise with the help of a new will called as codicil. The administration of will is subject to legal process that validates the will and ensure the execution of it. This process is referred as probate.
2. Trust
A trust can be referred a relationship of legal nature where one party, known as settlor or grantor, transfers ownership of property or assets to another person, called the trustee, for the benefit of a third person, known as beneficiary. The trustee has a legal obligation to manage the property in accordance to the terms of the trust agreement and to prioritize the best interest of the beneficiary.
A trust can be created during the lifetime or upon the death of the settlor with the help of a will. A trust can be revocable, meaning the settlor can modify or revoke the trust or irrevocable, meaning it cannot be modified or revoked without the consent of the beneficiary.
3. Guardianship
Guardianship refers to the legal appointment of an individual, known as a guardian, to assume responsibility for the care and management of a minor child or a dependent individual in the case of death or incapacity of the parent or legal guardian. This is often attained with the help of will or other estate planning and is subject to be active only when the parent of legal guardian is not in the position to take care of the minor or dependent individual due to death of incapacity.
4. Nomination
Nomination is the act of formally choosing a person to receive certain assets or manage certain responsibilities upon the death of the asset holder. It is pertinent to mention that the cases of nomination is usually seen in financial documentation such as bank account, insurance policy, mutual funds etc. A nominee is that person who is chosen by the account or policy holder to hold, manage or enjoy the asset. The benefit of nomination is quick and hassle-free transfer on the specified asset to the nominee upon the holder’s death, without going through the hassling legal procedures.
5. Joint Ownership
Joint ownership refers to a legal arrangement where two or more individuals share ownership rights in an asset such as real estate, bank account, or investment property. Each co-owner, is called a joint owner, and holds an equal or specified share in the property and in cases when a joint owner passes away their share automatically transfers to the surviving owner. Such joint owner can be spouses or child which streamline the transfer and assets to avoid unnecessary paper work to ensure easy transfer of the asset.
6. Power of Attorney
The power of attorney is a legal document through which a person can delegate his right to manage affairs to someone else. The appointed person is referred as attorney-in-fact and has the liberty to take decision regarding the subject matter of the power of attorney. The uses of power of attorney can be commonly seen in the fields of medicine, finances, investment, real estate etc.
How to begin?
1. Assets Evaluation.
It is the first and most basic step toward estate planning. It is crucial for an individual to have knowledge about all the assets he/she possess. These assets can be tangible asset or intangible asset. Only based on such knowledge necessary steps can be taken towards the process of distribution and inheritance of the said asset. This step ensures that the estate planning is with the reach of a person willing to do it.
2. Listing of Debt.
It is important to have complete knowledge of the outstanding debt a person has under their name. It is crucial to understand that the inheritance is not limited to transfer of assets but also subject to transfer of debt and liabilities. Hence, it is crucial for a person to have complete understanding of his outstanding loans. This will ensure a systematic approach towards the planning of repayment of such loan or to bring clarity regarding the person responsible for repayment of such debt.
3. Documentation
Once the listing of all the asset and debts is complete, the next step involves the documentation of all the listings in a formal manner and begin with the process of planning of distribution and allocation of such estates to the particular. This step involves the formation of legal documentation as well such as trust, will, nomination, guardianship etc. This usually requires involvement of lawyers and wealth managers.
4. Review Beneficiary
It is of utmost importance for a person to keep his eyes on the particular that who is going to get benefitted from his estate after his demise. It is crucial to keep revisiting and checking the nominee/beneficiary associated with the several accounts a person holds. A person who has worked his whole life to acquire assets would not want his heirs to suffer to get hands on his hard-earned estate.
5. Reassessment
Reassessment is the most crucial part of the Estate Planning. The estate of a person is very dynamic in nature and tends to keep changing with very minor changes. A person should keep revisiting his Estate Planning and make necessary changes to it to ensure that no discrepancy is present at the execution of the said planning.
Benefits of Estate Planning.
Estate planning has been subject to multiple benefits for an individual. It provides a sense of security to the person and ensures that even after his demise his estate would not go to waste. The fruits of his planning his planning is often enjoyed by his spouse and children. Let us take a brief look at some of the major benefits of the estate planning.
1. Preservation of Intent.
Estate Planning ensures that the inheritance and distribution of the estate of a person is carried out in accordance to the person’s wish. It is achieved through various executing instrument like Will, Trust, Nomination etc. It is also important to know that in those cases, where there is no estate planning, the estate in question will be subject to Succession Law of the Land. This may result in cumbersome legal procedure to be followed and may attract unnecessary burden over an already grieving family.
2. Mitigation of Intra-Family Dispute
The presence of estate planning mitigates the possibility of dispute or conflict between the heirs or interested parties. The estate planning ensures a systematic and well-defined distribution of the estate of a person, which leaves no room for any room for the protracted and costly litigation. It is crucial to remember here that the estate planning is subject legal enforceability and also comes with necessary tools to exercise in case of conflict. These tools include, no-contest clauses, mediation provision and trust agreement.
3. Reduction of Tax Liability
Proper estate planning, could help by reducing the tax liability arising due to change in possession. This may result in reducing the value of inheritance left for the beneficiary. In jurisdictions like Mumbai, Chennai and Kolkata, it is compulsory to probate a will where immovable property is involved. Such probate attracts court fees, time delays and public disclosure. However, with the help of an effective estate planning and using right tools like, joint ownership, nominations and private family trusts, such cumbersome process can be avoided ensuring a smooth, confidential and cost-efficient transmission of asset. Such similar planned approaches can help to loosen liability of the estate and ensure the entire value of the estate stays intact.
4. Protection for Minor and Dependents
Estate Planning creates a safe cocoon around the minor and dependents. In case a child is below the age of 18 or a person is dependent, in such case estate planning could help for the appointment of a guardian in case the demise of the estate owner. It is pertinent to mention that such guardian is legally appointed and obligated to take care of the minor or dependents. This ensure stability and care for the minor and dependents ensuring that even after the estate owner is long gone the dependents shall not suffer.
5. Incapacity and Medical Emergencies
The benefit of estate planning is not just about the perks arising after the demise of the estate owner. It also secures the family for situations where the owner becomes mentally or physically to make decision. It comes in relevant in the cases like aging, accidents, illness etc. Such scenarios can be handled with the help of the power of attorney, etc.
Should you invest in estate planning?
As long as a person is healthy and alive, they are sufficient to care for their estate and take decisions to grow it further. It is a misconception that only ultra-wealthy care about estate planning – but in reality, it is something everyone can benefit from. After the demise of a person he may not be able to add further to his wishes but it does not mean that his previous wishes die with him. The owner of an estate shall consider estate planning to ensure that after his demise his wishes gets fulfilled through his planning and legal documents. It is an utmost responsibility of an estate owner to ensure that his estate is inherited in accordance to his/her wishes.
In summary, estate and succession planning are indispensable components of responsible financial management. They empower individuals to preserve their wealth, facilitate a smooth transition of assets, protect loved ones and minimize legal and tax complexities. By investing time and resources in these planning processes, individuals can leave a lasting legacy while securing the financial well being of their heirs.