It is simply a process for an individual to arrange the transfer of his assets in the event of his death or incapacitation
Estate planning is not just for the rich and famous. It is simply a process for an individual to arrange the transfer of his assets in the event of his death or incapacitation. In fact, as soon as you acquire some assets or have dependants, you should start planning for your succession.
The goals of estate planning are to protect, preserve and manage your estate/assets during and post your life. In fact, looking at the various disputes in families in the public domain, estate planning is becoming increasingly necessary for every individual to ensure a planned succession, avoid family feuds leading to disintegration of businesses and lengthy court battles. Also if estate duty is reinstated in India today or in the near future, estate planning may turn out to be the best tool to minimise the estate duty. As this process is legally binding, it is important to do so in a timely manner in order to provide for the family. So, what does it take to make an efficient estate plan? Your starting point should be to draw up a comprehensive list of assets. Then figure out how you want to bequeath these assets, ideally in consultation with your family members.
Trust versus will: A will can be challenged in court. Usually, in a high-profile family, some member is likely to be unhappy over the distribution of wealth under a will.
Such a person could always raise hands in a court. But he cannot do so if wealth has been put into a trust.
A trust protects your assets from probate, keeps it out of the creditors' clutches and provides confidentiality, since the names of the beneficiaries are not disclosed, nor are the assets listed.
The main reason for this is the lack of flexibility and control over the end use of your assets. You cannot list out an investment mandate for your wealth nor can you allocate your wealth for somebody who is yet to be born, which you can do with a trust. Also, India doesn't have the concept of a living will. A trust helps you manage your wealth during your lifetime, unlike a will that is operational only after your death. Given these numerous advantages, a trust definitely scores over a will in a big way.
Before you opt for a trust: Though trusts give you the much-needed flexibility, you need to be careful of certain bloopers that you might make. First, choose the right trustees. A major problem could arise if you don't get the right trustee. After all, it is the trustee who manages your trust. Second, envisage your beneficiaries well.
There's very little that you can do if you choose the wrong beneficiaries.
A disadvantage of using trusts is that you cannot pull out an asset that you have put into a trust. So, make sure you only put that part of your wealth into the trust that you are not going to require in your lifetime. Also, people who have several listed companies need to be careful as to how they use their trusts. Most of the ultra HNIs, who have several listed companies, will be advised to create a holding company. In terms of structure, this is perfect but one more step can complete the succession planning, by creating a family trust above the holding company. This trust will hold personal as well as holding company assets. Certain long-term succession and taxation and personal objectives can be met through this structure. There is no thumb rule to this but it could work for most.
Types of Trusts: The Indian Law classifies trusts only on the basis of their purpose, namely private purpose (private trust) or public purpose (public trust) and religious/charitable (religious /charitable trust). A public trust is for the benefit of the public and the beneficiaries are incapable of ascertainment and a private trust is created for benefit of certain specified individuals who are ascertained. Besides the classification on the basis of purpose of trusts, trusts can also be classified as either revocable or irrevocable in nature.
Taxation: In case of a revocable trust, the income of the trust is taxed in the hands of the creator of the trust--the settlor. The tax imposed would be at the rates applicable to the settlor. In case of an irrevocable trust, the income of the trust is taxed in the hands of the beneficiaries. The tax imposed would be at the rates applicable to the beneficiaries.
Conclusion: Though planning one's estate may feel uncomfortable, the cost of procrastination can be high. Setting up an estate plan is not as complicated as it sounds.
You execute a trust deed where you appoint a trustee, name your beneficiaries and specify how and when the properties of the trust would be distributed to the beneficiaries.
In a trust, you transfer ownership of some or all of your assets (which can include investments, real estate, bank accounts) and even personal property (jewellery, antiques or furniture) from your name to that of the trust.
Transfer of ownership of assets to the trust can be done at anytime after the creation of the trust either by the settlor or any other person.
After you transfer the assets, you maintain the same access and control as you did before you put them in the trust in case of a revocable trust.
In case you create an irrevocable trust then you can retain some control over the assets in the trust by either having the trustee consult you or by appointing an administrator/protector who will be consulted by the trustee.
You lose nothing, but gain the assurance that your wishes will be carried out if something happens to you, without the time or hassles of probate through the hands of competent and professional trustees.
Hence estate planning is the foremost judicious step in securing your family's future and fulfilling your desires during your life and after you depart from the world.
