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Estate Planning Road map

Estate planning is the process of figuring out who manages your assets in the event of your incapacitation or demise. It is a combo of financial and succession planning. It is done in consultation with experts who specializes in estate and tax law. The estate is the sum total of your movable and immovable assets. Estate Planning makes provisions for estate management, estate preservation and creating a legacy for the estate. It is done with the same intent as succession planning - least disruption in transfer and minimal tax liability. Estate planning can be done in one of several ways – through nomination, wills or trusts or a combination of all. A separate article is available on each of this.

A vast majority of Indians tend to neglect estate planning. It is, at times, just complacency. At other times we don’t realise the tax benefits and how much better we can preserve our legacy. Hence there is no motivation for Estate Planning. It could also be avoiding conflict among beneficiaries since if our intent is in the open it may invite opposition and disagreement and leave us feeling vulnerable. This is in sharp contrast with countries such as the US and UK. where inheritance taxes are applicable. For example in western countries like USA, the estate tax is 40%on the inherited wealth. So people’s focus on estate planning is a part of planning their taxes.

Presently, in India estate planning is poorly understood, therefore hardly accepted. The fall out is that the intended beneficiaries do not receive their due. In the absence of a clear estate plan, there are legal wrangling, interpretations of what the creator intended and so the intent that the estate must pass on, in a timely and hassle-free manner, is defeated. We have all witnessed such bumpy, even bitter transitions among family, friends, business moguls and others. Also there is noise of a likely re-introduction of Estate Duty Tax that can affect the inheritances.

All this makes a sound case for the estate planning.

What is estate planning?

We Indians have one of the highest per capita saving rates. On an average Indian saves 30-35% of their net income. The reasons for saving include lack of social support for Senior citizen from government (in short, planning for our own retirement), habits (we have seen our parents saving extra pie for rainy days) and goal based saving (like for buying house, car, etc.) amongst others.

When to plan

Most of us defer estate planning for later date or time. Not that we do not want to plan distribution of our assets, but we avoid for various reasons such as—to avoid discussion on demise, avoid difference of opinion with better half on distribution of asset, lack of knowledge, etc. Pandemic has taught us that it’s better late never because you may suddenly be struck with life threatening ailments and we have seen Covid patients bidding goodbye when they leave their home for hospital. Thus start your Estate Planning as soon as you have any of the following:

ü Acquiring Property

ü Married and have responsibility for the family members like Wife & children besides aged parents

ü Substantial Savings in many Investment products

ü Ideal age could be 35-40 to start the process of Estate Planning

Estate Planning Stages

1) Early adulthood with limited assets: This stage of life includes young and unmarried individuals with limited assets. You are a Millennial full of energy, ideas and enjoying the life. This generation is generally marked by elevated usage of and familiarity with the Internet, mobile devices, and social media, which is why they are also termed as digital natives. Estate planning may not be a priority for you at this stage, as it would seem that you do not possess sufficient wealth to formulate such a plan.

2) Married life: Getting married is undoubtedly a huge landmark in one’s life. From an estate planning perspective, it is a union of the assets of two individuals. Hence, you need to think through how your plan should reflect your objectives. Depending on your objectives, you may want to align your plan with the aim of protecting the interests of your spouse also. With relationships taking a sour turn in some cases these days you want to safeguard wealth for their children. Instead of prenuptial agreement, a Family Arrangement would be better document.

3) Family life after Birth of a child: A birth in the family calls for crucial estate planning stage; an exercise that should be carried out the day you are blessed with a child. A Will enables parents to appoint guardians who will not only be responsible for managing the finances, but more importantly the upbringing of the child too. Your nominations get revised and your Will gets updated.

4) Golden years of your life: You are at the peak of your career and earning decent money and many people just don’t have time & preparedness to initiate Estate Plan as they are at the stage where everything that you aspired for have been achieved. You may think, why all these paper works? But this is the crucial stage when your Estate is building up very fast and you are in really dynamic situation and hence you ignore Estate Planning. Thus you should spend time and thoughts on your Estate Planning with all the seriousness.

5) Sunset years of your Career: You are on the verge of Retirement and suddenly realise to assess your Wealth and prepare for Estate Planning. May be it is too late in terms of corpus building as you are left with hardly any time to bridge the gap in Corpus, but do prepare your Estate Plan even at this late stage.

6) Legacy Planning, Golden years of your life: Most individuals look forward to this phase after years of grueling hard work. Your children may have left the nest (studies, employment or married) and you would have accumulated a sizable wealth. If you were consistent with updating your estate plan from time to time, you will not be left feeling overwhelmed. In fact, you will find yourself at peace knowing that those close to you will be well taken care of after your lifetime. This stage calls for updating your Will to reflect your changed circumstances, demarcating a plan to reduce administrative burdens on family members or ascertaining the need for alternative succession structures. Further, take this time to discuss your plans with your heirs, as this will reduce possibilities of future conflicts among the family members and ensure your wishes see the light of day.

Estate Planning Road map

Estate planning is not an option but a necessity for a person who wants to ensure that assets and passed on the his/her loved ones in such manner as he/she desires without compromising on the efficiency of such process.

An estate plan aims to preserve the maximum amount of wealth possible for beneficiaries and flexibility for the individual prior to his death. One of the goals of succession planning is to protect the interest of an individual during his/her lifetime and after his/her death safeguard the interest of his/her loved ones. This can be achieved by different ways of estate planning by distributing assets among his beneficiaries post his death. An estate plan aims to preserve the maximum amount of wealth possible for beneficiaries and flexibility for the individual prior to his death.

Estate planning is an ongoing process and should be started as soon as one has any measurable asset base. As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones, so at the very least a will should be set up even if the taxable estate is not large.

Succession Planning

Estate planning is closely related to succession. There are two modes of succession:

1) Intestate Succession- as per Hindu Succession Act, 1956; and

2) Testamentary Succession.

Intestate means, not having made a will before one dies. Testamentary succession means succession by way of will/testament. Whatever may be the mode of succession, house property is generally one of the most valuable properties in the assets possessed by any person and he needs to protect the needs of the loved ones during his lifetime and after his death needs of his loved ones. There is more than one way by which home can be protected and passed to next generation. In the absence of a Will, intestacy laws will ascertain how your assets are passed on, which may go against the interests of your loved ones

Process of Estate Planning

ü Prepare an Inventory of all your Assets and all your liabilities

ü Develop a Contingency plan if you were to die today. Ensure that if something happens to you, your family has required Corpus and any gap in the Corpus should be bridged with Term Insurance Policy

ü While working out Corpus, ensure that you have provided for needs of your Children (Studies, Marriage etc.) your Wife (how she will sustain for rest of her life) and other dependents like your parents

ü Protect you Assets from any litigation, destruction (take Insurance), loss of possession and transfer (transmission) of rights, title & interest in the Property in the event of your death

ü You must document your wishes with Nominations, Will, Trust, Family Arrangement so that your wishes are implemented after your death

ü Remember to identify Fiduciaries (your trusted person/s) to look after the process of transfer to the eventual beneficiaries and fulfill your instructions as mentioned in your Will, Trust Document, and Family Arrangement etc.

Using Life Insurance in Estate Planning

Life insurance serves as a source to pay pending taxes, pay expenses, fund business buy-sell agreements, and fund retirement plans. If sufficient insurance proceeds are available and the policies are properly structured, any income tax (Estate Taxes, if & when applicable) arising on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. Life Insurance is also used to bridge the gap in your required Corpus and normally experts suggest Term Life Insurance for this.

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