Chapter 12 Estate Planning

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The estate of most people will comprise a mix of assets and liabilities. Ensuring orderly
transfer of his own estate to the next generation is every person’s moral obligation, though
not a legal obligation. This is best achieved through an estate plan - a plan for what should be
done to the person’s estate when he is no more.

The financial adviser, being an independent professional, is in the best position to advise the
client to prepare an estate plan. He should attempt the discussion only when a high-trust
relationship is established with the client. Such a relationship might take several years to
forge.

There are times when the client may approach the financial adviser for an estate plan. On such
occasions, the adviser should seek to understand the client’s family structure, the financial
position of every close family member and the emotional relationship between the client and
every such family member.

The client has complete discretion to decide on his estate plan. However, the adviser should
point out the need to provide adequately for family members who are minors, women or
financially weak. If reasonable provision is not made for adult financially weak family members
(especially women), and the client does not document any strong reasons for such an estate
plan, courts may change the estate plan in case of litigation.

12.2 Assets & Liabilities

The starting point for any estate plan is a listing of assets and liabilities. The ownership of
these assets and the extent of known liabilities should be independently verified with the
parties concerned. The ownership pattern viz. self, as compared to spouse or joint ownership
is material.

The adviser should check on mortgage of assets and any conditions that limit free marketability
or tax considerations that limit complete encashment of value.

It is a good practice to record the source of finance for large assets, and application of funds
in the case of liabilities.

Besides the amount borrowed, the lender and the purpose of the borrowing, details of interest
rate, repayment date, any EMI and its frequency should be recorded. Any assets charged or
guarantees given against the loan or any other conditions should also be recorded.

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Such a listing and verification of assets and liabilities is a useful protection against genuine
mistakes of the client or fraud that the client may be exposed to.

As part of the exercise, the adviser can also confirm if wealth tax is paid and wealth tax returns
filed. The wealth tax return can be a starting point for the preparation of the statement of
assets and liabilities.

12.3 Nomination

Nomination is possible for a range of assets – demat accounts, bank accounts, fixed deposits,
mutual fund units, flats in co-operative societies etc. This is the most common form of estate
planning.

With most assets, the nominee is only a trustee for the beneficiaries of the estate. The
bank or the company will pay the nominee when application is made with death certificate.
However, close family members are potential beneficiaries of the estate of the deceased. The
beneficiaries can claim their share from the nominee who receives the proceeds of the assets.
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The rights of beneficiaries are governed by the inheritance law applicable to the deceased and
any valid Will that may have been prepared by the deceased.

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If a person passes away without making a valid Will, he is said to have died intestate. In such
cases, the personal law of the deceased determines the beneficiaries of the estate and their
entitlements.

Hindus are governed by Hindu Succession Act, 1956. The act is also applicable for Buddhists,
Sikhs and Jains.

The principles of Shariat govern inheritance in Muslims.

If there is no personal law for the religion of the deceased, the Indian Succession Act, 1925 is
applicable. Christians, Jews and Parsis are covered by this law.

12.5 Will

A Will ensures that the person can ensure bequeathing of wealth to his successors as per his
wishes. The personal law will come into play only for assets that are not specifically mentioned
in the Will.

While the Will is made when a person is alive, it comes into effect on his death. It is viewed
as the last declaration of the deceased person.

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not need to be in legal language. Registration of Will is not compulsory, but advisable.

The Will has to be witnessed by two witnesses. There is no need for the witness to know the
contents of the Will. They only need to confirm that the Will was signed by the testater in their
presence. The witnesses should not be beneficiaries.

Since assets not covered in the Will are distributed as per the applicable inheritance law, the
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It is advisable that the Will mentions one or more Executors. The job of an executor is
to execute the Will on demise of the Testater. The Executor can be a beneficiary. It is not
necessary to obtain Executor’s signature on the Will, though it is better than his permission is
taken. Even if a person’s name is mentioned as Executor, he is entitled to refuse to act.

On the death of the testater, the Executor has to apply to court for Probate. The application has
to be accompanied by copy of the Will with the confirmation of at least one of the witnesses
mentioned in the Will, death certificate and statement of assets and liabilities.

Grant of probate acts as an authorization for the Executor to execute the Will. If no Executor
is mentioned, or if the executor is unable or unwilling to act, Court can permit any beneficiary
to execute the Will.

The testater can make as many Wills as he wishes. The latest Will prevails over the previous
Wills. Minor changes in the Will can be effected by the testater mentioning these changes in
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12.6 Trust

An alternate format is to create a trust in which the assets are held. The trust deed will
mention the beneficiaries and the distribution. The trust will have trustees who will act as per
the trust deed. They will also be able to handle assets, issues and concerns not specifically
covered in the trust deed.

The trust route ensures that inheritance does not go through the court process. This saves
cost as well as time. Besides, the inheritance process can be handled with privacy.

Execution of Will comes with the risk of anyone objecting to it on various real or fictitious
grounds. The trust structure ensures speedy execution of the Will without such problems.

Creation and maintenance of trusts however entail investment of time and money. Therefore,
trusts are normally created only if the wealth of the person justifies the structure.

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