INHERITANCE & ESTATE PLANNING

What is Inheritance?

Any assets / wealth devolving on to the beneficiaries by virtue of succession on demise of a person is Inheritance. Following are the 3 legal statutes that deal with the devolution of the property on the death of a person:

• Hindu Succession Act
• Indian Succession Act
• Muslim Law

The applicability of the above statutes is summarized below for easy understanding:

A Person Dies:

No Will – Intestate:

Religion	Applicable Law
Hindu, Jain, Sikh, Buddhist	Hindu Succession Act
Christian, Parsi, Jew	Indian Succession Act
Muslim	Muslim Law

Makes a Will – Testate:

Religion	Applicable Law
All except Muslim	Indian Succession Act
Muslim	Muslim Law

Whether a NRI can acquire property by way of Inheritance?

• Any person, whether or not resident / citizen of India is eligible to receive property by inheritance.
• Transfer/ holding of the said property shall be subject to exchange control regulations in India.

Taxation on:

a) Inheritance of Assets / Property held in India:

• Currently in India, there is no Inheritance / Estate tax
• Several countries however, levy Inheritance / Estate tax. In this regard, a NRI shall also have to keep in mind the tax implications of inheritance in his / her country of Residence.
• Further, for your information kindly find below the rates that may be applicable in the US and UK:

Resident / Citizen	Remarks (subject to exemptions, reporting, etc. as per the domestic law of the country)
US	Estate duty upto approx. 40%
UK	Estate duty upto approx. 40%

b) Income earned from Property inherited:

Income earned from property inherited is taxed in India as under:

• Upto the date of death – taxed in the hands of the deceased. However, the same would be leviable and recoverable from the legal representatives of the deceased in a like manner and to the same extent as the deceased (liability restricted upto the value of property inherited).
• After the date of death – taxed in the hands of beneficiaries / executor(s) in their individual capacity.

• A WILL is a legal document which expresses a person’s wishes as to the distribution of his / her property upon death.
• A person who makes the WILL is termed as a “Testator”. The property of the deceased is called the “Estate”. A person who inherits all or part of an estate under a WILL is called a “Beneficiary”.
• Until the person dies, WILL is only an expression of his intention. Therefore, it may be changed as many times as he wishes.
• A person may dispose off any of his property during his / her lifetime, even if the property is mentioned in the WILL.
• The WILL only applies to those assets, right and interest which are owned at the time of death and any future or contingent interests.

Administration of the WILL (Probate, Letter of Administration and Succession Certificate):

Probate:

• After the death of the Testator, the grant of Probate by court establishes the Executor’s right to represent the estate.
• Probate is an official evidence of the Executor’s right to dispose off the property of the Testator as per the terms of the WILL.
• Under the Indian Succession Act, a Probate can be granted only to an executor appointed under a WILL.
• A Probate is mandatory in case of:
  • WILLs by Hindus executed within areas under the jurisdiction of Bombay, Madras and Calcutta High Courts;
  • WILLs by Hindus outside these areas if they relate to immovable property situated within the jurisdiction of Bombay, Madras and Calcutta High Courts

Letter of Administration:

• Where the Executor is not named in the WILL, an application can be filed in the court for grant of Letter of Administration of the property.
• Letter of Administration is a certificate granted by the competent court to an administrator authorizing him to administer the Estate of the deceased in accordance with:
  • WILL, in case of Testate;
  • Law of Succession, in case of Intestate

Succession Certificate:

• In case where Probate or Letter of Administration is not mandatory, Succession Certificate can be granted by the court to realize the debts and securities of the deceased and to give valid discharge.
• However, holder of the Succession Certificate is required to dispose off the amount so realized in accordance with the rights of the person entitled thereto.

JOINT OWNERSHIP:

• Where the assets are held in joint names, the interest of the deceased in that asset devolves on his / her legal heirs.
• The respective authority may transfer the assets in the name of the surviving joint holder by deleting the name of the deceased.
• However, we understand that the rules of succession will supersede the survivorship and the rights of the legal heirs to demand his / her interest in the assets of the deceased from the surviving joint holder shall not be adversely affected.
• It is advisable to make a WILL and to file appropriate nominations and applications for joining second name to various assets, in order to avoid the necessity of obtaining Probate or Letters of Administration or Succession Certificate for the sake of expediently dealing with the property of the deceased.

NOMINATION:

• Nomination has become a standard feature for various assets like Bank Deposits, Shares, LIC Policies, Accident Insurance Policies, PPF, Immovable Property, or other assets.
• In the eyes of law, the position of a Nominee is that of a Trustee.
• The Nominee need not necessarily be the Beneficiary under the WILL. He is legally bound to transfer the nominated property to the Beneficiary of the WILL or if there is no WILL, the legal heirs.
• Nomination coupled with a WILL in favor of Nominee, where the Nominee is intended to be made the Beneficiary, can avoid disputes and make the distribution process smooth, efficient and effective.
• The effect of the nomination is only to facilitate collection of the amount due to the Estate of the deceased without the production of a Succession Certificate or Proof of Title.
• However, in view of the judicial interpretation by the courts of S. 72 of the Companies Act, legal heirs / Beneficiary under the WILL may not be eligible to claim their interest against the nominee in case of shares of a company.

1. Purpose:

• Efficient management of assets in India
• Smooth transfer to current generation/future generation

2. Proposition: Estate Planning through Private Family Trust

• Settlor to set up appropriate Trust to hold his/her assets

3. Will in India – Issues/concerns:

In most cases, passing of the estate by Indian residents to their legal heirs is by making a WILL. Administration and distribution of an estate under the WILL has several issues:

• Normally, a WILL requires legal process of obtaining Probate or Succession Certificate from a Court in India.
• Such process may take between 12 to 36 months and until then distribution of the estate to the beneficiaries shall remain pending.
• All legal heirs may be required to join the legal process of the Court which is complex and time consuming.
• Sometimes distribution under the WILL is legally challenged in the Court due by the legal heirs.
• Invariably, Will once made, needs amendments which needs legal process and may create issues for legal heirs.
• In India, there is no strong legally backed services for management of Estate of the deceased.

4. Advantages of Trust:

It takes care of above stated deficiencies of having Will as a mode of Estate Planning.

a. Legal-

• Trust Deed is an open and regular legal document and generally cannot be challenged in a Court of Law.
• It is very convenient to revise the provisions of a Trust.

b. Administration-

• Trust document shall be known to the beneficiary (ies) (as it is an open document) and shall have power to make investments/manage assets in the best interest of beneficiary (ies).
• Trust has flexibility to distribute funds to beneficiary (ies).
• Trustee is empowered to distribute the assets to the beneficiary on the demise of the Settlors of the Trust. Such distribution does not require any legal process or compliance including that of the Court.

c. Planning distribution of the assets-

• The Settlors have power to make distribution to current or future generations.
• The Settlors may retain flexibility of control over assets and/or income of the Trust till their life (He/She does not part with his/her assets till life).

d. Taxation of the Trust –

• Income of the Trust shall be very tax efficient under Indian Tax Laws
• In most cases, taxes shall be the same as what the Indian Resident (Settlors) are liable to pay in their personal capacity

e. Trustee Services-

• In India, reputed financial institutions do provide Trustee Services to protect the interest of beneficiaries.