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When it comes to making an estate plan, there are several options that a person can choose. However, every option has its benefits and disadvantages. It is important to thoroughly look at the various tools available and understand the implications. This can be done with a discussion with a financial planner who may be apt to best describe a solution that works best for the person's needs.
Wills
The most traditional way of passing their estate to the next generation has been writing a will. A will is a legal declaration of a person's intention on how their assets should be distributed after their death. So a will operates only after the death of the person. In order to create a will, a person must have an executor - someone who will execute the will after their passing. The will also needs to be signed by at least two independent witnesses. It is important to know that the witnesses do not need to read the will as they are required to only witness the person's signature. So a person can keep the contents of the will confidential even from the witnesses. Contrary to the general belief, a will does not have to be registered and need not be notarized. It does not even need to be on a stamp paper or even the green legal paper. However, if a person wishes, the will can be executed in the presence of a magistrate or the public notary, nominated by the government authorities and sealed in their presence.
It is also important to know that a person can add or sell assets that are mentioned in their will at any time. A person is also free to change to change or withdraw their will at any time. The latest will is applicable even though an earlier one may be registered.
Disadvantages: Even though many write a will, there are still family disputes that occur. According to some research, about 10% of the wealthy have disinherited or cut a family member out in their wills. Even when wealth is distributed to all members, it is possible for a family member to feel they have been treated unfairly and contest the will on numerous grounds. Wills can be challenged on the grounds of authenticity, mental soundness of the person making the will, alleged forgery for example.
In order to avoid and resolve any contentions, some families have to get a probate, which can be very important especially in the case of real estate. A probate is a copy of the will signed by a registrar and certified under the seal of court that a will has been proved. A probate can only be granted to the executor appointed by the will. It is important to note that under the Indian Succession Act, wills in certain cities have to be probated before the distribution under the will can be effected by the executor. Once an executor files for a probate petition in the court of law, it can take six months to a year to be issued. However, when there are issues, it can take longer and it can become an expensive affair as the cost of getting a probate includes legal fees as well as stamp duty on the value of the property being willed. Getting a probate could also mean the contents of the will can become public as the probate petition travels through the legal system.
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A probated will is very effective, but can be time consuming and an expensive affair.
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Joint ownership
Some people approach estate planning by using joint ownership. It can be as simple having a husband wife be co-owners on a bank account or property. This method is not just limited to spouses. Some opt to name a trusted child on their bank accounts and even their property deed. The reason is often practical - in case a person becomes disabled, the trusted adult child who is often also the caretaker, is able to pay the bills and conduct the parent's personal business with ease. In the event of death, the trusted adult child is expected to distribute cash and other assets to other siblings fairly.
Disadvantages: This approach to estate planning can lead to unpleasant consequences. Even when the trusted adult child carries out their duty diligently, it can be easy for other siblings to accuse them of unfair practices. If the trusted adult child is dubious, it is possible for the trusted adult child to claim the entire assets for themselves and cut out their siblings. This can lead to protracted legal disputes with other siblings. Even if the trust adult child is not dubious, since they are named co-owners, it is possible for creditors to file claim to those assets. In the case of divorce, it is possible for an estranged spouse to also file claim for those claims.
With a spouse, many husbands opt for a joint property ownership and include the wife's name for financial security. This can lead to complications in case of creditors. For example, if there was a home loan with co-applicants, in the unfortunate event of a death of an earning member, the entire home loan burden will transfer onto on the surviving spouse. The surviving spouse will have to be responsible for the home loan even as they wait to receive the benefits of the will or any other investments. When there is a conflict like divorce or a squabble with the trusted adult child, it will not be easy to untangle the joint ownership once someone's name has been added and can be a cumbersome process.
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Joint ownership is far simpler than a will, but exposes the joint owner to creditor's claims on the joint assets even after the demise of the other holder..
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Beneficial transfer
With some people, they prefer to distribute their assets during their lifetime. The advantage is that it gives the person to settle any acrimonious discussions with their children and gives them control of any squabbles. So it can resolve any family disputes early. It also gives a person a chance to contribute to worthy causes and see the results of those contributions during their lifetime.
Disadvantages :Since transfer of assets are often done as gifts, this can mean the receiver is subject to gift tax. So it would be necessary to discuss with an accountant to understand if the gift tax complicates or erodes a significant portion of the assets.
It is difficult to predict the length of one's lifetime and can be difficult to estimate the needs for oneself. When the estate has already been transferred, the person makes themselves vulnerable to becoming dependent on the children. Once transferred, the assets cannot be claimed back.
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Beneficial transfer is very simple, especially to immediate family, but one risks outliving one's remaining assets!.
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Trusts
Many financial planners recommend trusts as an estate planning tool over wills because of its more flexible structure. Setting up a trust gives the individual to create a plan for administration, growth and disposition of the estate during one's lifetime and after. We will be looking at trusts in detail in another article. The advantage of a trust is that unlike a will, it does not need a probate and it is difficult to contest a validly created trust.
Disadvantages: Creating a trust is not a cheap option. It can be costly both financially and emotionally. It requires families to sit together and deliberate on various important aspects of business and wealth succession, to decide the type of trust, who will be the beneficiaries of the trust, when will the trust dissolve, and a host of other factors. More of this in a separate article on trusts.
To conclude
For a small, well-knit family without debts, joint ownership could be a neat and effective solution, provided there is high confidence in the family that the legal heirs are unlikely to contest the division of assets that happens naturally on the death of the first named holder of respective assets. When confidence on this aspect is not high, and assets are reasonably substantial, a will may be a good option. Beneficial transfer is being increasingly practiced by HNI families, especially when giving houses to their children, due to the absence of gift tax. The parents will have to wisely decide how much of their assets should be gifted away even during their time through beneficial transfer, and what should be retained for themselves. As a financial planner, your role will be to evaluate the circumstances of each family and recommend the optimal estate planning option for them.
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