In this series on Estate Planning, we have discussed a range of aspects relevant for individuals and businesses, from a domestic perspective. Increasingly however, your clients have transnational families - where one generation lives in India and the next abroad, or when your clients move between India and overseas through their careers. Estate planning for such transnational client families adds a whole new dimension - and this article seeks to provide advisors an overview of the issues involved in such cases.

Estate plan across the seas

Creating an estate plan that covers assets in different countries and tax jurisdictions can be a real challenge and that is something many face as they travel across the globe and families get dispersed. What are some of the issues with estate plans of non-resident Indians?

Financial planners are bound to see three different scenarios when it comes to issues related to transfer of assets abroad:

1. non-resident Indian clients who are either working abroad or have permanently settled abroad.

2. Parents with children residing abroad

3. Clients who invest abroad

The NRI client

For financial planners dealing with non-resident Indians, they need to be able to cater to two different needs - issues arising with inheritance and issues related to managing assets in India while residing abroad.

The challenge for non-resident Indian clients when it comes to estate planning is that they have to navigate succession of two different countries - the country where they are residing as well as in India.

So they must be aware of the inheritance laws of the country of residence as well as what laws are applicable in India. They also need to check if inheriting property in India could give rise to inheritance tax liability in their country of domicile.

Non-resident Indians are restricted on the type of property they can buy in India and are not permitted to buy agricultural land, plantation or farm property. However, there is no restriction on the type of property they can inherit. Both residents and non-resident Indians can bequeath a property in India to an non-resident Indian as long as the property was purchased in accordance to FEMA (Foreign Exchange Management Act) guidelines.

While non-resident Indians are not subject to any inheritance tax on a property they inherit, they are subject to capital gains tax if they decide to dispose of the property. Funds from the sale of the property can be repatriated through the use of a non-resident ordinary (NRO) account and non-resident Indians are allowed to repatriate up to US $1 million in a financial year from this account. They also need to be aware that depending on the laws of the country of their domicile, they might have to pay complete or partial tax on the capital gains that is repatriated.

With financial assets, non-resident Indians are not allowed to inherit certain assets such as national savings certificates and may have to sell them. If a non-resident Indian decides to keep the financial assets, they are required to file income tax returns in India.

Managing assets in India while residing overseas can be a headache and challenge for non-resident Indians. A trust may be an effective way to protect, grow and manage assets if a non-resident Indian has no one they can lean on take care of their assets in India while residing overseas.

Children abroad

For parents whose children are residing abroad, creating an estate plan is essential. Financial planners need to encourage parents to keep careful record of their assets and inform their heirs about their estate plans. Without an estate plan in place, non-resident heirs will find it more difficult than a resident heir to deal with inheriting the estate.

It is important to understand that FEMA classifies non-residents in three different ways:

1. non-resident Indians (NRI)

2. person of Indian origins (PIO)

3. foreign nations who are not of Indian origin (foreign nationals)

If a parent has a child who is permanently settled abroad and has taken up foreign citizenship, it is important that the financial planner encourages the family's heirs to get proper paperwork to obtain PIO status. Residential and commercial property can be gifted to a NRI or PIO but any proceeds from the sale of property requires RBI permission for PIOs.

Families who have children residing abroad may find the structure of trusts as an effective estate planning tool. With a trust, there may be less cause for asset value erosion due to double taxation (tax in the country of domicile) as the heir may be liable to pay taxes on the beneficial interest as opposed to the entire value of the assets. If a parent chooses a trust, it is even more important that parents choose skilled and trustworthy trustees to manage the estate since the heirs are residing abroad.

Financial planners dealing with families where children are residing abroad need to be aware of the issues related to transferring assets to non-residents.

Offshore assets

As more and more Indians spend time outside of India for business, education or leisure, acquiring overseas assets becomes a common practice as many seek and find opportunities to invest abroad but it is important that clients be reminded that India still has capital controls and they need to seek expert advice.

Foreign Exchange Management Act (FEMA) has given general permission to an Indian resident to own, hold, transfer or invest in foreign security. This has allowed many Indians to invest on a personal basis as well as form business subsidiaries.

India does recognize offshore trusts and as a result, offshore trust structures have become very popular with Indian residents for acquiring offshore real estate, insurance policies and other assets. However, with holding overseas assets, clients need to remember that the settlement in trust of overseas assets complies with the laws of the country where the assets are located. Financial centres can be offshore or onshore and places like Singapore and Hong Kong, which are traditionally considered onshore centres, are becoming very popular with Indians as global jurisdictions for wealth management.

To aid families who invest or have wealth distributed abroad, many wealth management institutions have global partnerships to help clients navigate the intricate maze of investing abroad. Inheriting and transferring assets abroad will be affected by the exact import of double tax avoidance treaties and related factors. Relevant regulations and treaties of the different countries involved have to be studied to make determinations on what happens with issues like estate duty or death tax.

While clients may find opportunities to benefit from investments abroad in the short term, financial planners also need to remind them to think long-term and have an estate plan in place that addresses how those assets will be transferred to their heirs.

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