Estate planning is an invaluable service you can offer to your clients, and this series in Saturday School aims to sharpen your skills in guiding your clients through estate planning. The first article was a curtain raiser on estate planning and the second discussed the pros and cons of wills vs joint ownership vs beneficial transfer. In the third part of this series, we discuss common misconceptions around estate planning and common mistakes that investors make when creating wills. Helping your clients steer clear of these misconceptions and mistakes will enable them to bequeath their assets as they intend, without creating confusion and bad blood that so often marks transfer of assets from one generation to the next.

Common mistakes in estate planning

Accumulating wealth may be easier than figuring out how to distribute it among the family. Estate planning is the process of succession planning and protecting assets after one's lifetime. However, there are common mistakes done in estate planning that often results in contentious family squabbles. These mistakes occur due to misconceptions.

Common misconceptions

1. Not understanding the laws of succession - A common misconception is to believe that all the estate is automatically passed on to the spouse. However, laws of inheritance and succession, are complicated and diverse in nature, and are executed differently depending on which religious community one belongs to. Depending on the law, children and sometimes even relatives can stake a claim to the property. It is also important to understand that the proportion of the inheritance and what they are entitled to varies according to community.

2. Not understanding the application of laws of succession - without an estate plan, the laws of succession would apply and the estate can pass on to unintended beneficiaries. If a family structure is diverse, then certain members of the family, such as a foster child, can be unintentionally cut out because there was no will or other estate plan tool to grant them access to the estate. In the case of a dispute, family members have to produce proof of relationship. With complicated family structures, such as a live-in partner, it may be difficult to produce the necessary legal proof of relationship.

3. Not understanding what is a nominee - A nominee is someone who takes care of the person's assets after their death until it is transferred to the real legal heir. A primary reason to have a nomination in place is for financial institutions to hand over the assets to the nominee. It is important to understand that there is a distinction between a nominee and a legal heir as they are not considered the same. In the eyes of law, a nominee is only a custodian of a person's assets and it is the legal heirs that will inherit the estate. A will overrides a nomination. If there is no will, the legal heir is determined by law and could stake a claim from the nominee and disputes could arise.

4. Not understanding the limitations of the nominee's role - It is possible to appoint a nominee(s) only for certain assets. Bank accounts, mutual funds, life insurance allow owners to nominate a nominee. With property, a nominee cannot be nominated. Even if one legal heir is appointed as a nominee, the final distribution take place through will or through succession law. It is important to note that for shares, the Companies Act prevails over a will and as per the act, the depository nominee of the demat account inherits the shares. Since financial assets may change in ownership, it is important to periodically review nominations.

Common mistakes with wills

The most traditional tool of estate planning is to write a will. However, even with a will in place, many make mistakes that often results in disputes later. Lets look at what the will entails to see where some of the pitfalls lie.

While a will can be written in any manner, there is a certain template that is followed in India. The first part of the will contains a declaration that a person making the will is in full senses and without pressure. It also contains identity details of the person such as name and address. The second part of the will contains the details of property and documents that the person owns. The third part of the will is division details of ownership where the will details who is to own which assets and the proportion of how much they will inherit. The final part of the will contains the signature of the person in the presence of at least two independent witnesses. The witnesses only sign that the will was signed in their presence and it is important to note that the witnesses themselves are not party in making the will in India. The will is then sealed in an envelope after completing the formalities and the seal must bear the signature of the person and the date of sealing. It is not necessary for the witnesses to sign on the seal of the envelope.

So where can it go wrong?

1. Language of will is too ambiguous - Wills often do not contain all the necessary components as required by law and many times are ruled as invalid by courts. Mistakes include no signatures from witness or no witness at all. If it was not drafted by a lawyer, ambiguous language can result in lengthy legal battles as it is unclear who the intended beneficiary is.

2. Dating and updating the will - The law allows individuals to update the will as they see fit. However, to remove any ambiguity, it is important that a new will mention that it supersedes any earlier wills and clearly mentions the dates. When wills are not properly dated, it can cause major confusion on which is the latest will and it can take several years before the court arrives at a verdict.

3. What can be willed - Only self-acquired property can be included and the will should clearly state the property is not inherited. No ancestral property can be assigned to any person through a will as all rights on inherited property are acquired by birth. It is important to know that someone cannot pass on their portion of the inherited property to one person or child only. Accordingly to law, inherited property will go to all the person's legal heirs as it is inherited.

4. Cash and value - With inflation and rising expenses, the value of assets often fluctuates with time. Unless, it is pure cash, experts recommend mentioning what each beneficiary will receive in percentage terms rather than absolute numbers.

5. Choosing the right witnesses - The attesting witnesses cannot be a beneficiary under the terms of the will as this might make the will invalid on grounds of vested interests. Witnesses can be friends, neighbours, colleagues, a lawyer etc.

6. Choosing the right custodian - If assets are being given to a minor, then a custodian of the assets till the minor reaches adult age should be appointed. Choosing a trustworthy person for the custodian is essential.

7. Physical condition of the will - Experts recommend paying attention to even the quality of paper on which the will is printed so it won't get torn on frayed over a period of time. Pages should also be numbered (e.g, page 9 of 11) so it is easy to identify that the will is complete and pages are not lost. It is also important to store it well in a plastic file. It is a good idea to not make too many copies of the will but to restrict to just one copy of the will that is stored separately from the original. A copy can be kept with the executor of the will for example.

8. Not informing the kin - Often, the cause of disputes is that family members are unaware that a will was in place. So informing them that a will has been created and giving them a fair idea of what they will receive may resolve any potential conflicts from brewing. Kin can also be informed on the location of where the will is stored and who to contact to execute the will.

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