Estate planning through living trust


Estate planning is not just writing of Will and getting it probated. We also need to know what is estate planning, why it is important to them and what are options available, Pankaj Kumar Gera highlights

We plan for our household & medical expenses, buying a house, plan for retirement, children’s education and their marriage among others. One area which gets the least focus is estate planning. Most of the people are either not aware about or are conscious of estate planning. Most of the business class plans about building business and creating assets while service class does not feel that the need since they think the ‘estate planning’ is for wealthy people.

Most people believe that the only option available for estate planning to them is ‘writing of Will’ and this requires assistance of a lawyer. But even a certified financial planner can provide us value based service in case of estate planning.

Estate planning is not just writing of Will and getting it probated. We also need to know what is estate planning, why it is important to them and what are options available.

This article briefly touches on various options available to us and their advantages & disadvantages. It also focuses on estate planning through living trust. With our growing income, the lower middle class is now becoming upper middle class, and upper middle class is becoming upper class. This decade will see rise in population of millionaires & billionaires. People today realise the need to preserve the wealth built and pass it down judiciously. Thus, the need for estate planning is increasing. Living discretionary trust is perceived to be realm of a few rich but this is a very simple process and is not a rocket science.

What is estate planning?

We Indians have one of the highest per capita saving rate. On an average Indian saves 28% of GDP (gross domestic product). The reasons for saving include lack of social support for senior citizen from government (in short planning for our own retirement), habits (we have seen our parents saving extra pie for rainy days) and goal based saving (like for buying house, car, etc) among others.

We would like to pass down our hard earned saving in a judicious manner to next generation. Whatever we accumulate during our life (earning minus expense + growth) forms our estate that we pass on to our next generations. Estate includes immovable like home (real estate), agricultural land, etc, as well as immovable assets like gold jewellery (commodity), our bank balance & fixed deposits (cash). Items such as our collections like coins and paintings are also a part of the estate.

According to Wikipedia, “Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximise the value of the estate by reducing taxes and other expenses.”

Why plan

While we are young, we do not feel the need to plan. We procrastinate estate planning till the time our retirement. Little do we realise the uncertainties of life. Many equate planning to die. Hardly do they realise the problem faced by inheritors.

Only a few people realise the uncertainty of life. Over Rs. 38.37 billion was lying unclaimed with provident fund department as on March 2009. Similarly thousands of crore rupees are lying unclaimed in bank accounts. According to RBI (Reserve Bank of India), Rs. 10.18 billion was lying in 13 million accounts as on December 2009. This figure is expected to have increased since claim on such deposit takes long time. Most of this money is lying in saving accounts. Bank deposits are mostly handled by husband while their wives are unaware of these deposits.

Objective of estate planning is that you decide who will receive and control your assets. If you desire that every penny of your hard money should go to your next generation, you should be doing estate planning.

When to plan

Most of us defer estate planning for later date or time. Not that we do not want to plan distribution of our assets, but we avoid for various reasons such as to avoid discussion on demise, avoid difference of opinion with better half on distribution of asset, lack of knowledge, etc.

Now is the best time to plan. The same needs to be updated once a year. You can plan for assets acquired and also for assets that you may acquire in future. We must put this on our priority list and not postpone it, thinking it to be irrelevant.

How to do estate planning

There are various ways one can do estate planning:

  • Disadvantages of not doing estate planning
  • Your inheritor may not be able to claim the amount
  • Disputes amongst family member
  • No control as distribution would be according to State Law (Hindu Succession Act)
  • It is not effective in case one is incapacitated

Gupta, my neighbour, has five children three sons & two daughters. Mr Gupta stayed with two sons in house which is in his name. Due to recent run in property prices, the house now is worth over Rs. 30 million. Mr Gupta constantly postponed his decision for estate planning. He thought there is ample time and remained ignorant towards the importance of estate planning. Now after his death, his property has become disputed since neither his two daughters nor his one son who was staying away from his parent, are willing to let go their share in property.

The elder daughter did not had share in parents property, however after recent changes, they have equal share in property. This has compounded the disputes. The condition of the house is debilitating and Mr Gupta’s daughter and his third son are looking forward to when the house will become habitable so that they can get their share. The two brothers staying in the house do not have enough cash to buy out brother’s and sister’s share. Further since the property will be received by surviving sons & daughter, they cannot Will it further (any property acquired intestate will be equally divided amongst Class I heir) and hence they do not have control over further transfer of estate.

Mr Jaggi’s father had a saving account in a public sector bank. He is a very senior person working for a ministry of Indian government. His father died without writing Will. Unfortunately he did not nominate in his saving account. Despite his three brothers and he himself giving an underwriting that they do not want any of their father money and that the same may be given to their mother, it took months before his mother could get the amount released. The Bank insisted upon succession certificate, it took nearly six months for them to get succession certificate, leave aside the cost they incurred.

We need to foresee and understand the problems that our family faces in case we die without doing estate planning.

Write a Will

Advantages

  • It avoids family dispute (though not a sure method)
  • Distribute assets according to your wish

Disadvantages

Needs to be probated to avoid legal conflict. (Probate means copy of the Will certified under the seal of a court of a competent jurisdiction). Expensive process

  • Can be challenged in court
  • Only control assets that are in one’s name
  • Not helpful when one becomes incapacitated
  • In case of a minor children, need to depend on executor or court appointed guardian

Mr Jain, our family friend, wrote a Will wherein he willed his property to his two sons in 60:40 proportion. He did not leave any share for his daughters since he had given enough dowry during her marriage. Post his death, daughters have challenged the Will on the ground that his father “was not in sound mind” when he wrote this Will. They claimed that since their father lived with their brother during last stage of his life (and when the Will was written), he was under his influence and due to his illness (old age), he was not in sound mind to take decision rationally. The Will was not probated. Further the Will was witnessed by one witness (who was physically present when will was drafted and signed), while other witness was not present when the Will was being signed. The matter is in court for last five years now. 

We need to comprehend the problems that we may face and how these can be avoided.

Giving away / beneficiary transfer: Distribute the property (estate) when one is alive.

Advantages

  • Avoid family disputes

Disadvantages

  • In case the person is not earning, he/she would become dependent on children.
  • Once distributed, it cannot be claimed back
  • Classic example is movie Baghban wherein the hero (Amitabh Bacchan) upon retirement distributes his retirement kitty amongst his sons, and in turn becomes dependent upon then for his own survival.

Joint ownership

Advantages

  • Least bothersome

Disadvantages

  • Unintentional disinheritance
  • Difficult to remove co-owner

Mr Sharma, 25-year old person, married Poonam, 22-year old girl in 2000. He transferred his property in joint name in 2005 for taxation purpose. In a tragic accident, Mr Sharma died at 32 year of age. They did not have any child. Poonam remarried at age 30 to Mr Vikas and had two children. Today the property is shared between the children of Poonam & Vikas.

Mr Prabhat married Ms Abha in 2002. Abha was a home maker. They applied for DDA (Delhi Development Authority) flat and were lucky to get the allotment in Vasant Kunj area in 2003. They bought the flat for about Rs. 13 lakh. However relations between them turned sour and decided to part in 2007. Though Abha did not contribute any money, she became lawful owner of 50% of flat.

Mr Modi bought a flat in Bandra, Mumbai along with his wife. They had one son and two children. His wife died and he remarried. To give full attention to his children, he decided not to go children from his second marriage. One daughter went to US after marriage while other daughter got married to industrialist. His son however developed sour relation with him and filed court case against his father to claim his share of 50% of flat since his mother has not made any will. His sisters did not claim their right. In an out of court settlement, the father sold the flat and gave son the due amount.

Thus, we must comprehend the advantages as well as disadvantages of each option.

Revocable trust: Create a living trust and transfer assets to trust

Advantages

  • Control is in hand of creator
  • Can change / revoke any time
  • Instruction are carried out when one is incapacitated or dies
  • Saves trouble of probation

Disadvantages

  • Costly

Mr Gaind builds and leases out property. All the properties are either owned in individual name or in name of their company. He has three children while is brother who is an equal share holder in all the business, has two children. He creates a revocable discretionary trust by writing trust deed which defines the distribution of income amongst future generation, earned by the trust by way of leasing out of the properties.

He also defines conditions under which trust can buy or sell or lease future properties. For management of the trust, he has appointed his long time chartered accountant and an advocate as trustees. He also has laid down procedure for appointment of future trustees when he (grantor) is not there. His mother wills the property, which are in her name to the trust. However for transferring the asset, he had to re-register the property in Trust name and pay the stamp duty. Now he purchases property in trust name.

Living trusts are in existence got over 100 years. Grantor creates the trust by writing trust deed and funds the trust by transferring the assets (movable as well as immovable). The trust deed specifies his instruction for distribution of wealth. While grantor is alive, he has full control over the activities as well as asset transferred. He writes mechanism of appointing successor trustees. 

Trust can be created by writing of trust deed. This requires person to specify the purpose of deed, its objective and how will it function. He needs to identify the trustees and give instruction of appointing successor trustees. He also needs to specify when trust has achieved its objective and how (& when) trust can be dissolved and assets liquidated. Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Invariably it has been observed that upon death of the main member, the family disintegrates which leads to division of assets which have been acquired over years through laborious work. Lot of money is wasted in fighting legal battles to take control over the assets. Division of wealth weakens the family and hence overall they lose. Living Trust is a mechanism of preserving the asset acquired over years and the fruits are distributed as per the will of Creators and avoid disputes amongst family.

We need to read laws relating to trust in our state and go through trust deeds which are in public domain.

 

The author is a certified financial planner and is the owner of Gera Wealth Creators.



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