Estate planning involves deciding and calling in advance who your assets will get transferred to after you die. One of the most common methods to lay out who your resources will get transferred to is by means of a will.There are other itineraries as well that an individual can use to pass on his/ her resources to his/ her legal heirs, namely by making a gift deed or generate a private household trust.This article looks at transferring of resources to legal heirs via these 3 roads: a will, a endowment deed, and a private household trust. The clause details the pros and cons of each route, as well as the charges and taxes you will incur. Will vs endowment deed vs private household trust What is a will? It is a legal document that names individual/ individuals who would receive the belonging and possessions of the will-maker after his/ her fatality. The document can be rescinded, modified, or substituted by the person building it at any point during his/ her lifetime.A will comes into impact upon the death of the will writer/ manufacturer, says Ashok Shah, Partner, NA Shah Associates. What is a gift deed: A gift deed is a legal document that records the purposes of the act of dedicating a endowment and is created by the donor( the person giving the talent) and given to the donee( person receiving the endowment) together with the endow. Shah says that the carry by way of gift deed happens during the lifetime of interested donors. What is a private family trust: A private family trust allows the creator of the trust to have complete control over the trust and freedom to pass on the assets to the beneficiaries, which can be set out in the Trust Deed by the creator/ author. Sudhakar Sethuraman, Partner, Deloitte India says, “For creating a private trust, a trust deed could be executed, or it can be created through a will. Registration of private trust deed may be optional, if created under an executed will.” “An individual can decide whether to transfer resources via private household trust during his/ her lifetime or after his/ her death, ” says Shah. Likewise Read: All you need to know about inducing private family trustAlso Read: Estate planning via will or trustPros and consEase of initiation/ amendingOne of the benefit of a will is that it can be handwritten on plain paper and can be amended at any time without any restriction. Nonetheless, do be maintained in mind that simply the last will is effective for distribution of resources. Also, enrollment of a will is important but not mandatory so that there are fewer legal challenges when it comes into effect.In comparison, a endow deed or trust report will also be required to legally to be prepared by a qualified professional. Dr Neelam Rani, Associate Professor( Finance ), IIM Shillong and Samarth Saxena, practising advocate, Bombay High Court say, “Once the endowment deed is executed and registered, the endow is complete. This gift deed can only be amended for clerical errors that too by means of a duly registered rectification deed executed by all concerned parties. Further, in instances of a trust, any modification to the trust deed will have to be done as per draft amendments/ adjustment provision contained in the original trust deed. In case the original trust deed was registered, such an amendment will also have to be registered.”Control over assetsIf one is transferring one’s resources through a family trust, it is possible for one to retain some restraint over the resources transferred either by appointing oneself as regent or appointing a trusted person as a trustee of the trust, clarifies Shah.On the other hand, gifting a particular property is never advisable for a person whose primary source of income is the gifted property itself( by rental it out ). Here is why: After executing a valid endow deed, the person gifting such belonging loses his legal right to enjoy the gifted belonging, say Rani and Saxena. They was also pointed out that, “A gift( under the Transfer of Property Act, 1882) must be accepted by the donee within the lifetime of the donor. Failing such acceptance, the gift would be invalid. To set it simply, there can be no talent to an unwilling person.”In case of resources transferred via will or trust the asset-owner retains restraint( total or partial) over the asset as long as he/ she lives. However, in case of gifting the resource the giver loses control over the asset after gifting.Also read: All you need to know about estate planning, inheritance, will and moreSurety of transferClearly the advantage of endowing as a means of transferring assets is that one is 100% sure that the opt recipient has received the asset( once the recipient has accepted the gift ). There can be no spat about who is entitled to get the asset as may happen in the case of an asset willed to a person.A will is ever open to challenge by persons who may allege that the will is fake or unsound in some manner. As a will executed after the death of the will producer he/ she is unable to settle any dispute arising over it later on. If a will is held illegal/ putting aside/ then one’s resources may not get distributed among the persons named in the will or in the manner/ ratio laid out in the will.Rani and Saxena say, “If the trust is created through a will and the will is held illegal/ set aside by testamentary tribunals, then the trust will not take effect.”They further add, “One needs to remember that all three – gift deed, will and trust deed can be challenged before the courts. Therefore, to avoid future disputes, one needs to ensure that the chosen instrument is structured with due care and caution.”Will vs Gift Deed vs Private Family Trust WILL GIFT DEED TRUST FUND Transfer of assets After death of individual During lifetime of individual During Lifetime or after extinction depending on wish of individual Ease of invention Can be handwritten; amendable any number of times Requires gift deed; Owner loses right to the asset during his/ her lifetime Requires trust deed to transfer resources from owner-individual to trust Control over resources Control is retained if assets are passed via will Owner loses control over the asset once endowed Owner has an option to retain control Costs One-time costs of making a will unless amendments are made in future Stamp duty is payable Apart from stamp duty, there might be sundry expenses such as payment of salaries to trustees etc. Taxation No taxes will be payable by the legal heirs at the time of receiving the resources Endowment to specified relatives are tax-exempt. Tax-exempt depending on satisfying various circumstances under the Income-tax Act. The process of probating a willProbating is the court-supervised process of authenticating a last-place will and testament of a deceased person and it renders legal legality to the rights and entitlements of the legal heirs.It is important to get a will probated, especially if you reside in either Mumbai, Kolkata or Chennai( as probating of will is mandatory in these cities ). The report contains court fees to be paid for probating a will. Here is the cost of probating a will: In Mumbai, the maximum accuses for probation of will is capped at Rs 75,000 irrespective of value of resources. In Kolkata, the maximum fee is capped at 50,000 and, in Chennai the charges are capped at Rs 25,000. Also spoke: What “youre supposed to” do after will comes into effectShah says, “If you endowed the assets during the lifetime( either directly or through the family trust ), the resources so endowed do not form part of the manor and hence not subjected to probate proceedings. In case transmit happens after the death of an individual where a trust is created under the terms of the will, then will may be required to be probated as per the applicable commonwealth laws.”How much each method will costEach method comes with it its own give of charges. For example, invention and maintenance of a trust expects constant supervision to maintain compliance with the trust deed. Rani and Saxena explained that this invariably leads to additional sundry expenses such as legal, accounting, payment of salaries to regents etc. “Therefore, created in a trust is advisable for only high-pitched net worth individuals whose resources require greater upkeep and are also capable of supporting such additional expenses, ” they said.They added, “Though wills are open to challenge before courts of law, for most regular households and individuals, a precise will which is free from distrust or ambiguity still remains the best suited. Apart from incurring one-time costs towards legal counsel, wills do not require any special overheads unless any amendments are made.”Also Read: How to make a will difficult to challengeThen comes stamp duty. If the assets are extended either via talent deed or private household trust, stamp duty will be payable depending on the resources. The stamp duty varies between the state and depends on several other factors like type of asset, to whom it is endowed etc. Shah says, “There is no stamp duty on assets unless they are passed through a will. Nonetheless, if you gift( either via deed or household trust) during the lifetime, then depending on the type of the assets, transfer will be subjected to stamp duty. For instance, stamp duty will be payable in case of transfer of immovable property via endow deed. There is no stamp duty on gift of jewellery unless gift deed is induced jewellery is likely to be gifted simply by bringing. Nonetheless, if you stir endow deed then 3% stamp duty is there.”Taxation in instances of will, gift deed and family trustTo transfer movable property( high value) to relatives, gift deed is one of the options. “There are no tax ramifications( on the giver of assets) under the Income-tax Act on gifting immovable or movable property( except currency, subject to limit) to specified relatives during a financial year, ” says Sethuraman.However, talents are taxable in the hands of the recipient except in certain circumstances. Sethuraman says, “Transfer of existing movable or immovable property to ‘relatives’ defined as per section 56 of the Income-tax Act are exempted under income tax laws. The carry-over of immovable property could be executed through a ‘Gift deed’ as per Transfer of Property Act, 1882 and stamp duty needs to be paid.”On the other hand, transmit of assets via will does not attract any taxation. Sethuraman says, “Section 47( iii) of the Income-tax Act categorically provides that any carry-over of a capital asset under a will is not regarded as a transmit. Thus, the same can be claimed as tax exempt under the Income-tax Act.”With is in relation to private trusts, Sethuraman informs that they are governed by the Indian Trust Act, 1882 and taxation is based on various factors viz. type and nature of trust, frame and status( which continues to remain a matter of debate) as per the Income tax Act. “The transfer of an individual’s resources to a private trust can be claimed tax-exempt subject to fulfilment of the conditions mentioned under the Act. Similarly transfer of an asset and its income, if any, from the trust to the beneficiary( for whom the trust was generated) could be considered as tax-exempt or taxable based on the specific provisions under the Act. Therefore, someones should carefully evaluate the option of setting up a trust while keeping taxation in mind for both himself and the beneficiary, ” says Sethuraman.Now, what if your talents are made to non-relatives as mentioned under the Income-tax act, how will that be taxable? Shah says, “If you give your properties or any other resources to a non-relative( person or persons not in the listing of relatives specified in the Income tax Act) under a will, the value of assets is not liable to income-tax in the hands of the recipient. However, if you carry the resources during your lifetime( either directly via talent deed or through a trust) and if the recipient is a non-relative, then he/ she would be subject to income tax on the value of the assets received.”Creditors claim”If assets are given via will and the original owner’s creditors, if any, claim these assets as payment for your obligations, then your resources can be attached by the creditor. If you have already endowed the resources( been submitted to certain exception relating to defrauding the secured creditor ), the assets endowed by you cannot be attached by the creditors. Between direct endowment to a beneficiary and endow through a trust, the latter is the preferred option as objective of “ring fencing of the assets” is better achieved when you endowed through the trust, ” explains Shah.What should be used do? While considering the different options, one must understand that when it comes to estate planning( as it is in the case with financial planning) you cannot take the ‘one size fits all’ approach. Each household is unique with different personalities where each member comprises a unique concoction of resources. This is why evaluating each of these three methods of transferring one’s resources before/ after one’s death is important. Choose the option that is the most economical, convenient and hassle-free and permitted for the smoothest carry-over of resources. For this it is advisable to seek qualified admonition.
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