Gift deed or will: How should you leave your assets behind?

A Will is a valid legal document that outlines the distribution of the assets of an individual to various recipients in granular detail.

How do you pass on your assets to the next generation? There are two ways to do it. You can either gift your assets to the recipients of your choice or you can create a will and pass them on after your death. Both approaches have their merits and demerits. First, let us understand how these two processes work.

How do wills compare with gifts?

A will or a testament is a valid legal document that outlines the distribution of the assets of an individual to various recipients in granular detail. You can will the assets to your spouse, children, relatives or any charitable trust.

The normal practice is to appoint an executor for the will, who is responsible to ensure that the instructions in the will are implemented in letter and spirit. A will can be changed by the testator (when alive) any number of times. A will is effective only on the death of the testator.

A gift deed is a legal document wherein assets are transferred during the lifetime of the testator. Movable and immovable assets can be gifted to one's legal heirs, relatives or even charitable causes.

There are two ways in which a gift deed differs from a will. Unlike a will, the gift deed is effective immediately on execution. In contrast, the will comes into force only on the death of the testator.

Secondly, a gift deed cannot be revoked, except under some special circumstances, where the gift is conditional, and the recipient has defaulted on his side of the deal.

It is not mandatory to register a will or gift deed. However, to avoid any legal problems in the future, it is best to get such deeds registered.

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How are wills and gift deeds important?

There are several reasons for people to evaluate wills and gift deeds when they are still fit and healthy.

Before getting into how wills differ from gift deeds, suffice to say that both methods are acceptable. The testator can decide on the mode of transfer of assets (either will or gift).

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How does a will differ from a gift deed?

Here are some key parameters to differentiate a gift deed from a will.

Date of effect: The most important difference lies in the date on which it becomes effective. While a will becomes effective only on the death of the testator, a gift deed is effective immediately on registration.

In both cases, registration is not mandatory, but it is advisable to avoid future legal hassles and also in the case of a gift, to claim the appropriate tax benefits.

Revocation: A will can be revoked at any time during the life of the testator, but nobody else can revoke it. There is no revocation in the case of a gift, except in special cases where the recipient did not meet the conditions imposed.

Tax impact: The will, by itself, does not have any tax implication. The assets actually move to the recipients only on the death of the testator.

However, in the case of a gift, there is clubbing and, also, the profit made on sale would be taxed in the hands of the recipient. Only personal effects are excluded from the ambit of capital gains tax.

Process of distribution: The will can specify the share of each recipient. It can be given proportionately to the heirs or even to a charity. In a gift deed, the transfer of property happens during the lifetime of the person.

In a will, there is a legal process to be followed after the death of the testator. This process is called probate and it ensures the validity of the will and the onus is on the executor of the will to ensure its implementation.

In the case of a gift, the only legal process is the execution and registration of the deed.

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Downside risk

One risk in a will is that the probate process can be quite elaborate. Also, the will is part of public record during the probate and hence privacy becomes an issue. Wills are open to disputes and quite often, legal hassles can go on for a long period before the heirs can enjoy the benefits of the will.

In a gift, there is loss of control since it is irrevocable. Also, gift has tax implications for the donor and the donee.

Having said that, the choice of will versus gift is a personal choice that must be made after seeking legal advice only.