Moneycontrol PRO

Explained | What is estate planning, how is to be done and why

It is a misconception that to plan an estate one must have massive wealth. Estate planning ensures transparency and avoids conflicts among heirs

(Representative image: Shutterstock)

(Representative image: Shutterstock)

An estate includes all properties and assets such as land, offices, gold, shares, art, antiques, mutual fund investments, life insurance policies, bank accounts, cash and cars.

Estate planning means having a plan to ensure that people or entities whom one wishes to pass on the estate receive them in the manner intended.

Heirs end up in long-drawn legal battles and years of litigation after intestate—without making a will— passing away of kin or when their estate planning is ambiguous and open to conflicting interpretations. 

Estate planning is critical to ensure transparency and avoid conflicts amongst heirs or people whom one wishes to bequeath the estate.

When to plan your estate?

Close

The time to plan an estate can is best put in a Chinese proverb —“the best time to plant a tree was 20 years ago. The second best time is now”. 

A common misconception is that to plan an estate one must have massive wealth. The truth, however, is that estate planning is not a one-time process and need not be done only when one is retired or ill. 

Estate planning includes planning in the present and updating in the future as and when there is a change in the estate. Here are a few ways to do it:

Will: where there is a will there is always a way

The most popular and easiest way to plan an estate is to prepare a will and accurately deal with all the properties (movables and immovable) in the will. 

A will must be unambiguous on the distribution of the estate to the intended beneficiaries and must mention executor/s.

It must be witnessed and attested by at least two people who must sign after the testator has signed the will. It is preferable to obtain a certificate of sound and healthy mind from a doctor near the time of the making of a will. It is preferred that the witnesses are not the executors or beneficiaries of the will.

Other popular ways of ensuring the authenticity of the will include video recording and registration with a sub-registrar of assurances. This ensures that the authenticity of the will is not challenged. 

A common mistake is not regularly updating the will with the change in the estate. Legal advice is to always amend or update the will through an amendment document known as a codicil.

Legal heirs need to keep in mind that the will is required to be probated if made in the state of West Bengal, cities of Mumbai or Chennai or if the will deals with immovable properties within the aforementioned territories or limits.

Personal laws and the laws applicable in a particular state where an estate is situated also play an important role. Equally important to note is that the inheritance laws differ from religion to religion.

Life insurance

While it is advisable to take life insurance of at least as much of an aggregate value as would be required to: (i) repay loans availed/liabilities incurred, (ii) take care of the basic needs of the family for at least 25 years after one’s demise, and (iii) pay all liabilities/debts which could be incurred as a result of pending litigation/s (if any), one must ensure that the nominee under an insurance policy and the beneficiary for the same under the will are common to avoid any conflicts and concerns at the time of claiming settlement. A similar practice should be followed for demat and bank accounts.

Trust to avoid breach of Trust

Depending on the requirements of an individual, estate planning may involve a combination of a will and a trust. When a beneficiary is a minor, instead of appointing a third party as the guardian, a structure may be devised for a trust to automatically come into being upon the demise of the testator and the assets can pass on to the books of the trust.

The trust can be managed by trustees who will have limited powers as per the structure devised. This ensures that the trustees or guardians are not able to misuse the powers or siphon off the estate and ensure that any profits arising out of the estate, including interest, are utilised for the benefit of the intended beneficiary. 

Further, the trust can be structured in a manner that dissolves automatically after the intended beneficiary attains a certain age and the assets of the testator are passed on to the ultimate intended beneficiary.

Planning an estate is now not a “nice to have”. It is a “need to have”. It is prudent to have trusted advisers who understand all aspects of estate planning to ensure a legally compliant and transparent structure.

It is never too late to begin. As Benjamin Franklin said, “If you fail to plan, you are planning to fail”.

(The author is Partner, Economic Laws Practice. Rahul Veera, Principal Associate, Economic Laws Practice also contributed to the article. Views are personal.)
Aditya Khadria
first published: Jun 13, 2022 01:25 pm
Sections
ISO 27001 - BSI Assurance Mark