Estate Planning in India: Through Wills, Trusts & LLCs

Estate Planning is the process of preserving, managing and dispersing the assets of an individual in the event of their demise. It is now gaining momentum and is being considered by many individuals to preserve the family wealth, avoid family disputes and ease out the process after their death, especially since the onset of the pandemic.

An individual’s immovable assets like properties, movable assets like car, cash, jewelry, shares and stocks, insurance policies and others, debts, loans and even financial obligations become an important part of estate planning.
 

Things to keep in mind before initiating Estate Planning

Following are some important considerations that one must keep in mind before initiating an estate:
 

• How much wealth do you own, in totality?
• Do you have excess capital? Are you comfortable giving this away in your lifetime?
• If you own a business, do you have an exit strategy or succession plan?
• How many heirs do you plan to provide your estate to?
• Do you have anyone trustworthy who can act as a trustee/executor of your estate?

 

Estate Planning through a Will

According to Section 2(h) of The Indian Succession Act, 1925, a ‘Will’ means the legal declaration of the intention of a testator with respect to his property which he desires to be carried into effect after his death. Hence, a Will is a legal document which is prepared during the lifetime of the person (known as a Testator) but comes into existence after his demise. A Will is a legally enforceable document that entails the wishes of the testator (writer) for the distribution of the assets post death. The essential features of a Will are as follows:
 

• Clarity on who gets assets – what and how much.
• Exclude estranged people.
• Helps in taxation.
• It becomes a public record, removes future ambiguities.
• Authenticating a Will by the court, known as probate, makes the Will bullet-proof.
• A Will cannot be challenged in court if all necessary elements are fulfilled. 
• Declares the testator’s wishes regarding distribution of his assets and possessions after his demise.
• Should be made by the testator in sound disposing mind and without any coercion or undue influence from any person.

Key contents of a Will

A Will must have the following contents:
 

• Details of testator: Name, address, age and other details that help identify the testator.
• Declaration: A signed declaration stating that the Will was made in sound mind and free of any coercion.
• Beneficiary details: Unambiguous details of who will be benefitting from this Will and their personal details like name, address, relation, etc.
• Executor: Details of the executor who would ensure that the directions of the Will are carried out. Key details of the executor must be mentioned.
• Details of property & assets: Details of the properties and assets up for distribution in accordance with the Will.
• Share: Details of the share for each beneficiary to be listed in full. If the asset is for a minor, details of the custodian for the minor must be mentioned too.
• Specific instructions: Any specific instructions must be clearly mentioned.
• Witnesses: There should be at least two witnesses for the Will’s signature by the testator. Witnesses are meant only for verification purposes.

Registration of Will

Although registration of a Will is not mandatory under law, however getting a Will registered increases its genuineness and authenticity as compared to a Will which is unregistered. This procedure is also known as ‘probate of Will’.  Once a Will is registered, it is recorded in the register of the Sub Registrar and hence the chances of it being stolen, mutilated or tampered are minimized. At any time, a certified copy of the original Will can also be obtained by the legal heirs of the testator after his demise.
 

Procedure for obtaining probate of Will

• Executor must file a petition with the original Will to the court for grant of probate. The petition must include the names and addresses of the legal heirs for issuance of notice.
• Executor must pay applicable court fee depending on the value of the assets.
• The petition must be filed before the competent court with the right pecuniary jurisdiction.
• The court then calls for objections from next of kin of the deceased and notifies the public about the probate petition.
• If no objections are filed, the probate is granted by the court.
• In case objections arise, the probate petition becomes the contentious suit leading to a trial. Judgement is passed on the probate depending on the evidence and arguments.

 

Executor of Will
 

• Responsible for execution of the Will, i.e., distribution of assets of the deceased.
• Not mandatory to name the executor in the Will.
• However, to avoid ambiguity is it advised that the executor be named in the Will.

 

What to do if no executor is appointed or mentioned in the Will?

• If there is no named executor, a person, usually a friend, family member or another interested party may come forward and petition the court to become the administrator of the estate.
• Any person filing for becoming the administrator of the estate has to obtain the letters of administration.
• If no person comes forward, an administrator by the probate court is appointed to act as the executor. The concerned person can reject this proposal by the court.

Estate Planning through a Trust

A Trust is a transfer of property by the owner to another for the benefit of a third person along with or without himself or a declaration by the owner, to hold the property not for himself and another. A Trust is hence an arrangement between the author of the Trust and the trustees to transfer the legal ownership of assets to the trustee with an obligation that the same should be held for the benefit of the beneficiaries as specified in the Trust deed. The key features of a Trust are as follows:

• Trusts can be used to achieve a variety of specific goals.
• It has six broad categories – living, testamentary, funded, unfunded, revocable and irrevocable – thus, making it a flexible option.
• A Trust maintains confidentiality about the assets and their value.
• Effective in reducing taxation on capital and income, particularly for the beneficiary.
• Allows for distribution over time, in case you do not trust the beneficiary to handle all assets at once.
• One of the major advantages of a Trust is that if the person goes bankrupt or faces other financial crisis, then the lender cannot touch the assets which are held within the Trust.
• The subject matter of the Trust is the property in respect of which the Trust has been created.
• The subject matter should be defined with certainty and such property should be capable of disposition.

For the purpose of estate planning, a Private Trust can be created when the purpose of the Trust is to benefit an individual or a group of individuals or their descendants for any legal purpose who is capable of holding property.
 

To further consider if Wills or Trusts suit your estate best, read our article at https://www.indialawoffices.com/legal-articles/will-or-trust-effective-way-of-estate-planning
 
 

Procedure of Trust formation

 
Following is the process for registering Trusts:
 

• Name the Trust: The name of the Trust must be chosen carefully and must not violate the provisions of any Intellectual Property Laws. It also must not violate the Emblems & Names Act too.
• Settlers/Trustees of the Trust: The trustees have to be decided. There is no limit on the number of maximum trustees for the Trust. However, a minimum of 2 trustees are mandatory. The author or creator of the Trust cannot be a trustee and the trustees must be residents of India under Indian law.
• Memorandum of Association (MoA) for Trust: This document will state the object for which the Trust is formed. The objective of the Trust most conform with the law.
• Draft Trust deed: This is considered as the legitimate document and evidence for the existence of a Trust. It must be noted in the companies’ registrar when drafted. The following information is contained in the Trust deed:

   

• Submit the deed to Registrar: Submit the deed to the registrar once it is ready with appropriate fees. All the terms and conditions related to the deed would be mentioned in the Trust deed.
• Obtain Certificate of Registration: On viewing all necessary documents, if the registrar is satisfied regarding the order of documents, the Trust will be registered. The registrar then provides the Trust registration certificate. This must be kept with the trustee and trustor. A bank account can be subsequently opened.

Forming a Limited Liability Company (LLC)

One of the emerging modes of estate planning is forming a limited liability company (LLC). LLC can be a useful legal structure as the assets will be under your control during the lifetime and at the same time it can be passed down to your loved ones while avoiding or minimizing estate and gift taxes.
 
Following are the key features of an LLP: 

• Asset protection and reduced estate and gift tax.
• Can be used for personal investment purposes.
• Allows control over assets during a lifetime, which pass onto legal heirs at the time of death.
• Add anyone to a membership role in an LLC, but each member must be at least 18 years old.
• Involve your minor relatives in an LLC by creating a Trust that includes them as a beneficiary; intersection of Trust and LLC.

What is a family LLC?

• A family LLC allows your heirs to become shareholders who can then benefit from the assets held by the LLC, while you retain management control.
• Parents often maintain main management of the LLC, while younger generations are listed as shareholders without voting rights. This way, control is maintained over the LLC while the parents are alive.
• If children are non-managing members while parents manage the LLC, the value of units transferred to them can be discounted quite steeply, often up to 40% of their market value.

How is a family LLC passed on?

• Under some state regulations, LLC may dissolve if no succession plan has been laid out for the LLC.
• However, even without a succession plan, dissolution can be avoided by transferring the LLC to another individual upon death mentioned in the operating agreement, creating a joint tenancy membership, creating a revocable Trust to hold LLC, or probating LLC through court to determine the succession.
• If succession plan is laid out, LLC is inherited accordingly.

Steps for forming an LLC

The following steps lead to the formation of an LLC:

• Choose Name: Keep a name for your LLC. Comply with specific state regulations and IP laws. Application for approval of the proposed names for the firm is made with Form-1.
• Obtain Digital Signature Certificate: Digital signature of the designated partners of the LLC must be obtained. Since most documents are filed online during LLC registration, this is important.
• Apply for Direction Identification Number (DIN): Mandatory to apply for the DIN of all designated partners or those with the intent of becoming partners at the LLC. Form DIR-3 applies to the allotment of DIN.
• Articles of Organisation: Draft the Memorandum of Association (MoA) and Articles of Association (AoA) and other relevant articles of your organisation. These documents will set out the object and purpose of the LLC and list the internal bye-laws and regulations by which it will be governed, respectively.
• Incorporation: The form of incorporation must be filed with the Registrar who has jurisdiction. Usually, the state holding the head office of the LLC has such jurisdiction.
• LLC Agreement: This agreement will govern the rights and responsibilities of the partners and members.
• Fee: Pay the requisite fee for registration of LLC.

 

Distribution of Estate after death, without Will

If a person dies without leaving behind a valid Will, it is said they have died ‘intestate’. Any property left behind, in that case, will need a Succession Certificate for distribution of that property:

• Succession certificate is the court order for distribution of assets of the deceased to the beneficiaries as per the Indian Succession Act.
• It is mandatory for transfer of title of the property from the deceased’s name into the name of the beneficiaries.
• Succession certificate gives privilege to the legal heir with right to recover debts or property.

Conclusion

Estate planning has taken added importance in the lives of families. However, it requires careful planning and consideration to ensure that no dispute or in-family fighting occurs after the estate creator’s death.

Apart from the standard Wills and Trusts method, LLCs have also come to assume centerstage when it comes to estate planning. The revival of estate planning is welcome as it helps reduce litigation in family disputes.