Understanding Succession Planning, Wills, and Private Trusts in India

SUCCESSION PLANNING WILLS AND PRIVATE TRUSTS By K. Sheshadri, B. Com., F. C. A., Chartered Accountant For The Bengaluru Branch of the Southern India Regional Council of the Institute of Chartered Accountants of India 21.02.2024 1

TYPES OF SUCCESSION Succession Testamentary Intestate Law on intestate succession Hindu Succession Act Hindus, Buddhists, Sikhs & Jains Muslim law different for Shias and Sunnis Indian Succession Act for all others 2

TYPES OF SUCCESSION(Contd.) Testamentary Succession Indian Succession Act except for Muslims Marriage under Special Marriages Act Sections 19 & 21 Personal Law of Succession inapplicable India Succession Act will apply 3

NO LEGAL HEIRS Property devolves on the government Escheat (section 29 of HS Act and section 34 of IS Act) Property devolves on the government with all attached obligations and liabilities 4

WILLS - BASICS Will A legal declaration Declaration is with respect to testator s property Effective only on death It can be changed/revoked Properties can be disposed of during testator s life Codicil An instrument made in relation to a will Alterations, explanations and additions to the dispositions Deemed to be a part of will A fresh will is better if there are substantial changes in the original will 5

WILLS BASICS (Contd.) Registration Not compulsory but ideal Essential if large properties, unusual bequests, multiple claimants/claims and complex assets are involved. Unregistered will can lead to disputes 6

CONTENTS OF A WILL Testator description Legatee description and relationship Estate clear description Executor to administer the estate Alternative executors Allocation among legatees Alternative legatees 7

CONTENTS OF A WILL (Contd.) No coercion, undue influence etc. Two witnesses (independent and younger in age) Doctor as witness Signature Residuary/omnibus clause to cover Subsequent receipts, acquisitions and bequests Items omitted by mistake Insurance and compensation claims 8

OTHER ISSUES - WILL Thumb impression permissible in case of inability to sign If the testator is unable to affix thumb impression some other person can sign on his behalf. Better sign all pages of the will Witness cannot be a legatee Divorce/separation to specify Will can be for a part of the property and the balance can be intestate Nomination no substitute for will Shakti Yezdani [2023] 157 Taxmann.com 364(SC) 9

LIFE INTEREST Enjoyment of a property by a legatee during his life time Life interest beneficiary (LIB) has no right to alienate the property On LIB s death property passes to another legatee as willed 10

WILLS - PRECAUTIONS Describe all immediate family members Revoke previous wills/codicils specifically by description Reasons for exclusion of close family members Reasons for inclusion of unrelated persons Describe allocations among legatees clearly Do not bequeath undivided interest if possible Reasons for unequal/unusual bequest 11

WILLS PRECAUTIONS(Contd.) No legal requirement to type or to be in English Better to type and execute in a language understood by legatees and courts Bequest for charitable or religious purpose permitted Bequest to unborn persons not in existence at testators death is void(Section 112) Prior bequest to existing person followed by bequest to unborn person valid 12

CAPACITY TO MAKE A WILL Sound mind Illiterates can make a will subject to proof that he was explained the contents In case of physical incapacity exemption from sub registrar for personal appearance possible Should be a Major 13

PROPERTY BEQUEATHED Coparcener can bequeath his undivided share in HUF Section 30 of HS Act Tenancy subject to rent control law and lease deed Own property 14

EXECUTORS & ADMINISTRATORS Executors Should be known to legatees and testator Consent is ideal Should be young Preferably a professional or a relative. Letter of administration No executor is appointed in the will Death, legal incapacity and refusal, of the executor Granted to universal or residuary legatees 15

MUSLIMS 1/3 of the property can be willed The balance passes as per the personal law Oral will is permissible No coercion, undue influence etc. Excess over 1/3 can be by consent of legal heirs No legal heirs bequest of whole property permissible 16

PROBATE & SUCCESSION CERTIFICATE Probate is granted only in testamentary succession The court certifies the copy of the will Conclusiveness and validity of the will is established Compulsory for will executed in Chennai, Kolkatta and Mumbai and for properties located there. Court fee outflow in probate Probate is granted to the executor Succession certificate issued by court for intestate succession to recover debts 17

KINDS OF WILLS Privileged will for soldiers in war front and can be oral, unsigned and unattested Joint will made by two or more testators in a single document disposing of the joint or separate property to same or different legatees Joint wills are revocable by each of the testator or even by the survivor 18

KINDS OF WILLS(Contd.) Mutual wills are separate documents made by two testators conferring reciprocal benefits on each other Mutual wills are revocable if both testators are alive Onerous bequest property with obligation 19

REVOCATION OF WILLS Wills are to be revoked following the same procedure for execution Wills cannot be revoked by obliteration or crossing across etc Revocation of a subsequent will that revoked an earlier will not revive the latter Rule against Perpetuity Section 114 Bequest invalid if vesting delayed Beyond the life of the initial successor(s) and testator Beyond Minority of the eventual successor Prevents creation of remote and uncertain future interests and lays down time limits 20

FEMA NRI/OCI can acquire immovables in India by inheritance from non residents if the non resident s acquisition is as per FEMA or the non resident had acquired property from a resident NRI can inherit from a resident section 6(5) of FEMA 21

LIMITATIONS OF WILLS Litigation Fragmentation of assets Variations in market value Can be changed and revoked Ringfencing assets not possible during life of testator Probate 22

PRIVATE TRUSTS BASICS Obligation annexed to ownership of property Author reposes and declares confidence Accepted by the Trustees For the benefit of beneficiaries Dual Ownership Trustees are legal owners Beneficiary is beneficial owner Author can be a beneficiary 23

PRIVATE TRUSTS Need for trusts Protection against insolvency/business failures Differently abled/ incapacitated children/ successors Protection of traditional family businesses Disinterested successors to businesses Protection of family wealth with income flowing to beneficiaries Ease of governance and low regulation No probate Muslim personal law and wills Inheritance tax abroad Perceived tax benefits in India Control 24

TRUSTS TYPES AND FORMS Discretionary trusts by will Stamp duty avoided No transfer no tax impact Taxed as an AoP under clause (ii) to the proviso to s. 164(1) provided it is the only discretionary trust so declared Distribution at discretion of trustees based on needs of beneficiaries 25

TRUSTS TYPES AND FORMS(Contd.) Revocable trusts Settlor can revoke at any time Section 61 will apply transferor liable to tax Section 63 (definition of revocation) Provision for retransfer of income or asset Right of resumption of power over income or asset Transfer includes even arrangement or agreement 26

TRUSTS TYPES AND FORMS(Contd.) Discretionary trusts Trustees can choose beneficiaries to whom benefit to accrue and quantum Determinate trusts Entitlement of beneficiaries is fixed by settlor or by a formula No discretion to trustees Irrevocable trusts Will not end until purpose is achieved or term ends 27

TRUST DEEDS Name Detailed recitals Must spell out settlor s intentions Unequivocal declaration of trust Definitions clause Purpose/object to be clear Trust Property Beneficiaries Intention to part with property 28

TRUST DEEDS(Contd.) Who can create- section 7 Competent to contract By or on behalf of minor with court permission Term of the trust Particulars of trustees Choice of trustees Mechanism for decision making 29

TRUST DEEDS (Contd.) Meetings of trustees Accounting year and audit Powers of trustees Delegation of trustees powers Flexibility Dispute resolution Whether revocable Dissolution Amendment 30

PRECAUTIONS Registration of the instrument of trust Registration if immovable involved Tax-benefit versus risk of loss of control over property Business through trusts tax at MMR Clubbing provisions to be considered Trustees should be capable, reliable and honest Discretionary trusts not really an option 31

PRECAUTIONS (Contd.) Drafting of trust deed Decision should be of assessee only Stamp duty implications Trusts in favour of non-relatives tax Tax/stamp duty on dissolution of trust Fraudulent transfer under tax and insolvency laws Will preferable for young settlors family discord 32

PRECAUTIONS (Contd.) Main trusts and sub-trusts for each immediate successor Multiple trusts for multiple business-lines Large institutional trustees (with portfolio managers and advisors) Appoint mentors to oversee institutional trustees Financial viability Tax on gifts and donations Bank accounts 33

INCOME-TAX Section 56(2)(x) - Exempts receipts by trust from individuals Provided trust is created solely for the benefit of the relative of the individual Relative defined in Explanation (e) to section 56(2)(vii) Caution on definition of relative 34

INCOME-TAX Representative assessee (section 160 (i)(iv) and section 160(2) Representative assessee is treated as the beneficial recipient of income Section 161(1) MMR for whole income if there is business income section 161(1A) No MMR for trust by will for the benefit of dependent relatives Representative assessees right to recover and retain from beneficiaries/trust section 162 MMR for discretionary trusts (section 164) subject to exceptions 35

SOME OTHER LEGAL PROVISIONS Arbitration inapplicable and disputes to be settled through civil courts (Vimal Kishor Shah) Fraudulent and wilful parting of property section 68 of IB Code Section 447 (fraud) of CA, 2013 Section 53(1) (fraudulent transfer) of TP Act Section 281 of the ITA (void transfers) 36

SOME CASE LAW CIT vs. Shriram Ownership Trust (2021) 430 ITR 356 (Madras) Vimal Kishor Shah vs Jayesh Dinesh Shah (MANU/SC/10913/2016) 37