One of the goals of succession planning is to protect the interest of an individual during his/her lifetime and after his/her death safeguard the interest of his/her loved ones. This can be achieved by different ways of estate planning by distributing assets among his beneficiaries. An estate plan aims to preserve the maximum amount of wealth possible for beneficiaries and flexibility for the individual prior to his death. Estate Planning helps an individual to ensure the following:
- Planning for harmonious succession and disposition of your Estate ;
- Protection of Estate with family’s needs in mind ;
- Effective management of Estate during and beyond your lifetime; and
- Preparing Estate for unforeseen eventualities.
Estate planning is closely related to succession. There are two modes of succession:
1) Intestate Succession- as per Hindu Succession Act, 1956; and
2) Testamentary Succession.
Intestate means, not having made a will before one dies. Testamentary succession means succession by way of will/testament. Whatever may be the mode of succession, home is generally one of the most valuable properties in the assets possessed by any person and same needs to protect the needs of the loved ones during lifetime and after his death in the following. There is more than one way by which home can be protected and passed to next generation.
Option No 1:- Family Settlement
Family settlement is one of the best and most prevalent ways to resolve succession related dispute between the family members. It is an arrangement between member of a family descending from a common ancestor or near relation. Family members try to sink their differences and settle disputes, differences by reaching at mutually acceptable solution of conflicting claims once and for all. By way of family settlement members of family buy peace of mind and bring about harmony and goodwill in the family by an equitable distribution or allotment of assets including his residential properties (Home) amongst member of the family.
Binding Nature of Family Settlement: - Family settlement duly recorded will be binding between family members. No family member is allowed to challenge the settlement if it was arrived by his/her consent. In order to be binding family settlement must be a bona fide one and must be voluntary and should not be induced by fraud, coercion or undue influence. The family arrangements may be even oral in which case no registration is necessary however it should be proved before court of law in case of dispute between family members. As pointed out earlier, immovable property including home is important part of family assets, therefore it is advisable to have a written settlement between the family members.
Requirement of Registration: - It is settled by various Judicial Pronouncements that registration of family settlement/ arrangement would be necessary only if the terms of the family arrangement are reduced into writing. Here also, a distinction should be made between a document containing the terms and recitals of a family arrangement made under the document and a mere memorandum prepared after the family arrangement had already been made either for the purpose of the record or for information of the court for making necessary mutation. In such a case the memorandum itself does not create or extinguish any rights in immovable properties (Home) and therefore does not fall within the mischief of Section 17(2) of the Registration Act and is, therefore, not compulsorily registrable.
Antecedent Title, Claim or Interest Not Necessary: - Equal distribution is not a precondition for validity of family settlement. The members who will be parties to the family arrangement must have some antecedent title, claim or interest even a possible claim in the home which is acknowledged by the parties to the settlement. Normally a stranger who is not related to family in any way can not be part of family settlement. However it is not an absolute precondition. Even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all its claims or titles in favour of such a person and acknowledges him/her to be the sole owner, then the antecedent title must be assumed and the family arrangement will be upheld and the Courts will find no difficulty in giving assent to the same. Normally Indian courts tend to lean in favor of validity of family settlement rater than against it.
Option No 2:- WILL and Life Interest
A will or testament is a legal declaration. Section 30 of the Hindu Succession Act is an assertion of the general rule that Hindu may dispose of the property by way of Will. By way of Will the testator provides for the distribution of his property at death. As per the customary Hindu law no coparcener, not even father, can dispose of the by will undivided coparcenary interest in the property, including home. Will can be used as mode of succession planning in respect of self acquired property and testators interest in the coparcenary property. Therefore entire interest in ancestral home can not be bequeathed by any one coparcener on his/her legal heirs.
Will can be used make unequal distribution of property to family members as well as outsiders with different kind safeguard to protect the interest of testator and successors. By way of Will testator can provide for protection of minor children and female members by way of life interest and trust. The testator can ensure that any family member shall have right to use the family home during his or her life time and thereafter it will pass on to other legal heirs. This kind of arrangement is called life interest.
Life interest means right to enjoy the property including home, during once life time. This was and is widely used to protect the interest of female members of the family. In this type of arrangement any person is given right to enjoy any particular property mostly home during the life time of that person. After the death of the person in whose favor the life interest was created the property reverts to legal heirs of deceased according the Will or in case there is no Will as per the laws of succession. A life interest can be normally created by a Will or by deeds such as settlement, gift, formation of Trust, etc. There are many types of life interests. It is possible for the owner to reserve a life interest for himself or herself. The owner can also create a life interest in favour of a third party or non-family members.
As the term itself implies, a life interest holder does not have absolute interest or control over the home. The holder of life interest cannot deal with the property independently. Life interest is non transferable non assignable right and it can not be transferred any other person. This does not prevent the owner from renting out the home or property on which life interest is created. Life interest holder can exercise various rights however holder cannot commit acts of waste and damage to his home, which an absolute owner is entitled to.
By way of life interest it can be ensured that the ultimate beneficiary is not deprived of certain rights and benefits which are made available to a life interest holder. In other words the creator of life interest is able to make sure that interest of holder of life interest as well his heirs is safe and is determined by his will. Will is desirable tool for complete estate planning.
Option No 3:- Private Trusts
A trust may be formed by any person competent to contract. Trust is also used as a mode of succession planning. In simple words trust means is an arrangement whereby a person (a trustee) holds property for the benefit of one or more beneficiaries. Trust is used to make a ring fenced structure which ensure that the interest of person’s future generations are well guarded. Trust can be revocable as well as irrevocable. If the author does not want to give up control of his/her assets then it is advisable to create a revocable trust which can be revoked by the author of trust at any time.
Normally a person can not determine the use/application of his property/assets by his successors/legal heirs after his death. The property might be sold or it can be attached in some legal proceeding or it can be transferred outside the family. The best way to ensure that property is used for the benefit of the beneficiary in any particular manner is to create a trust. Once the property is transferred to a trust, the trustees are bound to utilize the property as per the terms of trust deed. In this way interest of future generation are well protected. The terms of the trust may specify the manner in which any property is to be used. For example trust can specify that family home can be used only for residential purpose of the family members and can not be sold unless specific contingency arise. Further the trust deed may specify that with the consent of all the beneficiaries it can be sold and the consideration received can be divided between the family members. Trust deed can also provide that specified amount out the income of the trust is to be utilized for charitable purposes etc. There are endless possibilities in which a trust can be structured depending upon the facts and circumstances of each case.
Estate planning is not an option but a necessity for a person who wants to ensure that assets and passed on the his/her loved onces in such manner as he/she desires without compromising on the efficiency of such movement.
By Dr. Suresh Surana, Founder, RSM Astute Consulting Group