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Estate planning is not just for those with huge assets

livemint, Feb 9, 2021


Sneha Makhija

Devising an effective estate plan can help you seamlessly transfer your wealth

You spend a significant part of your lifetime in creating and managing your wealth. But when the question of devising a plan for passing on your wealth arises, it is conveniently pushed off to a later stage in life, not considering the unpredictability of the lifespan of an individual. This procrastination often is a result of certain myths that exist when it comes to estate planning. Let us understand and demystify some of such fallacies.

Estate planning is often considered a requirement for individuals with huge and complicated asset holdings. Little does one realize complications can occur irrespective of the quantum of wealth. Even if you feel your assets are not worth a lot or are fairly simple, having an estate plan can help determine who gets what and more so as per your wishes. As otherwise, succession laws will prevail whereby your assets will be distributed in a pre-defined manner as governed by law and not in accordance with your desires. For example, if a Hindu male passes away intestate i.e. without a will, his assets at the first level will be distributed equally between his mother, spouse and children.

Your first reaction maybe “Well, equal is fair, why plan then?”. Please note that all your assets will have multiple co-owners (your mother, spouse and children) and not necessarily all such co-owners would have similar objectives on how they wish to deal with those assets owing to their varying circumstances. Such instances can lead to the possibility of family disputes thereby deteriorating the relationships of your loved ones in future.

Failing to plan your inheritance can lead to troublesome transmission of your wealth to your loved ones. You should consider factors such as the location of your assets, composition of your estate in terms of financial assets, real estate holdings and business shareholdings that can have a bearing on the transmission of your estate. Further, with families going global it is imperative to devise a plan that takes into consideration international laws and its nuances to avoid any adverse ramifications for your family. For instance, when a US person receives a foreign inheritance by way of a will, there is only a reporting requirement depending on the quantum of assets received as against a US person being a beneficiary of a foreign trust that may have adverse tax implications depending on the plan devised. Hence, it is essential that you undertake asset-specific and jurisdiction-specific planning that considers the impact of applicable laws on your estate.

Notwithstanding your age, it is vital that as soon as you have an asset and a desired beneficiary, you should immediately consider putting a plan in place. Let us understand the importance of an estate plan through a case study. Mr Sharma was a senior executive with a multi-national company who passed away intestate in his mid-30s leaving behind his estate for his mother, wife and minor children. Since he was quite young, he didn’t feel it necessary to create his will and hence all his assets got distributed equally among his heirs as per the succession laws. The entire burden of managing the financial affairs of the family fell predominantly on the shoulders of his wife. However, she didn’t have complete independence to deal with the assets as they were held jointly with her mother-in-law and minor children. To generate liquidity, she wished to sell a few real estate properties that required her to obtain court permission, a prerequisite to sell the property of a minor. Further, Mr Sharma had not appointed nominees for all his financial assets, including employee stock options (Esops) which were held with a financial institution in the US. The financial institutions in India required the letter of administration (LoA), which is an order issued by the court when an individual passes away intestate confirming the rightful legatees of the estate. The process to obtain an LoA usually takes almost a year, hence nominations play a pivotal role for ease of access to funds by the family. Further, since Esops were held with a foreign institution in the US that had no nomination, it required additional administrative requirements such a medallion guarantee stamp. A medallion signature guarantee is a special stamp that confirms that the signature authorizing the transfer is genuine and that the signer has the legal capacity and authority to sign the document. This case clearly depicts the complexities that can arise for your loved ones if the necessary planning is not undertaken.

Devising an effective intergenerational plan helps you to protect, preserve and seamlessly transfer your wealth to your loved ones during your lifetime and beyond.

Sneha Makhija is head of wealth planning, products and solutions, Sanctum Wealth Management