Mumbai, Dec 16, 2022
Estate Planning involves devising a plan that not only includes strategies to transmit your wealth after your lifetime but also measures to protect and preserve your wealth during your lifetime and beyond.
By Sneha Makhija is Head of Wealth Planning, Products & Solutions, Sanctum Wealth
The terms estate plan and Will are often used interchangeably. Usually, one may think that if they have put a Will in place, they have put their estate plan together. Further it is not very uncommon for people to think that an estate plan is meant only for individuals who are super affluent while a Will is meant for the commoner. Hence, before we unravel the differences between the two terms, let us first understand the term estate.
Do you think you hold an estate?
An estate means the net worth of an individual comprising of all the assets and liabilities that a person owns. Assets usually comprise of financial assets such as bank accounts, mutual funds, shares, bonds, insurance, intangible assets such as patents, trademarks, copyrights as well as real estate, arts and artefacts, personal belongings such as vehicles, jewelry, precious gems, and stones, amongst others. Liabilities on the other hand include personal loans, mortgages, credit cards, taxes and the like. From this definition it might be clear that nearly everyone does hold an estate, and, in that case, shouldn’t everyone then undertake some form of estate planning?
For instance, Mr. A owns some investments and one real estate worth Rs 1 crore, on the other hand, Mr. B’s estate may comprise of financial investments, real estate across multiple jurisdictions, business shareholdings whose value may be worth Rs 500 crore. Hence, whether it is Mr. A or Mr. B both require estate planning, the major differences in their estate only being the value and composition of the estate that may warrant a simple or complex level of estate planning.
So, then how is Estate Planning different from a Will?
1.Estate Planning and Will: Defined
Estate Planning involves devising a plan that not only includes strategies to transmit your wealth after your lifetime but also measures to protect and preserve your wealth during your lifetime and beyond. It also helps you plan for a situation of managing your financial affairs in the event you are incapacitated.
On the other hand, a Will is a document that stipulates your wishes on how and to whom your wealth needs to be distributed post your lifetime.
2. Objectives Met
An estate plan has a broad scope as it aims to meet several objectives of an individual such as insulation of your wealth against unforeseen risks, prudent management of wealth in case of minor children, special children/adults, as well as family members who are not financial savvy, avoidance of probate, define decision making authority in case of your incapacitation, setting up a communication platform to mitigate family conflicts, medical directives in case of your acute health condition amongst others.
Whereas the Will has a one-point objective to provide directives on the manner in which your wealth should be distributed amongst your loved ones after your lifetime.
3. Combination of tools vs. single document
As we discussed, an estate plan aims at meeting several objectives such as to ensure your assets are transferred in a seamless manner according to your wishes, plan your wealth and legacy for your loved ones in an asset protected way as well to minimize the incidence of inheritance tax, if applicable. Currently, there are no inheritance taxes in India however most developed countries like the United States of America, United Kingdom, France etc. do have such taxes. Hence, one may have to consider cross-border laws and their implications especially when your loved ones are based overseas, or you hold assets or citizenship of such jurisdictions.
In order to meet the above objectives, a combination of estate planning tools maybe used such as: the last Will and testament, private family trust, power of attorney, gift deeds, advanced medical directive (popularly known as living Will in some jurisdictions), life insurance, family constitutions, family charters amongst others.
As an estate plan has a broad scope it entails devising a collection of legal and non-legal documents. On the other hand, a Will has a narrow scope as it is just one of the legal documents under an estate plan that is used to capture your intention on how you wish your wealth to be distributed post your lifetime.
4. Benefits and Limitations
A Will is the starting point and foundation of a good estate plan and in the absence of which intestate succession laws will prevail whereby your wealth will have to be distributed in a pre-defined manner as stipulated in law as against your wishes. For instance, for a Hindu male who passes away without a Will in place, at the first level, his wealth will get distributed equally amongst his mother, spouse, and children. This may not necessarily be the wish of the individual. Hence, a Will is a very crucial document that should be put in place by everyone as soon as one holds an asset and has a desired recipient.
However, a Will only comes into effect post your lifetime and hence has a limited purpose. Besides, if it gets challenged your loved ones may have to wait for years to get access to your wealth until the conflict is resolved.
On the other hand, the aim of an estate plan is to undertake holistic planning considering your family dynamics, your current situation as well as your objectives both during and after your lifetime. When you decide to put an estate plan in place you ensure greater protection of your wealth as well as financial safety of your loved ones. An estate plan does not just involve putting a set of legal documents in place but also mechanisms of preparing inheritors of your wealth on the opportunities and challenges managing and inheriting wealth can bring. However, since an estate plan entails comprehensive planning, it is more costly than putting only a Will in place.
It might be clear from the above that everyone can benefit from an effective estate plan, whether a simple or complex one, irrespective of the quantum of wealth. An estate plan ensures greater probability of your wishes seeing the light of the day as against a standalone Will. Hence, while a Will is a crucial document to pass on your wealth post your lifetime, on the other hand an effective estate plan can safeguard the interests of both your family and you during and after your lifetime thereby serving as an everlasting gift for your loved ones.
For more information, please visitwww.sanctumwealth.com