Operative elements of an estate plan
In the previous article on Estate Planning I attempted to cover its basics, elaborating on the concept and its place in one’s ‘wealth creation’ journey, of accumulation, preservation and distribution of wealth (or Estate). While pursuing this virtuous cycle of wealth creation, bulk of an individual’s focus is on accumulation and preservation of wealth so generated, not realizing that not planning for wealth distribution renders the process incomplete.
As per various studies, Indian families generally suffer from a cultural reluctance to discuss succession. Such reports emphasise on the need for greater awareness for succession planning since a lot of wealth is locked up in family businesses which need to be effectively devolved to the next generation. With majority of businesses today being family-run, still most Indian businesses families do not have succession plans in place for personal and/or business wealth. Over the last 25 years or so, India has witnessed sweeping changes across social, cultural and economic dimensions – inter-family dynamics have changed, social relationships have been altered, business opportunities have widened.
Effective estate planning ensures that families retain control over their businesses and a smooth transition of leadership of businesses between generations of families. It balances the needs of businesses with the interests of family members
Estate is anything which one owns or will get to own after death, and it includes physical assets, financial assets, intangibles (IPRs, brand) and digital assets (URLs, email IDs).
An estate plan has to take into account and ensure the following deliverables:
1. Estate owner’s wishes should prevail
2. Reduce/ eliminate the impact of one’s Personal Succession Laws
3. Minimise disputes in the family
An estate plan consists of many different elements, including what happens to one’s assets and who should act on estate owner’s behalf if he/ she is unable to. It should be easy to understand. The succession laws might not take into account one’s personal relationships or preferences while distributing one’s assets if he/ she dies intestate. Moreover, an estate plan ensures timely distribution of the family assets to the intended inheritors without any delays and at lowest cost.
Below are the different elements of an estate plan:
1.Will: This is the document which specifies who will inherit one’s assets and in what manner. A Will helps to ensure that the assets that an individual leaves behind for the loved ones are distributed as per his/ her wishes. There is also an important element pertaining to will when it comes to appointment of guardian for minors or children with special needs. The Will should state who will be the person and how the assets will be managed till the minors turn adults.
2.Trust: Trusts are legal arrangements that hold assets on behalf of a beneficiary or beneficiaries. There are different types of trust which can be created. The person who creates the trust can decide the terms of the trust to be formed. Trusts can also be created in the will, this is known as testamentary trust. However, these trusts are subject to the rulings under the ‘Will’ which means they also go through the process of probate.
3.Power of Attorney: It’s a legal arrangement where an individual designates someone to manage one’s finances in case an individual becomes incapacitated or is not in a position to do so. Many NRIs use Power of Attorney (PoA) to designate someone in India to manage their assets—movable or immovable.
4.Living Will: A living Will is an advance directive written primarily for physicians. There may be life situations like one is terminally ill, seriously injured, in a coma, in the late stages of dementia or near the end of life. This document states the wishes of the people for these kind of situations when one is at the end of life care and unable to communicate their decisions.
5.Nomination and Beneficiary Designations: This is not really a component of an estate plan but important for completing the estate plan. Appointing nominees are important for smooth transfer of your financial assets after your demise. The rights of nominee are limited to holding the assets as a custodian till it is transferred to the right legal heirs.
In some assets such as life insurance beneficial nominees can be appointed who will be the legal recipient of the life insurance proceeds at death of the policyholder. Under the new Insurance act, Parents, Spouse and Children, if any one of them is the nominee in the policy, they automatically become the Beneficial Nominee and hence they can consume the monies too. The legal beneficiaries can change in situation like marriage; hence it is important to periodically review nominations and beneficiary designations wherever applicable.
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