Even though most people in India are aware of estate planning, the number of people who do it is not very many. “Dying without an estate plan can significantly increase the burden of loved ones after death,” says Patrick Hicks, general counsel and head of legal at Trusts & Wills.
If you are new with the concept, let’s start with what an estate planning is and how it actually works. So, estate planning is simply the act of deciding who will inherit your property and valuables, which somehow reduces the chances of family conflict and ugly legal battles. Estate planning has various components such as power of attorney, health care directives, beneficiary designation, etc., but will and trust are the most common.
Will
A will is a document that expresses your final wishes, including how you intend to distribute your assets. Writing a will lets you determine who will receive your assets when you die, as well as who will raise your minor children if you and the other parent have died. When a person dies without making a will, he is said to have died ‘intestate’, and his property and assets are scattered according to personal laws.
The Hindu Succession Act, 1956 lays down how the property will be distributed when a Hindu dies without a will. The property of a Muslim will be inherited according to Muslim law. In the case of Christians, Parsis or Jews, the property is distributed as per the provisions of the Indian Succession Act, 1925.
There are some misconceptions that wills are for the wealthy, or that they are not necessary until you retire, or when you are very old. But it is never too early to plan for the uncertainties of the future. A will can be drafted during a person’s lifetime, and you don’t need to wait until you have lots of assets to transfer or until you’re old. The will can be amended as many times as the testator wants throughout his lifetime, but it can be executed only after the death of the testator. This is a sensitive subject, but it should be the first step towards financial matters.
Confidence
A trust is a fiduciary agreement that enables the first party (the settlor or grantor) to grant the second party (the trustee) the right to hold property and assets on behalf of and for the benefit of the third party (the beneficiary). There are different types of trusts, such as living, testamentary, revocable and irrevocable trusts. However, revocable and irrevocable trusts are two major ones.
A revocable trust can be changed or revoked at any time during the grantor’s lifetime. This allows you to keep assets in a trust while you are alive, with control of the trust transferred after you die to the beneficiaries you named. A revocable trust becomes effective as soon as the legal document is signed and funded. Once the grantor dies, a revocable trust becomes irrevocable.
An irrevocable trust cannot be modified, altered or terminated once signed and comes into effect without the consent of the beneficiaries. The grantor effectively relinquishes all ownership rights to the assets and transfers them entirely to the trust. The trust is managed by its trust agreement, and it even has a unique tax identification number. Any taxes due on the irrevocable trust must be paid by the trustee using the trust funds.
While will and trust are both effective tools of estate planning, knowing your needs and being aware of the tools is the best way for you to create an effective estate plan.
Also COVID-19 has shown us that life is unpredictable. The pandemic has affected all of us unexpectedly and has made us think about our future safety and security. It has been observed that a large proportion of persons who died of COVID-19 failed to do estate planning. It has been a wake-up call for everyone to own a well-defined estate plan, no matter what proportion they are owed. The sooner you plan, the better, so now is the right time to secure our family’s future.
Views are personal: The author – Akanksha Mathur is a Certified Financial Planner based in Jaipur.
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