What does one do with the
inheritance? This question was raised by a reader, whose father left behind a fortune. By current standards, the inherited
wealth was enough to cover her current
annual income many times over. The problem though was the conflicting advice she was receiving from everyone around her about using it.
Protect it, instructed her mother. This wealth was accumulated by your father through years of hard work. So treat it with respect and make sure it is not wasted, advised the mother. While that seemed quite fair, what would it mean, asked the daughter. Should I simply keep it aside and protect it and pass it on to my children? The mother did not say so, but seemed to think that was a good idea. What is the point of the inheritance then?
The risk profile, preferences, needs and attitudes towards money differ significantly across generations. If the elderly like to keep the capital protected and earn an interest income, even if it is modest, the younger generation that inherits it will have enough time on hand to seek growth out of that money. They may be able to take risks to make it appreciate in value.
A large inheritance enables several financial goals that may be otherwise tough to fund. It also modifies how money will be used and allocated. It would be a pity if these privileges are not enjoyed in one’s lifetime. Consider these choices, for example:
First, the wealth might do away with the need to buy insurance and pay a premium on it. Insurance is a protection that is purchased to reinstate the wealth of the family, in case a risky and unexpected event happens that upsets the finances of the household. The computation of the required amount of insurance to buy, will consider the wealth needed to generate an income that can stabilise the household, should there be a loss of income. The presence of a large bequest serves this very purpose without having to incur the cost of the insurance premium.
Second, the saving ratios of the household need not be so strict. The corpus that is needed for many of the life goals such as higher education and retirement might be well funded by the bequest. The household can enjoy its current wealth without the fear about the future goals or about unexpected large expenses. The freedom this provides might be very valuable. So many struggle with the decision about how much to spend and how much to save. The availability of a hoard of wealth makes it easier to spend, and enjoy the current income without sacrificing long term interests.
Third, the building of long term wealth for most households will require setting aside a small amount of money each year, which will eventually grow to a large corpus. This places severe restrictions on withdrawals. When the corpus has to be accessed for any emergency or an important large expense, it is dented by the impact. Building it again to reach the earlier levels remains a challenge using the current income streams alone.
Many find it tough to take a loan against their PF, or liquidate a large investment, even for an important goal such as higher education, due to the goal compromise it entails. Funding higher education for example, tends to harm the retirement corpus, with limited time available to build it back in value.
A bequest is large from day one. It earns a return on the entire invested corpus and therefore has the resilience to take withdrawals easily. It also enables funding multiple goals without a compromise and the money that remains after a drawing continues to be deployed gainfully. The benefit of a large sum invested over the long term is far superior to that of a gradually accumulating corpus.
Fourth, a bequest enables taking a long term view of financial decisions without the worry about tactics and timing. The strategic orientation that helps build wealth over time is easily applied when a large bequest that need not be accessed immediately is available for allocation. The division between growth, income and liquidity is easier and it is possible to view this corpus as different from the routine income that flows into the household.
Fifth, a bequest enables funding of projects that may not otherwise receive funding or attention. For example, if the inheritor nurtures the dream for entrepreneurship, and wants to begin a new business, the bequest is available to fund the initial capital. It is also possible to raise loans using the equity provided by the bequest. The flexibility of funding with own or borrowed capital helps with the structuring and shaping of the new business
There are some points of caution too. Any sudden increase in wealth can attract many exploiters towards the inheritor, some of whom might see the bequest as easy money that has not been earned righteously in their view. It is not uncommon for relatives and friends to make demands on any windfall of wealth. One must be cautious about not frittering away the wealth by falling prey to such demands.
Can there be a wrong nominee for your investments, financial assets?
​Who is the right nominee and who isn’t?
The right nominee is the person to whom you bequeath assets in your will. If you don’t create a will, the right nominee is the heir to the asset as per succession laws. Nominating this person will facilitate a smooth, successful, and final transfer of the asset after your death, devoid of conflict. You thus ensure that the person you want to leave that asset to actually gets that asset for good. But can there be a wrong nominee? Yes indeed. Here are 3 cases when you may end up putting down an incorrect nominee and what you should do to make transfer of your assets and estate smoother.
​When nominee and actual heir are different
Sometimes the person one nominates to receive money from his/her fixed deposit is not the same as the person to whom one bequeaths the same FD in the will. In most cases, after the holder’s demise, the bank will transfer the FD money to the nominee mentioned in the FD form when the FD is not jointly held. If jointly owned/held and the first holder too passes away, then to whom the asset is transferred will depend on the mode of operation of that asset.
Also read: Shares, FDs, property, mutual funds: If 1st holder dies will joint holder get money or nominee?
Supreme Court states that a nominee is merely a custodian of the asset/money, and the actual heir to the FD is the person clarified in the will. If the two persons are different then the actual heir will have to claim the money from the nominee. This can lead to legal wrangles if the nominee does not want to part with the asset/money received, aggravted further by the cost of legal battles in India.
​When a person passes away intestate
If someone passes away without creating a will, they are said to have died intestate. In this case, assets are distributed among heirs as determined by the applicable succession laws of the country. Succession laws depend on the religion of the person who has passed away. Normally, the laws classify family members as class I, II or III heirs and the wealth of the deceased is distributed by the court among these. Class I heirs get the first preference and so on.
For example, in case of a Hindu male who passes away intestate, the class I heirs include mother, wife, children, son of predeceased son and so on. However, father is not the immediate legal heir of a Hindu male. Thus, if there are no class I heirs of a Hindu male, only then the father will be eligible to receive the assets of his son. Hindu succession law also states that every legal heir of the same class (e.g say all Class I heirs) has equal right on every asset of the deceased if there is no Will. The bank will, normally, pay the money to the nominee and he/she will be required to transfer it to the legal heirs as per their entitlement.
​Here’s an example…
Let us assume you have nominated your son in one of your bank FDs. In the event of your demise, the bank will pay the amount to your son as he is the nominee. However, he will be required to share the money with other legal heirs to the extent they are entitled to receive the money as per succession laws i.e., with your spouse, and your other children. If he does not give their share to them, then they can go to court demanding their legal right.
​Special cases
In case of certain assets such as Employees’ Provident Fund (EPF), Employees’ Pension Scheme (EPS) and Gratuity, only defined ‘family’ members can be nominated by the person. A person cannot bequeath money from EPF, EPS and gratuity to anybody other than those defined ‘family’ members in the Will. If there is a mismatch i.e., the money is bequeathed to someone other than the defined ‘family’ member, then nomination takes precedence over the will. This implies that beneficiary in the Will will not obtain the money, which will instead fall under the nominee’ entitlement.
Also read: Who gets your EPF money is already decided
There is no need for haste and hurry when it comes to deploying the wealth. Decisions about how much and where to invest should be made with caution after considering the choices carefully. Making chunky investments in ill-defined projects has made paupers out of many winners of contests and lotteries.
Keeping the investment and withdrawal of the corpus well balanced is a strategy that needs thinking and considered action. Leaving the wealth unutilised would be a waste, while using it all up without thought might lead to regret. Giving up the current job and profession, and leaning on the wealth for survival is a very common mistake. The risks to the corpus increases when there is no other source of income. Deploying the wealth to generate a substantial income, though prudential investment, can make the other income redundant, only if such income is stable and sustainable. We are in the midst of a large-scale wealth transfer worldover, as a generation of parents that earned and saved more than they spent in their lifetime, pass its wealth over to the next generation. The lessons for the inheritors have only begun to receive some attention. A long road lies ahead.
(The writer is Chairperson, Centre for Investment Education and Learning.)
Inheritance and legal estate rights of five categories of children
​Succession in case of kids
In and post the brutal second wave of Covid-19, several people lost multiple family members. In some cases, minor children lost both parents at an untimely age. Since most of the deceased would not have anticipated this, chances are high that they would not have prepared a will. So what happens to their inheritance and the children left behind? Alternatively, what if the parents are divorced or the child is adopted? Here are the inheritance rights of such kids.
Minor children
According to the Indian Succession Act, 1956, and the Indian Succession (Amendment) Act, 2005, children- boys or girls, have a right to the father’s ancestral property by birth. The parents’ self-acquired property can be given to anyone they want through a written will. However, if they die intestate, I.e. without a will, the children being Class I heirs have a first right to their property. If, on the other hand, the children are minors, they do own the property but cannot legally manage it. In this case, a legal guardian, or one appointed by the court, has to file a petition in court to manage the property on behalf of the minor child till such time that the child becomes an adult.
Also read: How to organise your money in a way to make access easy even without your physical presence
​Children of divorcees
If the parents are divorced, the children still have a legal right to their property. The normal succession laws as per one’s religion apply in such cases. So the child has a right over the ancestral property, and in case of a self-acquired property, if the father dies intestate, he has the first right over it since he is a Class I heir. Of course, if the property is self-acquired, the father can give it to anyone he wants during his lifetime via a written ill.
Also read: Who gets the child’s custody in a divorce?
​Adopted children
Adopted kids have the same inheritance rights as the biological kids and are entitled to a share in their adoptive parents’ property. So if the adoptive parent passes away intestate, the adopted child can stake the same claim to property as the biological child. However, according to the Hindu Adoptions and Maintenance Act, 1956, after adoption, the child loses the right to stake a claim in the property of his/her own biological parents or in the associated coparcenary property. But if the biological parents want to voluntarily leave such property or a share in it to the child, they can do so.
Also read: How to manage money, asset transfers after untimely death of a dear one
​Children of live-in couples
Live-in relationships have not been granted any legal status or acceptance under the Hindu Succession Act, Islamic Law or the Christian Personal Law. However, according to the Supreme Court ruling of 2008, a child born to a couple in a live-in relationship would have the same right of inheritance as a legal heir. A subsequent Supreme Court ruling of 2015 declared that an unmarried couple that has been living together for a long time can be considered married. Hence, offspring of such a couple will have the right to his/her father’s self-acquired property under Section 16 of the Hindu Marriage Act, 1955.
Also read: 8 point plan to pass on your assets to spouse, children, heirs
