ESTATE PLANNING – HISTORY AND FUTURE IN INDIA

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This article was written by Somashish, a student of School of law, Christ University, Bangalore.

Introduction

Estate planning is defined by the Black’s Law Dictionary as the preparation for the distribution and management of person’s estate at death through the use of wills, trusts, insurance policies and other arrangements to reduce administration costs and transfer tax liability. It is also a branch of law that involves the arrangement of a person’s estate, taking into account the laws of wills, taxes, insurance, property, and trusts.[1] An estate is the amount, degree, nature, and quality of a person’s interest in land or other property.[2]The estate of a deceased person is a bundle of rights, powers, immunities and liabilities which survive him.[3]

The value of estate planning lies in securing predictability, certainty and orderliness in the disposition/use of a person’s estate after death. For example, in testamentary succession the intentions of the deceased remain effective in the eyes of law and the same intention is given effect with respect to varying properties which are part of the estate.[4] In thus recognising the intentions of the deceased the law protects their vital interests such as reputation, body and estate by granting representation to the same as the view taken by the old Roman Law under the ideas of hereaditosand persona.[5] Thus the criminal law declares that violation of dead bodies or violation of decent burial/corpses is a punishable offence.[6] Similarly defamation of deceased persons is also punishable if it hurts feeling of their kin, taking inspiration from the common law rule of de mortuis nil nisi bonum.[7] Though in India, historically, Hindu law did not recognise testamentary succession, the Indian Succession Act 1925 had changed that position.[8]

Estate planning leads to posthumous consequences. It is likely that either of the two scenarios could arise after death of a person, i.e. he/she may leave behind specific legal instruments disposing his property of various specific kinds to specific persons as per his/her wishes or he may not leave behind any legal instrument whatsoever regarding disposition of his/her property. In the former scenario estate planning is relevant. It is in the latter scenario that the general law of intestate succession pertaining the religious community of such person would prevail and rights to the property would pass on to the heirs qualified under that law.

Estate planning covers all posthumous decisions regarding disposition of the property of the deceased based on definite legal instruments which are made by the deceased as per his definite desires. Estate planning, therefore, rules out any circumstance of intestate succession.[9] All specific and general property of the deceased are transferred by means of estate planning based on the individual’s determination as to which persons deserve the said property.[10] Thus, the individual exercises his/her own autonomous volition to decide the posthumous disposition just as he/she willingly decides regarding disposition of property during life.

2. Purpose of estate planning

The necessity of estate planning arises due to the fact that if estate is left without any decisive posthumous legal disposition then tremendous uncertainty regarding entitlements to the estate would crop up among multiple disputing “heirs”. Any and every claimant could, practically speaking, lead strenuous litigations to seek declaration as rightful heirs to the property of the deceased. This uncertainty would prevail regarding the respective shares of each rightful claimant as well as regarding the specific property to which each claimant’s right should attach.

The purpose of estate planning is to clearly define the beneficiaries of the estate of the deceased and delineates the respective specific properties to which the beneficiaries are entitled. The legal instruments declare the final word on who gets, and who gets what from the estate of the deceased. The usefulness of estate planning is that corresponding to its precision it becomes less likely that property of deceased persons should get tangled in the gloomy quagmire of lengthy civil litigation.

Litigations can ensue due to many reasons in the family of the deceased. Not all members can remain in good terms with one another. Even if they remain in good terms personally it is not necessary that all of them would share the same views as to how the business should operate; one member may believe that others are absolutely incapable for running businesses profitably. In any case there can be other issues of egoism, apprehensions against future liveability as single family, obstacles to career advancement due to other members, among others.[11]

In India the decade long dispute concerning the grant of probate to the 1999 Will made by Priyamvada Birla in favour of accountant RS Lodha, fought out in one court after another between the Lodha and Birla families also highlights the importance of a properly coordinated and transparent estate planning process. The ownership of crores of charitable projects of the deceased Priyamvada Birla, remains in a limbo due to the haphazard exercise of the power of testamentary disposition which left behind two contradictory wills, each in favour of the two litigants.[12] At the same time, family businesses remain challenged by issues of interpersonal communication and lack of coordination, because of which coherence and transparency in estate planning become highly valuable to prevent tortuous litigation which reduces the net value of their interests due to judicial delays.

Similar example is the recent dispute regarding the Will of Bharati Shroff between Cyril and Shardul Shroff. The Will purported to dispose the entire share of Bharati Shroff in AmarchandMangaldas law firm in favour of Shardul Shroff.[13] The eventually settleddispute before the High Court of Bombay threatened to bring out several repressed ill-feelings among the family members and could have sullied the reputation of the premier law firm with over 90 partners and over 700 lawyers in the country.[14] Timely diagnosis of family differences could be achieved by transparent estate planning which takes into account the stakes of all interested persons and brings about reconciliation. The GMR Group’s family business constitution framing exercise has achieved such a result by establishing a definite pre-decided succession plan for the entire business.[15]

3. Legal instruments governing estate planning

(a) Wills

Wills are the legal instruments expressing an intention as to what should posthumously happen to the property of deceased testator.[16] A Will, though executed by a living testator becomes effective only on the death of the testator. There is no conveyance between living persons in the effectuation of a Will. When a will takes effect, succession to property takes place based on the wishes of the deceased in place of the succession under personal law in favour the legally recognised heirs. The essential characteristic of a Will is that it is a mere declaration of an intention of the testator; a declaration which can be revoked/varied by the testator.[17]The Indian Succession Act 1925 governs testamentary succession. It is optional under the law to register a Will with the nearest Registrar under section 18(e) of the Indian Registration Act, 1908.The disposition of property by testamentary devise or Wills could be of following kinds:

i.Specific Legacies- All bequests made under a Will to a person of a specified property or part of property which is distinguishable from other properties/parts of property are specific legacies. Thus, if A bequests to B, specified Charitable institutions, Industries owned/managed by A, it is a specific legacy.

1. General Legacy- A bequest made in favour of a beneficiary without specifying the particular property from which the legacy should materialise is a general legacy. Thus, if A has property in India and UK and bequests a share in the property he leaves behind in India, it’s a general legacy.

iii. Demonstrative Legacies- A demonstrative legacy is the bequest of a definite sum of money or quantity of any commodity with reference to a particular fund or stock out of which the payment of the bequest is to be made.Thus, when A bequeaths to B Rs. 3000 which A has right to receive by virtue of debt due to him from X, the same bequest is a demonstrative legacy.

If Will is made inor the concerned properties are located in the territories under the 1870 Bengal Presidency, the High Courts at Bombay and Madras an executor named in the Will or the statutory executor (the legal representative)must obtain a probate of the Will from the Court of competent jurisdiction, i.e. the District Court/High Court.This rule applies to Parsis also since 1962. The grant of probate is conclusive as to the movable/immovable property of the deceased throughout the state in which the same is/are granted. This conclusiveness applies in favour of the executor as to his representative title against all debtors of the deceased and all persons holding property which belongs to the deceased and affords full indemnity to all debtors paying their debts and delivering property to such probate holder. The probate holder has to pay a mandatory court fee for institution of probate proceedings which differs from state to state under their respective state Court Fee/Suit Valuation Acts. In Mumbai for example such maximum possible probate fee is Rs 75000 while in Bangalore the upper limit is Rs. 30000.

In other territories the obtaining of probate is not compulsory. The grant of probate only satisfies the law as to valid formation of the Will, particularly assuring that no coercion, undue influence, lack of consent, other such factors which can vitiate the truth and voluntariness of the Will, are proved against the Will. The probate, therefore, conclusively declares that the Will is truthful and voluntarily made.[18]Thus the probate is valuable in conclusively supporting the claims of the executor and the beneficiaries under the Will to the properties of the deceased.

There are some basic rules which must be taken note of in considering Wills. The language of the Wills must be particular and specific. The terminology and phrases used in the Will must be unambiguous and decisive. Moreover, it goes without saying that any court cannot add or take away from the words of the Will which in their express terms alone are accepted as conclusive as to intentions and wishes of the testator.[19] A right which is not granted by the Will in express terms cannot be construed from the Will by straining its language.

It is the duty of the executor to provide for the performance of the necessary funeral ceremonies of the deceased suitable to his condition from the sufficient property left for the purpose. The executor has a duty to collect all property of the deceased and the debts owed to the deceased as diligently possible. All funeral expenses, death-bed charges, medical expenses and boarding/lodging expenses upto (one month before death) must be paid before all debts. All expenses of obtaining probate/judicial proceedings necessary for administering estate shall be paid after the aforesaid funeral and like expenses. Wages to labourers due for services rendered to the deceased within preceding three months must be paid. Only after the aforesaid payments the debts of the deceased must be paid equally and rateably.

All legacies must be paid only after the debts are paid. All general legacies should abate or be diminished in equal proportions, and one legatee will not have preference over another. Rateable abatement of specific legacies should occur if assets are insufficient to answer debts and specific legacies. If sufficient assets exist for payment of debts and expenses the demonstrative legacy holder has a preferential claim for payment from the designated fund.

The law of Wills under Indian Succession Act does not apply to Muslims and Christians, who are governed entirely by their own personal laws.

(b) Trusts

Trust is a legal mechanism which attaches beneficial obligations in favour of third party beneficiaries, to the ownership of property transferred by the creator of a trust. The author of the trust creates the trust by reposing confidence on the transferee i.e. the trustee by means of an instrument of trust, for conferring benefits on third parties. A trust deed unlike a Will is compulsorily required to be registered under section 17 of the Indian Registration Act 1908.

The Indian Trusts Act 1882 governs all Trusts and trustees and provides all general principles, applicable rights and duties of Trustees and Beneficiaries, including the right to seek civil court appointed trustees to replace incumbent trustees, rights to accounts, compensation for breach of trust/fraud etc., to due benefits, to seek due investment of money in public/private securities, among others.

1. Public Trusts

Public Trusts are trusts made forbenefit of the public at large. In the Charitable Endowments Act, 1890 the endowments that are governed are those which are non-religious and provide relief of the poor, education, medical relief and the advancement of any other object of general public utility. The State/Central Treasurer of Charitable Endowments may be granted ownership of such public trusts’ properties if an application is made in that behalf. The treasurer then assumes the position of trustee with all duties of transparency and good maintenance.

All religious purpose based Trusts may also be a Hindu Charitable Endowment which is mostly governed by judge-made Hindu laws. The state laws as Hindu Religious and Charitable Endowments Acts in certain southern states such as Andhra Pradesh, Kerala and Tamil Nadu declare norms on appointment of managers, priests, and servants of temples, as well as management of temple properties constituted under Public charitable endowments.[20] These enactments provide for regulation of temple management, punish perpetrator of maladministration, without direct interference in the working of the temple.  These norms don’t deviate much from the generally settled Hindu law on such endowments which is mostly judge-made.[21] Therefore said Acts also leave considerable latitude for Trustees to autonomously manage temples.

The primary conditions to be fulfilled for creating public trusts in the nature of charitable endowments are that there must be a valid disposition of the property absolutely in favour of the deity of the concerned temple and the same disposition must be for serving the religious interests and welfare of the public. Only in the case of testamentary instrument is the endowment revocable. However a valid charitable endowment instrument cannot be revocable. The endowment deed can appoint suitable temple manager/priests as defined by the terms of the deed.The Code of Civil Procedure, 1908 declares remedies against maladministration under its section 92, the remedy of filing a representative suit under Order VIII say, as devotees/interested persons, and the equally viable remedy of institution of suits on behalf of the idol/deity by any worshipper.[22] Properties of the endowment cannot be alienated except for fair value and for purposes of welfare of the deity, devotees etc.

The Islamic charities or Wakfs are governed by the Wakf Act, 1995 and the substantive Muslim personal law on Wakfs. Authorities under the Act protect the properties absolutely disposed to God for Muslim Charitable purposes from maladministration.

Societies Registration Act, 1860 permits the creation of charitable purpose societies with defined charitable purposes which may include:(i) relief of poverty, (ii) education, (iii) advancement of religion and (iv) other purposes beneficial to the community not coming under any of the preceding heads. Societies must be registered with the registrar of companies. Societies can hold property including holding it in trust.

1. Private Trusts

A private trust is usually formed to ensure that inheritance is not splintered. For instance, let’s take A who has four children. In the absence of a trust, A’s wealth — which can include shares, property, gold, paintings, etc. — may have to be split into four if the children insist so. But if a private trust is created with the four children as the beneficiaries, the assets can remain undivided. Or, if the asset is an industrial enterprise, the continuity of the business can be ensured even while the children are being assured of the inheritance.

Governed by the rules of the Indian Trusts Act, 1882 as already explained above, these trusts have been known for incorporating significant tax benefits. The same shall be discussed in the Taxation section of this memo.

(c) Gift

Section 122 of the Transfer of Property Act, 1882, postulates that a gift is a transfer of certain existing movable or immovable property made voluntary and without consideration by one person called the donor, to another, called a donee and accepted by or on behalf of the donee. The essential elements of a gift are

(a) The absence of consideration;

(b) donor;

(c) donee;

(d) subject-matter;

(e) transfer;

(f)acceptance.

In order to constitute a valid gift, the pivotal requirement is acceptance thereof. No particular mode of acceptance is required and the circumstances throw light on that aspect. Donor’s consent to the gift deed must be free and not vitiated by force, fraud or undue influence.[23] A transaction of gift in order to be complete must be accepted by the donee during the lifetime of the donor. Factum of acceptance can be established by different circumstances such as donee taking a property or being in possession of deed of gift alone.

If a document of gift after its execution or registration in favour of donee is handed over to him by the donor whom he accepts, it amounts to a valid acceptance of gift in law. The specific recital in the deed that possession is given raises a presumption of acceptance. Unlike Wills, a gift deed has to be registered with the nearest Registrar under the Registration Act, 1908. The transfer effected by way of a gift deed must be accepted by the done. There is absolutely no place for posthumous acceptance or effectuation of a gift. However, the fact of the matter is that gift instruments are more convenient as they effectuate easier transfers of property and can be used by persons to steadily dispose of significant property when one contemplates death sooner than later.

Section 129 of the Transfer of Property Act, 1882 (TOPA), preserves the Muslim Law of gifts and excludes the applicability of the provisions of the TOPA to gifts by a Muslim. One major difference is that the Hiba gift of more than one-third of a Muslim’s estate cannot be made by a Muslim without the permission of his/her heirs if the intended donee is a stranger.[24]

(d) Provident Fund, Pension and Fixed Deposit Bank Accounts

The most efficient method of ensuring transfer of rights to the aforesaid is to ensure proper nomination under the relevant norms of the Banks and the schemes of the Employee Provident Fund Organisation.[25] Nevertheless a Will or Gift could equally be as conclusive a means of transferring rights to the same.[26]

4. Taxation

(a) Gifts

Under the Income Tax Act, 1961, if a person receives Gifts (either in cash or in kind) from any person, gift tax would be liable to be paid by the person receiving the gifts. Such income would be taxable in the year in which the gift is being received and taxable under head income from other sources. After adding this to income under head other sources, the gross total income would be computed and the tax would be levied on the gross total income as per the income tax slab rates. The tax slabs for the year 2017 provides complete tax exemption on income upto Rs 2.5 lakhs. Those with income of Rs. 3 lakhs-5 lakhs and above are subject to tax of 5%. Those with incomes of Rs 5-10 lakhs are subject to 20% tax and income above Rs. 10 lakhs attracts income tax of 30%.

Under the section 56(ii) of Income Tax Act, 1961 all gifts received from Relatives is fully exempted from the levy of tax and no income tax would be levied on such Gifts. To remove any confusion regarding the classification of Relatives, the Income Tax Act has very clearly laid down that only the following would be treated as relative for the purpose of claiming exemption from payment of Gift Tax:Spouse, Brother or Sister of the Individual, Brother or Sister of the spouse of the Individual, Brother or Sister of either of the parents of the Individual, Any Linear ascendant or descendent of the Individual, Any Linear ascendant or descendent of the spouse of the Individual, Spouse of the person mentioned above.

If the aggregate value of gifts (whether in cash or in kind) received from a person or persons (except relatives asspecified above) in any financial year does not exceed Rs. 50,000/,then such gifts are not liable to Gift Tax.However, if the value of gifts received exceeds Rs. 50,000/,then the entire gift so received is taxable as Incomefrom other sources.Gifts received by an individual on his own marriage are fully exempted from the levy of Gift Tax. It has also been clarified that the gifts received by a person on his own marriage are exempted and not on the marriage of their son/daughter/brother/sister.

Finance Act 2009, brought in an amendment to Section 56 of Income Tax Act and after this amendment gifts received of a value more than Rs. 50000 would now also be taxable. Thus gifts in kind which means immovable property, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any art work will be taxable as follows:

1. In case the property is received without any consideration being paid by the person receiving the gift, the stamp duty value/fair market value of the property would be taxable (provided the stamp duty value exceeds Rs. 50,000)
2. In case part consideration is being paid by the person receiving the gift, and the difference between the part payment made and the stamp duty value/fair market value is more than Rs. 50,000/, such difference would be taxable.

Any amount received under a will or by way of inheritance or in contemplation of death of the payer is fully exempted in the hands of the person receiving the gift. There is no maximum limit in this case and the whole gift received is considered as tax free.Gifts received from any fund or foundation or university or other education institution or hospital or other medical institution or any other trust or institution referred to in Section 10(23C) of Income Tax Act or Gifts received from any fund or Institution registered under Section 12AA of the Income Tax Act.

If a person gives gift to another, then such gift would not be regarded as transfer and therefore no capital gains would arise in the hands of the transferor i.e. the person who is giving the gift. And therefore, at the time of giving the gift, no tax would be required to be paid by the person giving the gift.

(b) Inheritance

No tax is levied on receiving inherited assets in India, but income tax would be levied on the receipt of any income arising from such inherited assets. Thus if there is sale of property the applicable Capital Gains tax will have to be paid. Moreover even if so much as rental income is earned from immovable property the applicable income tax as per relevant income tax slabs will apply. The tax slabs for the year 2017 provides complete tax exemption on income upto Rs 2.5 lakhs. Those with income of Rs. 3 lakhs-5 lakhs and above are subject to tax of 5%. Those with incomes of Rs 5-10 lakhs are subject to 20% tax and income above Rs. 10 lakhs attracts income tax of 30%.

(c) Charitable Trusts

Charitable trusts can obtain multiple exemptions on taxes on the income earned from immovable property owned [Sections 11 of the Income Tax Act], donations received [Section 12 of Income Tax Act] subject to the requirement that the relevant trust must register with the Income Tax commissioner. The said trusts shall be taxed from total income at the rate of 30% if anonymous donations are received by it [Section 115BBC] unless it is a trust for wholly religious purposes or both religious and charitable purposes. To gain advantage of exemptions the trust must apply minimum 85% of its income in India for charitable/religious purposes.

(d) Private trusts

Under the existing provisions of Section 10(38) of the Income Tax Act, 1961, income arising from a transfer of long-term capital assets, being equity shares of a company, is exempt from tax if the sale transaction was undertaken on or after October 1, 2004, and is chargeable to the Securities Transaction Tax (STT).

Under existing provisions of Section 115BBDA of the Income Tax Act, income by way of dividend in excess of Rs 10 lakh is chargeable to tax at the rate of 10 per cent in case of a resident individual, Hindu Undivided Family (HUF) or firm. This implied that dividend paid to private trusts was not subject to the dividend distribution tax (DDT).

Section 56 (2) (vii) of the IT Act provides that if any sum of money or any property is received without consideration or for inadequate consideration (in excess of the specified limit of Rs 50,000) by an individual or HUF, it is chargeable to income tax in the hands of the recipient under the head income from other sources. Relatives (according to IT Act) are exempt from this. The existing definition of property for the purpose of this section includes immovable property, jewellery, shares and paintings.

Thus, Private Trusts often constituted by major businesses to keep all major property and business ventures together for the benefit of all family members, enjoy income tax exemptions as against receipt of gifts transfers, dividends, and sale proceeds from equity shares.

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[1]Black’s Law Dictionary, 9^th Ed. 629.

[2]Id.

[3]B Rajeevi R Hegde v. AddlAgri, ITO, 1981 27 ITR 855 (Ker).

[4]Gopalakrishnan’sLaw of Wills, 1-10 9^th Ed., 2015.

[5]Id.

[6]§ 297 Indian Penal Code 1860.

[7]§ 499 Indian Penal Code 1860.

[8]Gopalakrishnan’sLaw of Wills, 10-12 9^th Ed., 2015.

[9]Gopalakrishnan’sLaw of Wills, 1-10 9^th Ed., 2015.

[10]Gopalakrishnan’sLaw of Wills, 1-10 9^th Ed., 2015.

[11]Kavil Ramachandran, The Ten Commandments of Family Business, 1-16 2015.

[12]Last Will of Priyamvada Birla, www.rediff.com/money/2004/jul/23spec1.htm(last visited 12 Apr 2017).

[13]AmarchandMangaldas dispute, http://www.moneycontrol.com/news/trends/current-affairs-trends/amarchand-mangaldas-dispute-the-caseshroff-vs-shroff-1559301.html (last visited 12 Apr 2017).

[14]Id.

[15]Kavil Ramachandran, The Ten Commandments of Family Business, 159-160 2015.

[16]§ 2(h) Indian Succession Act, 1925.

[17]Sankara Pillai v. State of Kerala, 1982 Ker LT 161.

[18]Tilak Raj Kakkar v. ShambhuNathKakkar, AIR 1987 Del 360.

[19]T Koteshwar Rao v. Land Acquisition Officer, Guntur AIR 2010 AP 58.

[20]See, §§ 18, 19, 28, 51 of the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act.

[21]Paras Diwan, Hindu Law, 481-511 2015.

[22]Bishwanath v. Shri Thakur Radhaballabhji, 1967 AIR SC 1044.

[23]Subhash Chandra v. Ganga Prosad, AIR 1967 SC 878; Raghunath Prasad v. Sarju Prasad, AIR 1924 PC 60.

[24]Mulla, Principles of Mahomedan Law, 100-116 1905.

[25]Tannan’sBanking Law, 250-2642015.

[26]Id.609 × 112