SUCCESSION PLANNING. Its all about legacy

Sure, most of us have known the famous quote by Benjamin Franklin, “But in this world nothing can be said to be certain, except death and taxes.” Consequently, is it surprising that we often take that quote to heart and plan as though estate planning is fundamentally about death and the avoidance of a resulting death tax only? Not unsurprisingly though, if we care to ponder over the issue with due passion do we realize that the fundamental purpose of estate planning is to leave a legacy for the living. It is not that death and taxes are unimportant, they just pale in significance to the legacy we intend to leave behind.

There are a lot of misconceptions about estate planning — like, that it’s only for the wealthy or that you don’t need to worry about it until later in life. Everyone should make their wishes clear — and the earlier you can start the better. At its core, estate planning is about the legacy that you leave behind. Will that legacy be one of conflict, confusion and cost, or a process that positively extends the impact of your life? You don’t have to plan to fail your family; you just have to fail to plan. By failing to plan properly, many of us are creating problems for our loved ones that do not exist. The tragedy of failing to plan properly is not visited upon the dead. It is the living ones that suffer its unexpected and unforgiving consequences.

Having realized the paramount importance of the subject, its need and the consequences, comes the next big question, HOW? For our succession planning to be optimal, to be able to create a perfect combo best suited to our circumstances, our temperament and so on, we must explore the various options available, the pros and cons of each instrument, the inherent weaknesses and strengths of these options. Yeah! You read it right; it has to be a combo, as there exists no instrument which can be labelled as a “Perfect” one.

Let’s delve into the brief account of the various Pillars of succession planning. For the sake of simplicity, this article focuses on Wealth succession. Not only should this add to our better understanding of the topic, it shall also help us educate and empower our clients opt for what suits best to fulfill their desires.

Gift

“Voluntary transfers of property inter-vivo (between living persons) without compensation or any type of consideration” is how the Gift can be defined.

Gift, through Instrument of Gift, will effect a transfer of entire ownership over the property and interest therein to the done, the donor cedes title completely. None of us are alien to the concept of giving or receiving Gifts. Though there are certain restrictions and limitations within which this must be done, through proper documentation, this makes it the simplest way of a legacy planning. Gifts within the family have been kept out of the previews of Tax laws, the catch here being the definition of family. Gifts to unrelated persons are permitted only up to a particular limit (50K at present) before they attract the applicability of Tax Laws. Minors, obviously enough, are not capable of Gifting. Acceptance of Gift (express or implied) is a concept which must be born in mind while carrying out planning using this instrument.

PROS – CONS

This being the simplest form of succession planning, also ensures that the donor sees for himself/herself his loved ones enjoying the perks of his gifts, a desire expressed by many aged persons. This also ensures ironing out of any issues that may arise out of such transfers, during the lifetime of the donor self. However, there are flip sides of this too. GIFTs ARE IRREVOKABLE in nature. The famous Singhania’s case has been in the news on more than one occasion, and if we do not learn appropriate lessons from it, the
loss is entirely ours.

TESTAMENTARY SUCCESSION / WILL

“A legal declaration of the intent of a testator with respect to his/her assets which he/she desires to be carried into effect after his/her death” could be the simplest definition of a WILL or Testament.

Today’s digital era has ensured that almost all of us are aware of this concept of legacy planning through a WILL document. This involves a very simple but written down process of listing ones assets and the instructions about their final disposal. This document not only needs to be attested by Testator’s signature, it also needs to be authenticated by at least two witnesses, all signing the document in presence of each other. There are other precautions as well which need to be adhered to. However,
there are many misconceptions which at times make it counterproductive. For example, there is no legal requirement of “Registering” the document, even “Unregistered” but properly created WILL can be perfectly Legal one. WILL is governed by Indian Succession Act (ISA) hence it is applicable to Hindus, Jains, Sikhs, Buddhists, Christians, Parsis, and Jews but NOT applicable to Muslims. One can make amendments to or create a new WILL as many times as may be needed. Important point to be
remembered here is the fact that a Will or part of it can be negated if it is in contravention with the law of the land, in other words, illegal actions cannot be permitted through this. It is advisable to seek the help of a “Qualified Consultant” for this exercise to achieve a peaceful and desirable outcome.

PROS – CONS

This is probably the simplest form of Legacy Planning instruments. The ease of understanding and creating a WILL makes it most desirable. However, Contrary to common belief, a Testamentary document or WILL is NOT, repeat, is NOT a private document. A WILL cannot be “Probated” by the courts unless it is made public. In other words, how much ever we efforts we put in to keep our WILL away from public scrutiny, it becomes a public document before it can be operationalized. This leaves an undesirable and
frightening window open for the unscrupulous actions like litigations to come into picture. Add to this, the misconceptions and/or unscientific advises received while creating a WILL makes it untenable in the court of law more often than not, thus leaving intended beneficiaries high and dry.

FAMILY TRUSTS

The TRUST in most simple terms can be defined as “An arrangement between two persons, under which the property of one is held by the other, usually for the benefit of a third party (beneficiary).”

There are special circumstances, special needs etc which necessitate special instruments, Family or Private Trust(s) being one such option available. Consider the situations like Very Young heirs, differently abled heirs, spouse in second marriage, spendthrift heirs, HNIs looking to “Ring-Fence” their assets, those likely to attract huge succession tax etc. They all will need an arrangement which can be easily fulfilled by creating a private trust. Appropriate type of trust creation helps you “Ring Fence” your assets from
undesirable outcomes.

PROS – CONS

One of the Best options available to “Ring-Fence” the assets from legal hassles and other undesirable outcomes, Family Trust or Private Trusts are highly effective measures to pass on Family Values, Philanthropy and so on. However, their complex structure and complexities involved in creating and managing them is real hurdle in its universal application. Finding trustworthy Trustees, the successors to the trustees, protector of the trust, legalities and costs involved in their creation are real challenges one is likely to face.

FAMILY LIMITED LIABILTY COMPANY

This relatively newer concept allows the Heirs, even minors, to become shareholders who can then benefit from the assets held by LLC, while the management rights are held by the individual self. The succession plan of LLC would still be needed. Intersection of Trust and LLC is possible too.

WILL SUBSTITUTES

Inter-vivo Gift, Gifting after death (Testament) or Legacy Planning through Trust formation – all carry some lacunas because of their inherent structure. To fill up some of the Gaps remaining, comes to our rescue is the Facility of NOMINATIONs of various Life insurance/ pension Policies. Sadly enough though, so far, this has been the most UNDERUTILISED instrument for the purpose of Legacy Planning.

We all are in the business of selling dreams through Insurance and/or Pension policies. The inherent nature of these policies along with the availability of Nomination facilities helps us achieve many of the commonly desired goals of Legacy Planning. All we need to do is to stretch our imagination a bit and go beyond the superficially understood purpose of such products. Yeah!! We need to think of the “Uses of Life Insurance Policies other than Life Insurance.” The ability to decide the ultimate disposal of Death
Benefits and/or Maturity benefits along with the flexibility to alter the same as per will during the life time of a person can be highly powerful tool to precisely achieve many of the desired Succession Planning Goals while preventing many undesirable outcomes commonly associated with the other options of such planning.

PROS – CONS

Appropriate product selection along with proper nomination is highly effective in creating a robust legacy plan for most of us. The biggest challenge, however, is the mindset change of the clients as well as the advisors too wherein the public perception of such products, ignorance of the clients as well as of the sell force, mis selling practices all need to be aware of. Fortunately though, most such challenges can easily taken care of by appropriate knowledge of the product, the process and faith in the service provider.

1. Annuity Plans with ROPP at Death
   This allows an individual to enjoy the perks of the corpus during one’s lifetime, allowing the corpus to be passed on to his/her successor only after his/her death.
2. Pension Plans with Joint Life Option (Father-Child combo)
   Joint life Annuity is fairly commonly used option while opting for Annuity plans. Having Next Generation member as a joint annuitant is possible too, wherein, after the demise of the joint life annuitant, the corpus is passed on the nominee of joint life annuitant (Third generation in most cases.)
3. Proposer different from LA Policies
   Proposing a Life Policy (Saving/Investment plans) on the life of Children and/or Grand Children with the Policy duration coinciding with particular goal can be highly effective in passing on wealth to its desired destination.
4. Savings Plans with Long Term Income options
   Intelligent use of Survival Payout period along with appropriate nomination helps oneself achieve peaceful golden years along with precise succession of wealth (remaining payouts and Purchase Price) in desired manner.
5. Nomination in case of LTRP Plans
   The LTRP arrangement, which is an efficient tool for managing wealth transfer from a business entity to an individual, can also be used as efficient adjuvant for managing business successions as well as wealth transfer mechanism for transferring the wealth from business to desired nominee(s).
6. Third Party Payment option
   Slight modification of an arrangement of Proposer different from LA, here the Payor need not assume the ownership of Policy. An appropriate choice of a Policy on the life of a heir with Third Party Payment ensures maturity benefit (wealth transfer) to desired person at desired time.
7. Life Long Policies with Death Benefit to the nominee
   Life long Term Insurance Policies are usually purchased with an aim of providing death benefit to the nominee. Though this does raise an ethical dilemma of need for pure insurance after earnings have stopped, none the less, this is option available to those who desire it this way.
8. Married Woman’s Property Act.
   Policy availed under MWP cannot attached even by Courts of Law, thereby protecting wealth of your near ones and dear ones.