How to ringfence your will?

Even top-notch industrials make the mistake of not making a clear succession plan or will during their lifetime. As a result, after their death, squabbles start among their family members regarding who will get what. Whether you are a rich industrialist or a middle class person, getting a clear will made during your lifetime is important.

In the absence of a succession plan and any declaration regarding the distribution of assets, the provisions of the Indian Succession Act, 1925 will come into play, and a legal battle may ensue among the family members of a person after his/her death.

Ways of succession

Following are some of the ways to smoothen the succession process –

Nomination: While investing, an investor needs to declare the name(s) of one or more persons as nominee(s) to ensure easy transfer of assets in case of unfortunate death of the investor. Options are also given to opt out of nomination at the time of investment. Investors may change their nominee(s) any number of times during the investment tenure.

Although, the investment assets are transferred without much hassles to the nominee(s) after the demise of an investor, a nominee, however, is just considered the recipient of the money/asset and not the ultimate beneficiary. So, nomination doesn’t provide a clear title to a nominee and he/she is bound to transfer the benefits to the legal heirs of the deceased person as in most cases the provisions of the Indian Succession Act prevail over nomination.

Will: A will can override a nomination as it’s a legal document containing a declaration made by a person during his/her lifetime regarding the distribution of his/her wealth after the death of the person. Will is important for HNIs and UHNIs to ensure that their wealth, property, and assets are distributed to the intended persons without much hassles and that their legal heirs don’t get into fierce legal battles to get the lion’s share of their wealth. Will may be changed any number of times by a person during his/her lifetime. If a person makes a number of wills, it’s the last will that will be considered valid after the death of the testator (i.e. creator of the will). The rights of the beneficiaries mentioned in a will are absolute as the Indian Succession Act, 1925 can’t take away the rights of the beneficiaries.

A will should contain the details of the testator, his/her declaration that the will is being drafted in sound mind and free of any coercion, details of the beneficiaries and their relations with the testator, details of the wealth, properties and assets, division of share among the beneficiaries, specific directions, if any, how the liabilities of the testator to be paid back, details of the executor, who will execute the will after the death of the testator and the signature of the testator and at least two witnesses.

Although a will may be written on a plain paper and registration is not mandatory, it’s better to register it to prevent it from effects of instances like getting stolen, destroyed, disfigured, tampered with, etc.

Another way to secure a will is through probate. It’s a legal process, in which, apart from protecting a Will, the content of the will is also reviewed by the authorities.

Need for Ringfencing

While the main motive of a succession plan is the smooth transfer of assets from one generation to the desired members of the next generation, there may be other complications in a succession process. For example, if a person names his children as beneficiaries to get all his real estate properties, they may not allow their mother to stay after the death of the person. On the other hand, if a person remarries after separation and hands over the properties to the second wife in his will, she may deprive the children of the first wife of getting the benefits of the father’s property after the father’s death

So, in such a case, to ensure equitable treatment, the person needs to ringfence the right of his wife while making his children beneficiaries in the will.

Similarly, in order to ensure a gradual handover of wealth to the children after his/her death, a person needs ringfencing to protect his assets in his/her absence till beneficiaries get the entire benefits.

However, for this, it’s better to include a trust in the will to ensure the protection of the properties and assets and ensure the intended distribution of wealth over a specified time period through the trust.

Ringfencing through Trusts

Trusts are legal entities set up under the provisions of the Indian Trusts Act, 1882. Apart from creating a private trust for succession purposes, a Hindu Undivided Family (HUF) may also solve the purpose. While an HUF is run by the members of the family, a private trust may be managed by non-family members as well. An HUF not only enjoys income tax benefits like an individual, but also saves the hassles and costs of transition of properties from members of one generation to the next generation as HUFs never die and hold assets perpetually. Even though HUF enjoys tax and other benefits, all the family members have rights over the assets held by such a trust.

So, to divide the assets as per the will of a person to the intended beneficiaries only, setting up a private trust – like a Private Family Trust – would be a better idea. Under such a legal arrangement, the properties and assets of a person are transferred to a family trust, where the trustees act as the representatives of the actual beneficiaries and transfer the assets to the beneficiaries as per the terms mentioned in the trust deed.

As properties and assets need to be transferred to the trust to make such an arrangement work, it involves significant costs and stamp duties. So, creating a family trust for the purpose of succession makes sense, if the amount of wealth is very large and there is a need for ringfencing for conditional transfer. Otherwise, writing a Will and registering it would also solve the purpose.