With family-run businesses having become a norm in India and with the rapid advancement of globalisation, the significance of succession planning has become unprecedented. Ensuring a smooth transfer of assets or devolvement of wealth, in addition to the fulfilment of wishes, can be a complex process. Legal frameworks such as Wills and Trusts provide a great degree of flexibility and control for effective planning. Hence, understanding their role, advantages and limitations becomes crucial.
The Role of Wills in Succession Planning
A Will is a legal document that outlines the manner in which the assets of a Testator or Testatrix are to be distributed amongst their beneficiaries after their demise. For a Will to be considered valid, it must fulfil all the requirements laid down under the Indian Succession Act, 1925.
Key Components of a Will
Testator’s Competency- The creator of the Will is known as the Testator or Testatrix (referring to a man or woman respectively). For a Will to be valid, the testator must be legally competent that is, they must be of sound mind, attained the age of majority and not been coerced or under undue influence.
Appointing an Executor- The person appointed by the Testator to administer the Will by managing assets and paying off debts is known as the Executor. Appointing an Executor is not mandatory yet advisable for proper execution of the Will.
Naming Beneficiaries or Guardianship for Minors- Through a Will, the Testator can designate individuals or entities to whom he/she wishes to devolve his assets. Such person(s) is known as a Beneficiary or Legatee. They may be legal heirs, loved ones, charitable trusts or unrelated individuals. A Testator may also choose to name guardians for their minor children in a Will, ensuring they are left in the care of people they trust.
Executing a Will (Attestation by Witnesses)- The Indian Succession Act mandates the signing and attestation of a Will by two or more witnesses for its execution. Such witnesses must be neutral parties not standing to benefit from the Will. Section 67 of the Act holds a bequest or legacy in the name of a Beneficiary void if the Beneficiary is also a witness to the Will. In the case of multiple Wills, the most recent valid Will is considered the final declaration of a Testator’s intent.
Advantages
- The creation of a Will allows for control over asset distribution such that one’s assets are distributed as per their wishes to the beneficiaries they choose.
- Will provide clarity on succession and maintain family harmony by preventing disputes.
- The personalisation and flexibility that Wills has to offer are one of their biggest plus points. They can be customised as per one’s needs and requirements which may include personal wishes like funeral arrangements, organ donation, etc.
Limitations
- Wills are required to undergo a probate process which is a formal legal process for its validation. The probate process tends to delay the distribution process and involves huge court fees.
- After a Will is filed for probate, it becomes a public document potentially exposing private family and financial information.
- Drafting a Will involves certain legal formalities and requirements to be fulfilled. Disputes are likely to arise in case of any errors or omissions in this regard.
- Wills take effect after the Testator’s death and so the assets are not protected in cases of incapacity.
- Wills do not provide the same tax planning opportunities as certain types of trusts which protect the estate from creditors and exempt it from tax.
The Role of Trusts in Succession Planning
A Trust is a legal instrument through which the holder of an asset (Settlor) entrusts it to another person(s) or entity (Trustee) for the benefit of a third person (Beneficiary). Trusts offer a range of benefits that may address the limitations associated with Wills when it comes to succession planning.
Types of Trusts
A few of the commonly used Trust structures are listed below. Combination arrangements of such Trust structures are also popular depending on the needs and circumstances of the Settlor eliminating the need for devising multiple Trusts.
1. Revocable Trusts: Such Trusts can be revoked (cancelled) or altered at any time by the Settlor. Revocable Trusts offer great flexibility; however, they fail to provide tax benefits or protection from creditors as in the case of Irrevocable Trusts.
2. Irrevocable Trusts: These cannot be changed or revoked after having been established. These Trusts reduce the overall tax liability of the estate as well as provide credit protection.
3. Determinate Trusts: Such Trusts offer little or no discretion to the Trustee on how assets are to be distributed. The trust deed clearly specifies the beneficiaries and their entitlements or interests.
4. Discretionary Trusts: Such Trusts empower the Trustee to make decisions on the distribution of the trust capital based on needs and circumstances providing flexibility in asset management.
5. Living Trusts: These allow assets to be managed and distributed both during the lifetime as well as after the demise of the Settlor.
6. Testamentary Trusts: Such Trusts are established through a Will and come into effect on the death of the Settlor.
Advantages
- Certain Trust structures like irrevocable Trusts offer credit protection and tax benefits which can help safeguard assets and optimize financial legacy.
- Trust arrangements are also not subject to the probate process and hence make way for quicker asset distribution as well as reducing legal fees.
- Unlike Wills that do not protect the Testator in case of incapacity during the lifetime, Trusts ensure that the Settlor’s financial affairs are handled despite incapacity.
- Trusts offer a great degree of flexibility and control allowing the Settlor to lay down his specific terms and conditions.
- Trusts can be designed for specific purposes such as charitable trusts, educational trusts, etc ensuring the Settlor’s goals and aspirations are met.
Limitations
- The initial establishment process is complex and often requires the assistance of experienced attorneys thereby making it a costly affair.
- Trusts require detailed planning and unambiguity in language to avoid disputes and unintended consequences.
- Improper planning may lead to unintended tax consequences and family disputes.
- Detailed records of all trust transactions are required to be maintained which requires time and attention.
- Failure of Trustees to fulfil fiduciary duties towards Beneficiaries can result in imposition of legal liability.
Conclusion
Both Wills and Trusts offer distinct advantages as arrangements for succession planning. In order to ensure that the succession plan remains relevant and effective, one must periodically review and update the Trusts and Wills. By understanding the roles and leveraging the strengths of both tools, one can create the most perfectly robust and comprehensive succession plan.