Estate planning & legacy preservation for smooth transition of wealth

In light of the evolving economic landscape in India and the surge in individual wealth, a growing number of families are prioritising estate planning and legacy preservation in order to enable the smooth transfer of wealth to the next generation. Beyond just writing a will, estate planning includes complex techniques for managing and protecting assets, reducing tax liabilities, and averting future disputes. Although estate planning has not been widely used in India until recently, new legal changes and trends are rekindling interest in it, especially among wealthy families. 

The increasing level of personal wealth and the possibility of tax law amendments have elevated the importance of estate planning. Historically, wills and the Hindu Undivided Family (HUF) structure were traditional estate planning tools. However, there are currently substantial changes and potential legal revisions surrounding these tools.

Tools and strategies

1. Because they provide more legal and tax certainty and allow the holding of various assets, including securities and real estate, managed by designated trustees for the benefit of beneficiaries, irrevocable trusts have become increasingly popular in India. 

The purpose of an irrevocable trust is to move the assets from the grantor’s control and name to that of the beneficiary. This reduces the value of the grantor’s estate regarding estate taxes and protects the assets from creditors.

Irrevocable trusts cannot be modified, amended, or terminated without the beneficiary’s permission or by a court’s order. The exact rules can vary by state. The grantor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust. Irrevocable trusts also benefit from tax planning.

2. Limited liability partnerships (LLPs) help safeguard business assets and provide personal liability protection, this is particularly beneficial for families that own significant business holdings. Family trusts and LLPs have been used to secure wealth for several generations.

3. Company owners in India must understand the importance of succession planning to guarantee a seamless handover of their companies to the following generation, minimise disruptions, and protect value for beneficiaries. For this, family offices provide the beneficial option of organisation structure, family legacy and taxation. 

Needless to say a financial information document (FID) should be kept updated by the senior family members as a family guide in case of sudden demise.

Legal and tax considerations

Personal legislation, like the Hindu Succession Act and the Indian Succession Act, which have laid guidelines for testamentary and intestate succession (depending on religion), impact estate planning in India. 

Although India currently lacks an inheritance tax, other taxes such as capital gains and gift taxes can impact wealth transfer. Therefore, careful consideration of tax implications is crucial. 

Shift towards structured estate planning

1. Professional advisors are becoming more involved as families seek assistance from financial advisors and estate planners to create structured plans that ensure compliance and efficiency. This trend is partly driven by the complexity of managing multi-generational wealth and the need for cross-border estate strategies.

2. Trusts are being increasingly used due to their legal protection, ability to avoid family disputes, and customisation to meet unique family needs.

3. Business families are increasingly opting for structured succession planning. A well-crafted plan ensures business continuity, safeguards against familial conflicts, and helps optimise tax obligations.

Challenges and considerations

While estate planning is gaining popularity, several challenges persist, including cultural reluctance to discuss wealth and mortality, lack of awareness, and complex legal frameworks. Additionally, potential reforms such as the abolition of the HUF as a tax entity could necessitate quick adaptations, upending long-standing structures.

To manage these difficulties, clients work with knowledgeable legal and financial experts to design a strategy that fits their unique requirements and complies with existing laws. The importance of efficient estate planning will only increase as India’s wealth landscape changes, guaranteeing that families can maintain their heritage and accomplish a seamless transfer of wealth across generations.

Estate planning is increasingly necessary for all families—not just the wealthy—to protect their assets.