Year 2020 has been a remarkable year with a grand entry of novel corona virus, disrupting our daily routine. There is not only uncertainty to one’s life, but also fear of not securing our near and dear one’s life financially. With this, there is absolute need for each and every individual to take corrective steps in alignment with their intention in formally expressing their love for their dear and near-ones, while also securing their financial future. Thus, the concept of succession planning becomes very important task for the betterment and security of your near and dear ones.
Usually Indian families refrain from the word succession / inheritance, simply for reasons like, (i) emotional sentiments attached with fellow family members; (ii) holding a belief that succession planning is only for rich families; (iii) fear of losing control over assets and fear of putting family’s unity at stake; (iv) avoidance of awkward family discussion and not to disappoint any family members; (v) Hesitation in sharing private wealth data with consultants; (vi) tendency to procrastinate considering it is not “time bound”; (vii) considering entire process as expensive and complicated, etc. While all the above reasons stated are very commonly observed in Indian families, these resistances often create problems for the family members upon demise of wealth creator in the family, for whom it was created in the first place.
Succession here would simply mean inheritance upon death of oneself. Now, considering there is an enacted law, viz., Indian Succession Act, 1925, whether still an individual need to plan for their succession. Answer to this simply is YES. Yes, one still needs to plan and provide for succession for their near and dear one’s security. The reasons simply are, (i) Allocation of family wealth amongst desired family members and next generation at desired ratio in a smooth manner; (ii) Controlling the end usage of assets / wealth; (iii) Protection of family wealth from non-supportive members; (iv) tool to impose conditionalities on the family members for reasons like unity, peace and harmony amongst family members; (v) Planning and optimisation of tax upon transfer of wealth to next generation; (vi) Identification of true successor and allocation of responsibility amongst family members, in a family business scenario; (vii) ringfencing liability attached to the assets of family business, etc. These are few noted down reasons for any individuals to think, plan and restructure their succession.
In the past there are many famous disputes where due to absence of succession planning by wealth creator of the family, disputes have taken place. One such famous example is Reliance group. Dhirubhai Ambani had created crores of wealth and had forayed into varied business empires. But he had neither created any succession plan nor any will for allocating his wealth amongst 2 of his sons. He had died intestate, leaving control of his empire in dispute between both the sons. Soon thereafter, while working together, dispute arose between both the sons and it also resulted into allegation by each other. Considering Reliance Group is an established industrial empire, it not only had adverse repercussions on the peace and harmony amongst Ambani family members but on all the stakeholders, in addition to creating regulatory chaos. This is just one such example.
Life as it is, is very uncertain. Each human being is driven by a purpose and works really hard to achieve that purpose such that more than 50% of their life gets consumed to achieve their desired milestone. In a social environment that we all are living, major purpose for everyone is to live and contribute towards their own social welfare, their family’s growth and social causes. This is a continuous process. Accordingly, after one’s demise, not leaving a Succession plan for your loved-ones can hamper your intentions of contributing towards growth of your loved ones without securing their financial future and can also cause inappropriate utilisation of your estate that you worked really hard to earn.
In a situation like this, usually it’s one’s loved ones who suffers the most, not only emotionally but also, financially. Usually, problems faced after one’s demise in such a situation are as under:
- Not aware of all the assets and financial obligations and documentation for same;
- Chances of sudden appearance of a fake creditor may also arise;
- The most trusted family member / your loved one might not get the share that you think he/ she must get;
- Appropriation of your assets and financial obligation takes place according to the applicable generic law as per prevailing succession act (link to subsequent question);
- Your family members might get involved in a legal battle which might take many years to settle;
- Any claimant from your family may just appear to claim a share from your estate, whom you don’t intend to pass on anything;
- Life of your minor child / specially abled family member is at a stake as court would appoint an executor / guardian who might not be trusted one;
- Your bank accounts and your assets gets frozen till the conclusion of probate which might take many years to conclude;
Accordingly, it is not only responsibility but also an obligation today, to plan and execute succession for the benefit of loved-ones and immune from any of the above adverse possibilities by taking action NOW!
Considering that there is no threshold for planning for succession, even if one does not belong to affluent class, still need of succession planning is equally important. Thus, there is no criteria of age, gender, caste, amount of wealth or a right time for starting to plan for succession.
Accordingly, it is very important to plan and execute the succession planning as a first corrective steps for financial planning. Although it’s an emotional task for many of us, but equally important to identify and execute the correct mode of succession planning. Usually, succession planning involves complex provisions of tax, regulatory laws and personal laws, thus, it is always recommended to consult professional before identifying correct mode of succession planning depending upon facts of each case.
Following are the different modes of succession planning:
- Transfer after Death:
- Intestate Succession: When a person dies without leaving will or plan for succession, it is said that such person has died intestate. In such scenario, inheritance takes place as per provisions of Hindu Succession Act, 1956.
- Writing a will: Will is a legal declaration of a persons wishes regarding the disposal of his or her property after death.
- Transfer during lifetime:
- Private family trust structure: A trust is created when the settlor hands over any property to the trustee, which is to be used and employed for the benefit of the beneficiary. This legal arrangement is codified by means of a trust deed;
- Gifts: Transferring assets / liabilities in the name of your family members while alive;
- HUFs: Formation of Hindu Undivided Family structure. This is most common structure adopted by many Indians, in joint family scenario, in past 2 decades. Considering, now a days concept of nuclear family is adopted by most of the families, HUFs structure has less relevance in today’s time;
- Family Arrangements: This mode of succession planning, Settlement/ distribution of all assets/ businesses amongst respective family members takes place amongst the member of the family under a legal agreement of Memorandum of Understanding. Planning tax and cash neutrality in overall settlement is done via various restructuring arrangements;
- Ownership Structure: This mode of succession planning, mainly applies when family business is required to get transferred from one generation to another. Accordingly, under this mode, holding companies ensure common ownership of family assets. Further, it provides an additional layer of leverage for growth of business.
Even though one can go with either of the option, each of the options are supplemental to each other when it comes to succession planning. While one may get overwhelmed or confused with so many options available for succession planning, it is always better to adopt combination of above modes as none of them are mutually exclusive. Each option has their own limitations, pros and cons, even if end result is to benefit the interest of family members.
For detailed discussion on the above subject, please feel free to connect at contact@devadhaantu.in
