Practical Guide to Estate Planning Tools

Do you know what is the actual power of your nominee?

Do you know the key differences between Nomination, Trust and the Will?

In this second part of the series of Estate Planning, you will learn the Key details of all these important tools of Estate Planning.

If you have not yet read the first part, then please read the Part-1 of Estate Planning.

There we have discussed the fundamentals of Estate Planning and briefly discussed the essential tools of estate planning.

In this part, we will have a detailed look at all the essential Estate Planning elements.

So, let’s get started.

5-Essential Tools of Estate Planning

So far in the first part, we have discussed that there are 5 essential tools of Estate Planning, listed below:

Nomination
Will
Succession Laws
Joint Accounts; and
Trust

We will discuss them one-by-one, let’s start with Nomination.

1. Nomination

You have to list someone in the “Nomination” space, whenever you open a bank account, start investments in a mutual fund, buy your life insurance policy, or open a PPF account.

Some people fill the nomination space, whereas others leave it BLANK.

And, those who fill the nomination space they simply ‘assume’ that this nominee will be the next owner of their assets in case they die!

NO! It is not so.

The nominee is only a person to contact or a caretaker of the investment. He can claim the custody of the particular investment product after the death of the main holder.

A claim of the nominee can be considered but a final claim on a financial product will be of the ‘legal heirs’.

This is the reason why a clearly written ‘registered’ will is so important.

The misconception of nominees as the owner of the assets leads to major disputes and such cases go on for years in the court.

But still, it is recommended NOT to leave the nominee space BLANK.

If you have clearly mentioned your trustworthy nominee on your assets, this is what they can do:

Even if there are 7-8 legal heir, a nominee will be able to divide the shares among them wisely. Otherwise, the division may end up in a major dispute

In case, there is no legal heir, a nominee can rightly claim the asset. Though is not guaranteed, as it will pass through succession law, to hand over the assets to the right person. We will discuss succession Law a bit later in this article.

But there is an exception in the role of a nominee for the Companies Act. Let us discuss:

Role of Nominee in Companies Act:

As per the Companies Act, the nominee is the final owner of the assets left behind by the main owner. In this case, the nominee will even bypass any legal heir or any written will.

Therefore, any financial product that falls under the purview of the Companies Act, the nominee in those financial products will be the final owner and after the death of the first holder, they have all the legal rights. Examples of such financial products are: shares, debentures, FDs of the company and the Demat account – all these financial products fall under Companies Act and the nominees mentioned for these financial products are the final owners.

For the rest of the Financial Products, Nominee is just a care-taker and the final ownership will be claimed by legal heirs only.

2. WILL

What is “Will”?

A will is a legal document stating how your wealth should be distributed among a set of people and under what conditions. It’s a way to document your wish and give a legal framework to it. Note that you can divide only those assets through a will that is self-acquired and earned by you. You can’t give away something in a will if you have not earned it-like ancestral property, which you got in inheritance.

Basic eligibility to create a Will

A will can be prepared by anyone who is 18 years of age, of sound mind, and free from any coercion, fraud and undue influence.

As we all know that life is quite unpredictable and uncertain. It is always better to prepare a Will and store it safely while you are young and in good financial and physical health. You don’t need to wait till you own lots of wealth to transfer or you wait till your retirement to create a Will.

There’s no specific age when you should make a Will as long as you’re a major (18 years of age and above). But in the following circumstances, you must consider making one right away

You are married and have family
You are in a situation of divorce or re-marriage
You are diagnosed with Terminal Illness

Key insights into a Will document?

Personal Information like name, date of birth, address.
Declaration of sound mind, stating that you are writing this will not under pressure, but with your understanding.
Details of property and your investment details like insurance policies, bank accounts, real estate, mutual funds, shares, etc.
The proportion in which assets are divided and parties to whom it should be divided.
Signature of the person writing the will and witnesses.
You can find the Will Format here.
If the person writing the will is above age 70, there should be a certificate by a medical practitioner that the person is fit for writing a will.

After mentioning all the legal heirs in the will, it’s a good thing to mention additionally that “I HAVE NO OTHER LEGAL HEIR”.

Check if you can videograph the will registration process so that there is no question on the authenticity of the will.

Essential eligibility criteria to write a Will

I will share very simple things you should be clear about the will, which you should know:

A person should be above 18 years old to write a will.
There is no fixed format for a will – you can write it on a plain paper.
The registration of a will is not mandatory by law, but it’s recommended to be registered.
You can make changes to your will any number of times. It is recommended to review your Will periodically.
The latest will shall be considered as the final will.
You should always put a recent date on the Will.
2 witnesses are required at the time of writing the will and their signature is required. It is better if the witnesses are younger than the will-maker and should be highly trusted.
Ancestral property cannot be passed on by a will.

Two important points regarding a will

Point 1 – Taking Professional Help

Knowing all these essential information on Estate Planning can not make you an expert to do it all by yourself. You should choose a lawyer or a right estate planner to do this job.

Point 2 – Registering a will

Though the Will registration is not mandatory by the Law, but it is highly recommended for three reasons.

Reason 1 – A registered will gets a label of legality around it and the chances of someone challenging it reduces. When you register it, there is one copy with you and another copy is with the registrar that can be obtained later. If you want to modify your will later, that’s also possible.

Reason 2 – For many purposes, a “registered will” is demanded, especially in the area of real estate. And if a will is not registered, then your legal heirs have to run around the court to obtain a “probate” which is nothing but a document confirming that the will is authentic and the legal heirs’ identity is correct.

Reason 3 – Registering a will involves nominal fees and is an easy process. Many people do not have an idea about the fees and complexity part and they want to avoid the costs of registration and don’t want to take that extra step of going to sub-registrar office and registering a will. In most cases, the cost of registration is as low as Rs. 200 and at the maximum, it will go as high as Rs. 500-1,000, not more. Can you imagine how much more powerful a will becomes when it’s registered? You just need to be present with 2 eyewitnesses at the time of registration, but these 2 eyewitnesses and their spouses should not be the beneficiaries.

In case a Will is not present, the distribution of assets is been done according to Succession Laws, defined next.

3. Succession Laws

In case a will is not present – the division of wealth happens as per “succession laws”, which are laws defined by the country.

You can read this in-depth article on Succession Laws to understand them more clearly.

Image shown below briefly highlights the Succession Laws applicable in India (for Hindus)
You may feel that division according to the Succession Laws looks perfect. Even if it is so, please don’t make it an excuse to skip writing the will.

Your action step is to get hold of a good Estate Planner in your city (or online) and get it prepared.

And, never ever forget to register the will.

Let’s now discuss the next Estate Planning tool called ‘Joint Account’.

4. Joint Account

We all know what is Joint Account!

So far we have discussed about Nomination, Wills, Succession Laws; but all these laws come into picture when there is no holder of an asset, but in a joint account, if one of the holders dies, the control is still with the secondary holder.

The power of joint accounts is one of the most underrated things in personal finance. It can be the most powerful estate planning tool. You might know that a joint account holder has always treated as the second holder apart from the primary holder since the second holder has all the necessary control as the primary holder does, and this is how he will be the new owner in case of death of the primary holder.

The only precaution you have to take is that you need to have high trust on that person, else things can go ugly.

Therefore, convert your Single account to a joint account in case of your saving bank account, mutual fund, Demat account or any other kind of investments but do it carefully.

Please note:

Also, this is not true in case of immovable assets like a flat, where each one is the owner of only his share, in case of multiple owners. Even in case of the death of one of the co-owners, his/her share is not passed to the other co-owner. It will move to the legal heir only as per will or succession laws. You should consult your lawyer for more details.

Another Estate Planning tool is ‘A Trust’, it is discussed next:

5. TRUST

What is “Trust”?

A trust is an agreement between the settlor and the trustees to transfer the legal ownership of assets/property to the trustee with the obligation that the same should be held for the benefit of the beneficiaries as specified in the trust deed.

A Trust has four components:

Author of the Trust/settler:

Trustee: An individual/entity appointed by the Settlor to administer the Trust and accept the responsibility to act as Trustee.

Beneficiary: The person(s) for whose benefit the Trust is created is called the Beneficiary.

Trust-property or Trust money: This is the subject matter of the Trust and can comprise of both, movable and immovable property viz. cash, jewelry, land, investment instruments, etc.

For creating a Trust, legally it is necessary for the Settlor i.e. the person who creates a Trust, to ensure that the following four conditions are complied with:

Make an unequivocal declaration binding on him;
Outline the purpose/objects of the Trust
Clearly specify the beneficiaries of the Trust; and
Transfer the identifiable property under an irrevocable arrangement to the beneficiaries

Conclusion

Now that you know all the key details of Estate Planning, but let this information do not allow you to take all your estate planning decision all by yourself.

It is more for your knowledge and awareness about Estate Planning. Whenever you have to do any estate planning every time you must consult an Estate Planner to create your will, trust or other estate planning related stuff. How can you select the right Estate Planner is described in the first part of our Estate Planning article.

If you have any more queries on Estate Planning feel free to drop them in the comment below. If you have not yet read the first part of the estate planning article, then please don’t forget to read that.

We will help you to create a financial plan personalized with your needs, click the link below and register for your FREE Financial Planning Consultation Call.