While there is less probability of the inheritance tax getting re-introduced, experts quoted in this article mentioned that there is great uneasiness among the general public on the disproportionate growth of wealth within the sections of the society.
If this tax is reintroduced, the entire estate such as investments in equities, debt instruments, physical property, art, international assets and even officially counted and declared gold and other precious metals can also come under the purview of the inheritance tax.
However, inheritance tax might be only applicable to families and individuals whose estate value exceeds a certain threshold limit.
In this article, we will look at some ways that families can implement to navigate inheritance tax and proceed with effective succession planning.
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Trusts
One of the best ways to navigate such a scenario would be to set up a trust where the assets are transferred into a trust and the original owner renounces their direct ownership and control over these assets.
“This is akin to a formalised gifting process, where the assets are no longer considered part of the individual’s personal wealth. Even though the assets are transferred out of personal ownership, the trust can be structured in a way that the original owner (or their family) can still benefit from these assets as beneficiaries. This provides a balance between losing direct control and continuing to benefit from the asset’s value and income. By transferring assets into a trust, an individual’s personal estate value is reduced. The reduced estate value may fall below the threshold that triggers inheritance taxes, or at least lower the total tax liability,” said Sneha Makhija – Head of Wealth Planning, Sanctum Wealth.
Pranjali Madnani, Co-founder, WillBee feels that irrevocable trusts are one of the best ways to reduce inheritance tax.
“Under the now-abolished Estate Duty Act of 1953, irrevocable trusts offered a way to reduce potential estate tax burdens. By placing assets into an irrevocable trust, an individual could effectively remove them from their taxable estate. The Act offered exemptions for property held in trust for another person (given a minimum of two years before death), as well as for a primary residence and property outside of India. Additionally, estate duty on jointly held spousal property was delayed until the passing of both spouses. These provisions made irrevocable trusts a strategic tool for those aiming to streamline their estate planning and minimise taxes for their beneficiaries,” said Pranjali.
Setting up multiple trusts within a family can help families save tax.
“Whether it’s a nuclear family or a joint family, trusts cater to the specific requirements of a person. For example, one trust could be for the parents, another for one child, and a third for another child, each tailored to their specific needs and aspirations. This customization ensures that each trust can support different objectives, not just in saving taxes but also in fulfilling specific personal or career goals of the family members,” said Yash Poddar, Founder, FamO.
Creating charitable organisations can be another way to save tax and manage assets effectively.
“Creating a charitable organisation or foundation provides tax advantages while channelling wealth towards philanthropic causes. Donations and income of such organisations can qualify for tax exemptions. This structure allows individuals to manage their assets effectively, benefit from tax deductions, and support causes they believe in,” Advocate Siddharth Chandrashekhar, Counsel at the Bombay High Court.
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HUFs
According to Siddharth, Hindu Undivided Families (HUFs) are a recognized form of succession planning in India, relevant specifically for Hindus, Jains, Sikhs, and Buddhists. A HUF forms automatically upon marriage and includes descendants of a common ancestor. The eldest male member, the ‘karta’, manages family assets.
“HUFs offer tax efficiencies in wealth management and intergenerational transfer, as typically no inheritance taxes apply within the family unit,” said Siddharth.
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Married Women’s Property Act
Nehal Mota, Co-founder and CEO, Finnovate, said that it is important that life insurance is taken under the Married Women’s Property Act (MWPA).
“While it is not sure whether life insurance proceeds will be considered for taxation if the inheritance tax is passed, a life insurance policy is considered the deceased policyholder’s estate or inheritance, and the legal heirs have a right to it. Hence, to protect their spouse and children, one can buy insurance policies under the Married Women’s Property Act Trusts. Here, life insurance policies can be structured as trusts, ensuring proceeds go directly to the wife and children. This can bypass the typical probate process, potentially reducing inheritance tax burdens,” said Nehal.
Gifting Assets
Yash also mentioned that one of the methods that is often seen in family businesses, both listed and unlisted, is gifting shares within the family.
“When shares are gifted, they are usually transferred to family members directly. This act effectively bypasses the need for them to be part of the estate that would be taxed upon death. For example, if a family of six members gifts shares to five different members, these shares are then held directly by each individual. The ownership is transferred during the lifetime of the gifter, thus avoiding inheritance taxes on these shares. The recipient’s own the shares outright, and any value appreciation or dividends are directly theirs, not part of the central family estate,” said Yash.
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Sneha added that under the current laws in India, gifts to close relatives are exempt from tax.
“This allows individuals to transfer substantial assets without incurring additional tax liabilities. When gifting real estate, although the income tax may be exempt, stamp duty costs must be considered. Some states offer concessional stamp duty rates for transfers to close relatives, which can further reduce the financial burden of gifting,” said Sneha.
She added that not all assets may be ideal for gifting, especially those that might appreciate significantly in value. “Deciding which assets to gift can involve considering their current value, potential future value, and any emotional significance,” said Sneha.
Yash mentioned that gifting is a part solution and setting up trusts or creating a will is still important.
“It’s like a workaround that can help distribute portions of wealth. However, for a comprehensive solution that covers all aspects of an estate, one would still look at setting up trusts or creating a will. Gifting can manage some aspects well, especially if you’re clear about what assets you want certain family members to have. But for broader estate management and to cover all legal bases, combining gifting with trusts and wills is the best approach. This combination ensures that there’s no family discord or disagreements about asset distribution after someone passes away,” said Yash.
Padmaja Choudhury is a freelance financial content writer. You can reach out to her at padmaja@padmajachoudhury.com.
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Published: 06 May 2024, 04:11 PM IST