Intergenerational transfer of assets: will or gift deed?

Circa 1963: Devraj Gupta was a leading and astute businessman in Mumbai. Not only had he created a reputed business but also he had created assets and properties for his family. With age not on his side, he had a justified and growing concern: “If something were to happen to me, I should be able to ensure that these properties transfer smoothly to my wife and the next generation.”

On 28 March 1964, Devraj Gupta registered his will bequeathing his properties to his wife and sons in equal measure. He was a satisfied man that he has done what most Indians don’t do—made a will and ensured a smooth transition of his assets. But he couldn’t have been more wrong. It would take almost 50 years after his death for his wish to be fulfilled.

Circa 1969: After his demise in October 1965, as required under law his widowed wife filed a probate petition for the will. Four years later after following the due process, the Bombay high court on 12 March 1973 granted the probate to the will.

On 10 May 2013, the Bombay high court dismissed subsequent petitions filed by other members of the family seeking to revoke the probate and petitions disallowing the respondents in anyway dealing in the said properties. (You can read the complete high court order here: http://bit.ly/WillProb)

This is an exceptional example that demonstrates the need of using the right vehicles for different asset classes during the process of transfer of wealth from one generation to another and also avoiding legally locking up of assets in this process. Effectively the transfer of wealth in such cases skips the generation where it is intended to benefit but the benefits go to the generation after next—the grandchildren—thus delaying the economic value added.

India will see the initiation of intergenerational transfer of assets of over Rs.10 trillion in the next decade. Such a large transfer of wealth from one generation to another will lead to two challenges: Need for tax-efficient low-cost vehicles for this transfer and ensuring effective time-bound transfers to beneficiaries.

A will or testament is a relatively simple way of intergenerational transfer of wealth and given its importance, everyone should have a will irrespective of their age or net worth. On the positive side, it is relatively easy to write and it can be revoked with a new will or amended through a codicil as many times as one wants. Over the years, variants such as video wills and online wills have emerged and are acceptable in India. On the negative side, a will as an instrument is more liable to be challenged thus prolonging the process of transfer of wealth to the rightful owners than other instruments. Another important facet is that law of limitation may not always be applicable for challenging a will thus leading to litigation even after an undefined period especially in the case of immovable properties. Legal disputes could even reduce the resale value of assets or leave heirs to bear hefty fees, eroding the value of inherited assets.

Gift deed as a tool for transfer of wealth

A gift deed is a much more efficient instrument for transferring immovable properties from one generation to another. A gift deed can be used for all asset classes. However, it derives its utility in the case of immovable properties due to the significant benefits it gives to the next generation. The positives of a gift deed are that the transfer of assets happens during the life-time of the testator (donor) and the transfer happens immediately compared with using a will which is a much longer process. The other alternative of formulating a trust—used by a lot of high net worth individuals—for transfer of assets is a legal process which takes some time before the actual transfer can take place. Additionally, a gift deed for immovable properties needs to be registered for it to be effective and by virtue of being registered is difficult to be post-facto challenged by other parties thus making it virtually litigation free. The taxation for gift deeds in being tax-free for both the donor and donee when in favour of defined relatives is also beneficial.

On the flip side, a gift deed is irrevocable once executed and thus does not allow for any changes even if one changes his mind. On the other hand, a will is a living document and any changes can be made till the testator is alive. There are also cost implications in the case of a gift deed for immovable properties in the form of stamp duty for registration. The stamp duty for registration of a gift deed varies from state to state but in most cases is significantly lower than the normal stamp duty and is payable usually at the circle rate or ready reckoner rates as published. Thus the effective cost of executing a gift deed is marginal given the significant benefits it offers.

Source:www.livemint.com

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