Nilesh is a retired senior professional and lives with his son’s family. He has accumulated a good amount of wealth in his lifetime. His children including his two sons and a daughter are aware of the personal wealth he holds and are hoping to inherit it. He is now 72 and is pondering over equitable distribution of his wealth among the three, without dispute or procedural hassle and in a tax-efficient manner. He wonders what might be the optimal way to ensure this and is exploring various options.
Nomination is a simple way to ensure that investments are passed on to the children. There is documentation involved all the same. Gifting to children is simpler but irrevocable. A will that seeks the formation of a trust or Hindu Undivided Family (HUF) is tax-efficient. Nilesh needs to seek options that are flexible and also save tax. Inheritance itself is still not subject to tax, though the income from the inherited wealth is taxable.
Nilesh may not be able to avoid the documentation issues involved in the transfer of his wealth. If he chooses nomination as the route, he can change the nomination as many times as he wants during his lifetime. In order to get the investments transferred to themselves, his children will have to provide documentation as required. It is also important to note that transfer does not amount to final settlement under succession laws.
The nominee only holds the wealth as a trustee, until disputes if any, are settled. He can consider writing a Will, which also can be amended anytime. The Will can include all his wealth, including movable and immovable assets, which do not have nomination facilities.
For optimising taxation of inherited income, Nilesh’s children can create a Hindu Undivided Family (HUF) structure. Inheritance is the basis for creating an HUF, whose income and wealth could grow over time and be taxed in the hands of the HUF. Creating trust with his children as beneficiaries will also enable such separation of incomes.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
