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 Since you may acquire certain assets after making the Will, the Will may either have to be revised or there can be a ―residual clause‖ in the Will stating how assets acquired in future should be distributed. 4.4.2 Types of Will - Unprivileged, Privileged, Joint, Mutual and Conditional Privileged Wills Any soldier being employed in an expedition or engaged in actual warfare, or an airman so employed or engaged, or any mariner being at sea, may, if he has completed the age of eighteen years, dispose of his property by a will made in the manner provided in section 66 of Indian Succession Act. Such wills are called privileged wills. Illustrations (i) A, a medical officer attached to a regiment is actually employed in an expedition. He is a soldier actually employed in an expedition, and can make a privileged will. (ii) A is at sea in a merchant-ship, of which he is the purser. He is a mariner, and, being at sea, can make a privileged will. (iii) A, a soldier serving in the field against insurgents, is a soldier engaged in actual warfare, and as such can make a privileged will. (iv) A, a mariner of a ship, in the course of a voyage, is temporarily on shore while she is lying in harbour. He is, for the purposes of this section, a mariner at sea, and can make a privileged will. (v) A, an admiral who commands a naval force, but who lives on shore, and only occasionally goes on board his ship, is not considered as at sea, and cannot make a privileged will. (vi) A, a mariner serving on a military expedition, but not being at sea, is considered as a soldier, and can make a privileged will. Unprivileged Wills Wills executed according to the provisions of ‗Section 63‘ of the ‗Indian Succession Act, 1925‘ are called Unprivileged Wills. An unprivileged Will is one which is created by every testator not being a soldier, airman, mariner so employed. Every testator, not being a soldier employed in an expedition or engaged in actual warfare, or an airman so employed or engaged, or a mariner at sea, shall execute his will according to the following rules:--  The testator shall sign or shall affix his mark to the will, or it shall be signed by some other person in his presence and by his direction.  The signature or mark of the testator, or the signature of the person signing for him, shall be so placed that it shall appear that it was intended thereby to give effect to the writing as a will. 490

 The will shall be attested by two or more witnesses, each of whom has seen the testator sign or affix his mark to the will or has seen some other person sign the will, in the presence and by the direction of the testator, or has received from the testator a personal acknowledgment of his signature or mark, or of the signature of such other person; and each of the witnesses shall sign the will in the presence of the testator, but it shall not be necessary that more than one witness be present at the same time, and no particular form of attestation shall be necessary. Joint Wills A joint will is a single document executed by more than one person (typically husband and wife), making which has effect in relation to each signatory's property on his or her death (unless he or she revokes (cancels) the will during his or her lifetime). Although a single document, the joint will is a separate distribution of property by each executor (signatory) and will be treated as such on admission to probate. In other words, a Joint Will is a single Will that two people prepare together where each one leaves all of their assets and property to the other. After one of the Testators dies, the surviving Co-Testator cannot change the Will. If the surviving Testator creates a new, separate Will, the specifics from the Joint Will may still be upheld by a court of law. Some Joint Wills include a stipulation for how the assets will be distributed after the second person dies. Couples can encounter several issues and difficulties when choosing to draft a Joint Will, rather than separate wills. For example: if one spouse decides they want to make a change to the Will, they will not be able to do so without the consent of the other spouse; if one spouse solely owns an asset and wants to leave it to someone other than their mutual children, this can be problematic as well. Mutual Wills Mutual wills are any two (or more) wills which are mutually binding, such that following the first death the survivor is constrained in his or her ability to dispose of his or her property by the agreement he or she made with the deceased. Mutual Wills are two identical but separate wills, prepared by two people who name each other as their Beneficiary should one die before the other, and mutually agree upon other Beneficiaries after both of their deaths. Historically such wills had an important role in ensuring property passed to children of a marriage rather than a widow or widower's spouse on a remarriage. 491

Conditional or Contingent Wills A Will may be expressed to take effect only in the event of the happening of some contingency or condition, and if the contingency does not happen or the condition fails, the Will will not be legally enforceable. Accordingly, where A executes a Will to be operative for a particular year, i.e.,. if he dies within that year. A lives for more years, after that years. Since A does not express an intention that the Will be subsisting even intestate. A Conditional Will is invalid if the condition imposed is invalid or contrary to law. 4.4.3 Legal Requirements and Testamentary Capacity Persons Capable and Competent to make a Will  According to Section 59 of Indian Succession Act 1925,  Any person of sound mind can make a Will - A person who has reached the age of majority can make a Will. However, as per Section 60 of the Act, a father whatever his age may be, may by Will may appoint a guardian or guardians for his child during minority. - A married woman may make a Will of her property which she could alienate by her own act during her life-time. The following persons cannot make a Will:  Lunatic, insane persons - Minor i.e. below 18 years of age. - Corporate bodies by their very nature are incapable of making a Will, though they may benefit under the Will of an individual partner. Other persons who can make a Will:  Persons who are deaf or dumb or blind are not thereby, incapable in making a Will, if they are of sound mind  Persons, who are ordinarily insane, may make a Will during an interval while they are of sound mind.  No person can make a Will while he is in such a state of mind, whether arising from intoxication or from illness or from any other cause, so that he does not know what he is doing. General Procedure to Make A „Will‟ Making a Will is the simplest form of estate planning. There is no legal requirement that a will be drawn up by a lawyer. There is no prescribed format to make a will. It can be in any language and can be either hand-written or typed. There is no stamp duty to be paid on a will. To be a valid document, the will must be signed and witnessed by at least two witnesses. Registration of a will is not compulsory in India. However, registration implies that the person writing the will and the witnesses have appeared before the registering officers who have verified their identity and attested the same. 492

A ‗Will‘ should be prepared with utmost care and must contain several parts to make a complete Will though there is no defined format for making a Will but a general procedure should be adopted while writing a Will by the testator which includes: 1. Declaration In The Beginning: In the first paragraph, person who is making a Will, has to declare that he is making this Will in his full senses and free from any kind of pressure and undue influence and he has to clearly mention his full name, address, age, etc at the time of writing the Will so that it confirms that a person really wishes to write a Will. 2. Details of Property and Documents: The next step is to provide list of items and their current values, like house, land, bank fixed deposits, postal investments, mutual funds, share certificates owned by testator. He must also state the place where he has kept all the documents if the will documents are under safe custody of the bank then testator has to write details about the releasing of the Will from the bank. Here it is the most important duty of the testator to communicate the above matter to the executor of the Will or any other family members, which will make the Will valid after testator death. 3. Details of ownership by the Testator: A testator while making a original Will should specifically mention that who should own his entire property or assets so that it will not affect the interest of the successors after his death. If testator wishes the name of the minor as beneficiary then a custodian of the property should be appointed to manage the property. 4. Attestation of the „Will‟: At the end, once the testator complete writing his Will, he must sign the will very carefully in presence of at least two independent witnesses, who have to sign after his signature, certifying that the testator has signed the Will in their presence. The date and place also must be indicated clearly at the bottom of the Will. It is not necessary that a person should sign all the pages of the Will instrument but he must sign to avoid any legal disturbances. 5. Execution of A „Will‟: On the death of the testator, an executor of the Will or an heir of the deceased testator can apply for probate. The court will ask the other heirs of the deceased if they have any objections to the Will. If there are no objections, the court will grant probate .A probate is a copy of a Will, certified by the court. A probate is to be treated as conclusive evidence of the genuineness of a Will. In case any objections are raised by any of the heirs, a citation has to be served, calling upon them to consent. This has to be displayed prominently in the court. Thereafter, if no objection is received, the probate will be granted and it is only after that Will comes into effect. Registration of „Wills‟ According to the Section: 18 of the ‗Registration Act, 1908‘ the registration of a Will is not compulsory. Once a Will is registered, it is strong legal evidence that the proper parties had appeared before the registering officers and the latter had attested the same after. The process of 493

registration begins when a Will instrument is deposited to the registrar or sub-registrar of jurisdictional area by the testator himself or his authorised agent. Once the scrutiny of Will instrument is done by the registrar and registrar is satisfied with all the documents then registrar will make the entry in the Register-Book by writing year, month, day and hour of such presentation of the document and will issue a certified copy to the testator. In case if registrar refuses to order Will to be registered then testator himself or his authorised agent can institute a civil suit in a court of law and court will pass decree of registration of Will if court is satisfied with the evidence produced by the plaintiff. A suit can only be filed within 30 days after the refusal of registration by the registrar. If the testator willing to withdraw the Will after the process of registration then a sufficient reason has to be given to registrar, if satisfied he will order for the registration of Will. Testamentary Capacity Testamentary capacity refers to person‘s full sense and mental sanity to have confirmed and signed the Will after understanding what his assets comprised and what he is doing by making a Will. He understands in full mental capacity who he is naming the assets to and how are they related to him and what repercussions it may have later. Testamentary capacity is the legal status of being capable of executing a Will. According to Indian Succession Act 1925, a person is said to have testamentary capacity only if he is in a sound disposing state of mind. It is essential that the testator should have sufficient capacity to comprehend perfectly the conditions of his property, his relations to the persons who were or should or might have been object of his bequest and the scope or the bearing of the provisions of his Will. Important Elements in Testamentary Capacity (i) It is a voluntary act on the part of the testator • There is no compulsion or force on the testator to make the Will • It is his own decision to dispose off his property (ii) The testator should have a sound disposing mind • The testator should not be suffering from any mental disorder which could possibly interfere in his decision making • He should not be in a state of intoxication due to alcohol, drugs or disease • Testamentary capacity is task-specific, a person suffering from mental illness can make a will provided his psychopathology is not interfering in his decision making • Testamentary capacity is also situation-specific. Clinician should explore the circumstances under which the testator is making the Will. (iii) The testator should know what he is doing by making a Will 494

• The testator should be in full senses to appreciate the nature of the act an. (iv) The testator should have sufficient capacity to know the extent of his property • The testator should know the nature and extent of his assets which he is going to distribute • He should also know the approximate value of his property (v) The testator should be aware of the potential beneficiary • The testator should have the knowledge about the legal heirs of his property • He should also know the potential beneficiaries whom he is likely to distribute his property and the relationship with them • He should be able to rationalize his decision. (vi) The testator should be aware of the consequences of his decision • Testator should be aware of the possible consequences of the distribution of his assets. (vii) The testator should be free from undue influence/fraud/coercion • Under Section 61 of Indian Succession Act 1925, a Will or any part of a Will, the making of which has been caused by fraud or coercion or by such importunity as takes away the free agency of the testator is void. • However sound mind the testator may be having, if it has been the subject of undue influence, the soundness of mind will not help the will to be declared valid. (viii) The testator must have the knowledge of the contents of the Will • It is the inevitable effect of the sound mind to know the contents of his Will. • If the testator does not know the contents of his Will it cannot be said to be a valid Will. • However such knowledge and approval of the testator may be presumed on the proof of signature of the testator. 4.4.4 Modifying or Revoking a Will A Will can be revoked, changed or altered by the testator at any time when he is competent to dispose of his property. A person can revoke, change or alter his Will by: • Executing a new Will, • Revoking the earlier Will, • Registering the new Will (if the old Will is registered), • Destroying the old Will or • by making a codicil. 495

On the marriage of a Parsi or a Christian testator, his/her Will stands revoked, this however does not apply to Hindus, Sikhs, Jains and Buddhists. Revocation of will by testator's marriage: Every will shall be revoked by the marriage of the maker, except a will made in exercise of a power of appointment, when the property over which the power of appointment is exercised would not, in default of such appointment, pass to his or her executor or administrator, or to the person entitled in case of intestacy. Explanation: Where a man is invested with power to determine the disposition of property of which he is not the owner, he is said to have power to appoint such property. Revocation of unprivileged will or codicil: No unprivileged will or codicil, nor any part thereof, shall be revoked otherwise than by marriage, or by another will or codicil, or by some writing declaring an intention to revoke the same and executed in the manner in which an unprivileged will is hereinbefore required to be executed, or by the burning, tearing, or otherwise destroying the same by the testator or by some person in his presence and by his direction with the intention of revoking the same. Illustrations (i) A has made an unprivileged will. Afterwards, A makes another unprivileged will which purports to revoke the first. This is a revocation. (ii) A has made an unprivileged will. Afterwards, A, being entitled to make a privileged will, makes a privileged will, which purports to revoke his unprivileged will. This is a revocation. Revocation of privileged will or codicil: A privileged will or codicil may be revoked by the testator by an unprivileged will or codicil, or by any act expressing an intention to revoke it and accompanied by such formalities as would be sufficient to give validity to a privileged will, or by the burning, tearing or otherwise destroying the same by the testator, or by some person in his presence and by his direction, with the intention of revoking the same. Explanation: In order to the revocation of a privileged will or codicil by an act accompanied by such formalities as would be sufficient to give validity to a privileged will, it is not necessary that the testator should at the time of doing that act be in a situation which entitles him to make a privileged will. 496

4.4.5 Probate Process Probate is the copy of the will which is given to the executor together with a certificate granted under the seal of the court and signed, by one of the registrars, certifying that the will has been proved. The application for probate shall be made by petition along with copy of last Will and testament of the deceased to the court of competent jurisdiction. It takes about 8-10 months to obtain a probate if the petition is not contested by any person. At the time of filing the petition, court fees will have to be paid. The copy of the will and grant of administration of the testator‘s estate together, form the probate. It is conclusive evidence of the validity and due execution of the will and of the testamentary capacity of the testator. A probate is obtained to authenticate the validity of the will and it is the only proper evidence of the executor‘s appointment. The grant of probate to the executor does not confer upon him any title to the property which the testator himself had no right to dispose off which did belong to the testator and over which he had a disposing power with a grant of administration to the estate of the testator. Probate proceedings cannot be referred to Arbitration. The probate court (whether it is the District Court or High Court) has been granted and conferred with exclusive jurisdiction to grant probate of a Will of the deceased. Section 213(1) of the Indian Succession Act inter alia states that the right of a legatee (a person who inherits under a will) to property bequeathed under a will can‘t be established in a court unless a court of competent jurisdiction in India has granted a probate of the will under which the right is claimed or letters of administration with the will annexed thereto have been obtained. However, section 213 (2) states that the said section is not applicable to the wills executed by Mohammedans, Hindus, Buddhists, Sikhs and Jains except in certain circumstances mentioned therein. Further, section 213 (2) states that in case of a Parsi dying after the commencement of the Act, a probate is necessary if the will in question is made or the property bequeathed under the will is situated within the ―ordinary original civil jurisdiction‖ of the Bombay high court. To whom probates can be granted: Under the Indian Succession Act, 1925, a probate can be granted only to an executor appointed under a Will. However, it cannot be granted to a minor, a person of unsound mind, or to association of individuals, unless it is a company that satisfies the conditions stipulated by the government In the event a person dies intestate or a Will does not name any executor or the executor named in a will is unable or unwilling to serve, the courts must appoint an administrator which is done by issuing a short document called Letter of Administration (LoA). 497

To whom can a LoA be granted: Under the Indian Succession Act, 1925, a LoA can be granted to any person entitled to the whole or any part of the estate of the deceased person. However, it cannot be granted to a minor, a person of unsound mind, or to association of individuals, unless it is a company that satisfies the conditions stipulated by the government. Procedure to Apply for a Probate An application/petition for probate must be filed in court along with the original will in question. The application should be made before the district judge (or High Court depending on the property value and also depending on whether the High Court has original jurisdiction for testamentary matters) in whose jurisdiction the testator at the time of his death had fixed abode or had some property situated. The application should contain the following facts:  The time of the testator‘s death;  a declaration that the will attached is the last will and testament;  a statement that the will was duly executed,  the value of assets which are likely to be inherited;  Title deeds pertaining to the immovable property mentioned in the will, if any.  Documents pertaining to movable property in the will, if any; and  a statement that the executor making the application is named in the will. On receipt of the application, the court issues notices to the next of kin of the deceased to file their objections, if any, to the grant of probate. A general public notice is also given in a newspaper. The executor is thereafter asked to establish the (a) proof of death of the testator; (b) proof that the will has been validly executed by the testator; and (c) proof that the will is the last will and testament of the deceased. Proof of death is usually shown by submission of original death certificate. In order to assess whether the will has been validly executed and is a genuine document, it must be shown that that the will was signed by the testator and that he had put his signatures to the testament of his own free will; that he was at the relevant time in a sound disposing state of mind and understood the nature and effect of the dispositions and that the testator had signed it in the presence of two witnesses who attested it in his presence and in the presence of each other. 498

Sub-Section - 4.5 Powers of Attorney 4.5.1 Use and Purpose In the modern world where commerce and industry have assured large and long roles to play, the need for entering into contracts of agreements in relation to business and other transactions have become a common and necessary feature of daily life. As man became busier it became more and more necessary for him to depend on others for getting his things done. The hectic activities of the businessmen and industrialists have made the execution of power of attorney for delegating his functions. Granting a Power of Attorney is a legal process that involves the drafting of a document which assigns to another person the power to act as your legal representative. Principal should be careful while authorising an agent as attorney to avoid inconvenience and expense of any legal proceedings in the future. A power of attorney is an instrument that is used by people to confer authority on somebody else to legally act on their behalf. A PoA functions on the principle of an ―agency‖ where the PoA holder, that is, the person to whom the power is given, is authorized to perform certain acts on behalf of the PoA grantor, and such authorized acts by the PoA holder will have the same effect as if done by the PoA grantor himself. Consequently, the PoA grantor is bound by the acts of the PoA holder in relation to transactions with a third party. PoAs are widely used both by corporate entities and individuals for various purpose such as applying for consents and approvals and dealing with governmental authorities in relation to these, getting property registered, incorporation of a company, execution and registration of documents and so on. It is important to note that for being a legally valid document, each PoA is required to be compulsorily executed on appropriate value stamp paper and should also be notarized/authenticated. A related question that often arises is whether a PoA is required to be registered or not. The answer to this lies in the terms of the PoA. For example, if a PoA merely authorizes the PoA holder to sell the immovable property on behalf of the PoA grantor and does not result in creating, declaring, assigning, limiting or extinguishing any right, title or interest in favour of the PoA holder in the property, then the PoA would not be required to be compulsorily registered. However, if the intention of the parties is to transfer/convey property under the guise of a PoA, then the document is not only required to be stamped at a higher rate, as a conveyance deed, but also requires registration. 4.5.1 Types - General and Special The Power of Attorney can be classified into two categories which includes: 499

(i) General Power of Attorney: A general power of attorney is one by which an instrument is executed by the principal authorising the agent to do certain acts in general on his behalf. The word ‗General‘ here means that the power must be general regarding the subject matter and not general with regard to powers in respect of a subject matter. If the subject matter is not general but restricted to something either specific or (ii) specifically mentioned by the principal while drafting an instrument then it will not constitute a general power of attorney. It is otherwise called as limited power of attorney. (iii) Special Power of Attorney: A special power of attorney is one by which a person is appointed by the principal to do some specified act or acts. In this type of power of attorney, an agent conferred with a power to do specific act in a single or specified transactions in the name of the principal. (iv) Durable Power of Attorney: A Power of Attorney which specifically says otherwise, agent‘s power ends if principal become mentally incapacitated. However, a power of attorney may say that it is to remain in effect in the event of future incapacity of the principal. A power of attorney that says this is called a durable power of attorney. To ascertain whether power of attorney is of general or special in nature, the subject matter in respect of which power is conferred Is to be seen accurately. The power of attorney is the unilateral document wherein donor or the principal gives authoritative power to the agent by signing the document and the agent‘s sign is not always required. 4.5.2 Revocation In case of a power of attorney (POA), a person appoints an agent to act on his behalf. Revocation of the POA is as important as delegation of the power itself. Otherwise, it might be to the prejudice of the parties themselves. In deciding whether the agency can be revoked or not, two conflicting interests are to be reconciled and a suitable middle way is to be formed so that none of the parties suffer unjustly. The interest of the one who has delegated power should be in conflict with that to whom the power is given. The statutes are silent as to when a POA can be revoked. A POA is automatically terminated if either one of the parties to the instrument dies or becomes insolvent, or any specific condition in the instrument is breached. Usually, if the power given was one coupled with interest, it cannot be withdrawn. Section 202 of the Indian Contracts Act contains some relevant provisions. Accordingly, if an agent has an interest in the property that forms the subject matter of the agency created via the POA, the agency cannot be terminated to the prejudice of such an interest. Also, where an agency is created for valuable consideration and authority is given to effect a security, it cannot be revoked. The POA is irrevocable if it creates an agency coupled with interest. Where an authority or power is coupled with interest, it is irrevocable unless there is an express stipulation to the contrary. 500

Still, the parities can by agreement make it revocable. If the power is irrevocable, the parties are nevertheless free to make it revocable by an express stipulation to the contrary. However, in cases where it is revocable it cannot be made irrevocable merely by writing it in the agreement. Just because a power is declared in the instrument granting it to be irrevocable does not make it so. Irrevocability requires something further. If on a construction of the document and in the light of the facts, the document does not prima facie meet the conditions for the creation of a power coupled with interest, merely because the document itself describes the agency to be irrevocable, does not make it so. The interest which an agent gets in the property must be simultaneous with the power given to him in order to give him a power coupled with interest. If the interest created in the agent is the result or proceeds arising after the exercise of the power the agency is revocable and cannot be said to be an irrevocable agency. According to the Indian Contract Act, no agency can be terminated where the agent has an interest in the property which forms the matter of the agency. To decide whether a given power is coupled with interest or not, the facts of the case and the wording of the instrument itself are relevant. 4.5.3 Role of the Executor Granting a power of attorney and appointing an executor for your estate both authorize another individual to act for you as a legal representative. An executor carries out your wishes for your estate after your death. A power of attorney assigns someone to carry out your wishes while you're alive. The principal, or maker of a power of attorney, appoints an agent to handle her affairs during her lifetime. The maker of a will, or testator, however, designates an executor to handle his affairs after death. Whereas an agent may only have his powers revoked by the principal, an executor may only be removed by the court. Legal Powers which can be granted to the Attorney (Agent) Broadly speaking a power of attorney provides an agent ―all powers that the principal has‖ to manage the principal‘s financial affairs or make health care decisions may be enough for many purposes. An agent may be authorised to: (i) To execute all contracts, deeds, bonds, mortgages, notes, checks, drafts, money orders. (ii) To manage, compromise, settle, and adjust all matters pertaining to real estate. (iii) To lease, collect rents, grant, bargain, sell, or borrow and mortgage. (iv) To sell any and all shares of stocks, bonds, or other securities. (v) To file, sign all tax returns, insurance forms and any other documents. 501

(vi) To enter into contacts, and to perform any contract, agreement, writing, or thing to make, sign, execute, and deliver, acknowledge any contract, agreement. (vii) To make health-care decisions for the donor or his minor children. (viii) To sue on behalf of the principal. Role of the Executor Executors can be required to provide the following services themselves or be required to arrange the relevant professionals. Serious consideration should be given before entrusting those tasks to a family member or friend who may not have either the time or expertise to perform them:  Notify the beneficiaries - When a person dies, the executor locates the Will and immediately contacts the beneficiaries and any relevant business associates.  Look after the estate - It is important for the executor to ensure that all assets including property and investments are safe and arrange insurance protection when needed. The immediate needs of the beneficiaries must also be assessed to ensure that they do not suffer any unnecessary financial hardship.  Value the estate - The executor must identify and account for all assets and liabilities. Each item then requires written confirmation from banks, financial institutions, insurance companies, share registers, titles office and creditors etc. The value of assets must be ascertained, often by obtaining valuations from licenced valuers or estimates from recognised sources.  Obtain authority to administer the estate - Before an estate can be administered, the executor must apply to Court for the authority to deal with the deceased's estate. This is referred to as obtaining 'probate of the Will'.  Pay all debts - Creditors, funeral expenses, income tax, fees for administering the estate and out-of-pocket expenses must all be paid. This often requires the executor to sell some assets. Beneficiaries may choose to provide funds to cover these expenses so as to keep the assets of the estate intact.  Divide the estate - When all debts have been paid, the executor is then free to distribute the remaining assets according to the directions laid out in the Will.  Establish trusts - Executors are responsible for setting up trusts for beneficiaries. Trusts are required if the beneficiary is under 18 years of age or mentally incapable, or if there are specific instructions in the Will. Such trusts need ongoing administration, often over many years. 502

Sub-Section - 4.6 Trust Structure for Efficient Transfer Trusts originated at the end of the middle ages as a means of transferring wealth within the family and have remained the characteristic device employed for organizing intergenerational wealth transmission in situations where the transferor has substantial assets or complex family affairs. Modern day private trusts are used to carry out this function in India. Public trusts, on the other hand, may be used to contribute property towards religious and charitable purposes. The first attempt to regulate the management and administration of trusts was made by the British Government in 1810 by passing a regulation, followed by many such regulations. Currently, the legislations governing trusts in India are among others The Indian Trusts Act, 1882, The Charitable and Religious Trusts Act, 1920, The Religious Endowments Act, 1863, The Charitable Endowments Act, 1890 and The Societies Registration Act, 1860. Reasons for Setting up a Trust  Providing for family and protecting, in particular, the interests of very young children and adults with special needs;  Attaching certain conditions to gifts;  Bypassing the probate process while ensuring succession from one generation to another;  Giving children the benefits of family wealth without losing control over key assets;  Creating a single relatively large pool of investment funds which has more scope to perform well than a series of smaller pools;  Creating a legal framework and a tax effective structure for the family assets which will last for a long time;  Protecting these assets against actual and potential creditors;  Allowing administrative, investment and recordkeeping functions and possibly also property management functions to be centralised &handled more efficiently and at a lower cost;  Managing tax risks that may arise on the devolution of the trust property; How to Create a Trust Four essential conditions are necessary to bring into being a valid trust  The person who creates a trust (settlor) should make an unequivocal declaration of an intention on his part to create a trust. In order to create a trust, the settlor must properly manifest his intention by an external expression of it (by written or spoken words or by conduct) as opposed to an undisclosed intention.  The settlor must clearly define and specify the purpose. Since the purpose has to be accomplished by a trustee, who may not always be the author himself, it is necessary that the purpose is clearly 503

declared so that the trustee can faithfully accomplish the author‘s purpose, for which the author has reposed confidence in the trustee.  The settlor must specify the beneficiaries. Where there is no transfer of ownership, there is no trust. The settlor gives up the ownership of the property thus resulting in transfer of legal ownership of the property to the trustee and transfer of beneficial ownership to the beneficiaries of the trust. The concept of ownership in the case of a trust is different under Indian and English Law. India does not recognize duality of ownership in the case of a trust, i.e. it recognizes only legal ownership and not equitable ownership as is provided for under English law which recognizes duality of ownership i.e. legal and equitable. Under Indian law, the trustee is both the legal and beneficial owner of trust property.  The settlor must transfer identifiable property under an irrevocable arrangement and totally divest himself of the ownership and the beneficial enjoyment of the income from the property. 4.6.1 Trust Structures for Tax Efficiency The Indian Law classifies trusts on the basis of their purpose, namely private purpose (Private Trust) or public purpose (Public Trust) and religious/charitable (Religious / Charitable Trust) Creating a private trust can be an efficient mode of planning one‘s Estate. Estate Planning by a Trust structure can be explained by the diagram 1 I. Private Trust A private trust is created for the benefit of specific individuals i.e., individuals who are defined and ascertained individuals or who within a definite time can be definitely ascertained. 504

A private trust does not work in perpetuity and essentially gets terminated at the expiry of purpose of the trust or happening of an event or at any rate on eighteen years after the death of the last transferee living at the time of the creation of the trust. Private trusts are governed by the Trusts Act. This Act is applicable to the whole of India except the State of Jammu and Kashmir and the Andaman and Nicobar Islands. That apart, the Trusts Act is not applicable to the following: (i) Waqf; (ii) Property of a Hindu Undivided Family; and (iii) Public or private religious and charitable endowments; A person can be a settlor of a private trust if he has attained majority (i.e., has completed 18 years of age or in case of a minor, for whom a guardian is appointed by the court or of whose property the superintendence has been assumed by the court of wards the age of majority is 21 years) and is of sound mind, and is not disqualified by any law. But a trust can also be created by or on behalf of a minor with the permission of a principal civil court of original jurisdiction. Apart from an individual, a company, firm, society or association of persons is also capable of creating a trust. A family trust set up to benefit members of a family is the most common purpose for a private trust. The purpose of the family trust is for the settlor to progressively transfer his assets to the trust, so that legally the settlor owns no assets himself, but through the trust, beneficiaries get the benefit of these assets. A family trust can be set up either while one is still alive (by a declaration of trust contained in a trust deed) or upon death, in terms of a will. The Foreign Exchange Management Act, 1999 (―FEMA‖) of India has granted general permission to a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such ‗Foreign Currency Assets‘ have been acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Such person may set up a trust in such jurisdiction or any other jurisdiction to which he could contribute the Foreign Currency Assets. However, a trust receiving foreign contribution in India would need approval under the Foreign Contributions Regulations Act 1976, which is administered by the Ministry of Home Affairs in India. However, such trust can only be a trust, the objects of which are dedicated to cultural, economic, educational, religious or social purposes. Family (private) trusts may be set up either inter vivos i.e. during a person‘s lifetime or under a will i.e. testamentary trust, either orally or under a written instrument, except where the subject matter of the trust is immovable property, the trust would need to be declared by a registered written instrument. 505

Private trusts may also be used as a collective pooling vehicles for individual retail investors. a) Mutual Funds All mutual funds in India are set up in the form of trusts which are registered under the Securities and Exchange Board of India (Mutual Fund) Regulations. Mutual Funds are portfolios of stock market shares and other financial instruments built with funds collected from usually small investors whose primary concern is security of investment. These funds are run by government trusts, banks, and now private financial institutions as well. These funds can be open–ended or closed–ended. b) REITS (Real Estate Investment Trusts) A REIT is an entity which pools in money and invests in real estate assets. It provides a similar structure for investment in real estate as mutual funds provide for investment in stocks. A REIT can be publicly or privately held and is generally listed on a stock exchange. Assets of such a trust are managed by a fund manager. Further to the 2014 Budget, REITs are eligible for a pass-through status for taxation purposes (although this is a partial pass through). The consequence is that long term capital gains on sale of units as well as dividends received by the REIT and distributed to the investor shall be tax exempt. Interest income received by the REIT is tax exempt and foreign investors shall be subject to a low withholding tax of 5% on interest payouts. II. Public Charitable or Religious Trust A public trust is created for the benefit of an uncertain and fluctuating body of persons who cannot be ascertained at any point of time, for instance; the public at large or a section of the public following a particular religion, profession or faith. A public trust is normally permanent or at least indefinite in duration. As regards public trusts, there is no Central Act governing formation and administration of such trusts. But various states such as Bihar, Maharashtra, Madhya Pradesh, Orissa, etc., have enacted their own legislations prescribing conditions and procedures for the administration of public trusts. These Acts are more or less similar in nature though there may be certain variations. A public trust is generally a non-profit venture with charitable purposes and in such cases it is also referred to as the charitable trust. A trust created for religious purposes is termed a religious trust and it can be either a private or a public trust. A religious endowment made via trustees to a specified person is a private trust and the one to the general public or a section thereof is a public trust. The creation of religious charitable trusts is governed by relevant personal laws. The administration of these religious trusts can either be left to the trustees as per the dictates of the personal law or it can be regulated to a greater or lesser degree by statute such as the Maharashtra Public Trusts Act, 1950. In case of Hindus, the personal law provisions 506

regulating religious trusts have not been codified and are found dispersed in various religious books. There are four essential requirements for creating a valid religious or charitable trust under Hindu Law, which are as follows: i. valid religious or charitable purpose of the trust as per the norms of Hindu Law; ii. capability of the author of the trust to create such a trust; iii. the purpose and property of the trust must be indicated with sufficient precision; and iv. the trust must not violate any law of the country. Taxation of Trusts Income tax in India is governed by the Income Tax Act, 1961 (‗ITA‘), which lays down provisions with respect to chargeability to tax, determination of residence, computation of income, transfer pricing, etc. Residents are ordinarily subjected to tax on their worldwide income, whereas non-residents are taxed only on their Indian source income, i.e. income that accrues or arises to them in India. (i) Private Trust For the purpose of Indian taxes, a private trust is not regarded as a separate taxable unit. However, a trustee under the ITA acquires the status of the beneficiaries and is taxed in the role of the beneficiaries in a representative capacity. The provisions relating to taxation of trusts are laid out in Section 161-164 of the ITA. a) Irrevocable Determinate (Specific) Trust In such a trust, the beneficiaries are identifiable and their shares are determinate, a trustee can be assessed as a representative assessee and tax is levied and recovered from him in a like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him (i.e. the beneficiary). The tax authorities can alternatively raise an assessment on the beneficiaries directly, but in no case can tax be collected twice. While the income tax officer is free to levy tax either on the beneficiary or on a trustee in his capacity as representative assessee, the taxation in the hands of a trustee must be in the same manner and to the same extent that it would have been levied on the beneficiary, i.e., in the role of the beneficiaries. Thus, in a case where a trustee is assessed as a representative assessee, he would generally be able to avail all the benefits / deductions, etc. available to the beneficiary, with respect to that beneficiary‘s share of income. There is no further tax in the hands of the beneficiary on the distribution of income from a trust. b) Irrevocable Discretionary Trust A trust is regarded as a discretionary trust when a trustee has the power to distribute the income of a trust at its discretion amongst the set of beneficiaries. 507

In case of an onshore discretionary trust, with both resident and non-resident beneficiaries, a trustee will be regarded as the representative assessee of the beneficiaries and subject to tax at the maximum marginal rate i.e. 30%. In case of an offshore discretionary trust with both resident and non-resident beneficiaries, a trustee hould not be subject to Indian taxes or reporting obligations. However, if all the beneficiaries of such discretionary trust are Indian residents, then a trustee may be regarded as the representative assessee of the beneficiaries and can be subject to Indian taxes (on behalf of the beneficiaries) at the maximum marginal rate i.e. 30%. In this regard, an offshore charitable organisation can also be one of the beneficiaries to the offshore discretionary trust. As a matter of precaution, it would be preferable if the charitable organisations selected have not originated in India, have not been created to benefit Indian residents as a compulsory class and are applied towards a cause which is not specific to India. c) Revocable Trust Under the ITA, a transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor or it in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. Thus, where a settlement is made in a manner that a settlor is entitled to recover the contributions over a specified period, and is entitled to the income from the contributions, the trust is disregarded for the purposes of tax, and the income thereof taxed as though it had directly arisen to the settlor. Alternatively, even in a situation where a settlor has the power to re-assume power over the assets of a trust, the trust is disregarded and the income is taxed in the hands of the settlor. In the case of a revocable trust, income shall be chargeable to tax only in the hands of the settlor. If there are joint settlors to a revocable trust, the income of the trust will be taxed in the hands of each settlor to the extent of assets settled by them in the trust. This arrangement is not specifically required to be recorded in a trust deed. (ii) Public Trusts Subject to conditions, income from property held in trust or other legal obligation, for a religious or charitable purpose is tax exempt. ―Charitable purpose‖ as defined in S. 2(15) of the Income Tax Act includes relief of the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. However, when the aggregate value of receipts is more than INR 25 lakhs or more, the advancement of any other object of general public utility is not regarded as a 508

charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. Also, income of a revocable charitable or religious trust is chargeable to income tax in the hands of the settlor. Income derived by such a trust from voluntary contributions not being contributions made with a specific direction that it shall form part of the corpus of the trust or institution, is also tax exempt. The above mentioned exemptions are allowed only to the trusts which are registered in accordance with the provisions given in the ITA. The ITA also provides certain grounds on which the exemption to the income of such trusts is not allowed, for example, income from property held under a trust is for private religious purposes and not for the benefit of the public; or in the case of a charitable trust established after the commencement of the ITA, any income thereof if the trust is established for the benefit of any particular religious community or caste, etc. Further, subject to the fulfillment of certain conditions, any income of an institution constituted as a public charitable trust or registered under the Societies Registration Act, 1860 or under any law corresponding to the ITA and existing solely for the development of khadi or village industries or both, and not for the purposes of profit, to the extent such income is attributable to the business of production, sale, or marketing, of khadi or products of village industries, is not included in the total income of the trust. 4.6.2 Trust Structure to Align Strategic Objectives of the Settlor A trust can be set up either as: (i) Revocable: A trust that can be revoked (cancelled) by its settlor at any time during this life; (ii) Irrevocable: A trust will not come to an end until the term / purpose of the trust has been fulfilled; (iii) Discretionary: An arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent; (iv) Determinate: The entitlement of the beneficiaries is fixed by the settlor at the time of settlement or by way of a formula, the trustees having little or no discretion; or (v) Combination Trusts namely: of (i) - (iii)/(iv), (ii)- (iii)/(iv) A settlor may set up a revocable trust in order to exercise control over the assets and distributions of income and capital from the trust or an irrevocable discretionary trust in order to safeguard the assets against the claims of the creditors (actual and/or potential) of the settlor and/or the beneficiaries or multiple trusts to achieve various objectives. Indian trust law does not lay down restrictions with respect to a trust being set up with hybrid characteristics i.e. 509

having both, determinate and discretionary features for different classes of assets in the same trust or provide a specific format for the trust instrument. This flexibility allows a trust structure to be devised to suit the specific needs and requirements of the settlor and eliminates the need to create multiple trusts. Unlike most common law jurisdictions, Indian trust law does not recognize duality of ownership viz: legal and equitable. The trustee is the legal and beneficial owner of the trust property and the beneficiaries merely have a beneficial interest in such property. Private trusts in India (of a non-religious character) set up for the maintenance and support of the settlor‘s family members, are also subject to the rule against perpetuity. This rule prescribes that a trust can be in existence for a period of 18 years from the date of death of the last existing beneficiary. In India, trusts are also being increasingly used for succession planning and asset distribution, since they are considered to be one of the preferred modes of managing and passing on the family assets in the most efficient manner. Creating a legal framework for the family assets, bypassing probate process, safe-guarding interests of family members including maintenance of members with special needs/disabilities, attaching conditions to gifts (be it on attaining a particular age or fulfillment of the settlor‘s wishes) and avoiding family disputes over the property being some of the prime considerations while designing a trust. With large business houses in India being family-owned and controlled, a trust can serve as a bankruptcy remote protecting assets from creditor‘s (actual and potential) claims, provided the assets have been transferred two years prior to the bankruptcy being declared. With managing and advisory committees being set up under the directions of the settlor, to monitor and advise the trustees on application and management of the trust assets, Indian trusts are being used as tools to bring a relatively large pool of assets/ investments under one umbrella, which has more scope to perform well than a series of smaller pools. Exploiting offshore business opportunities, acquisition of interests and cross-border movement of family members have also triggered the need to create trust and like structures viz: onshore, offshore or hybrid. 4.6.3 Trust Perpetuities All kinds of trusts whether pubic or private are subject to more or less the same governing principles. Duties and disabilities of trustees are the same. There are, however, certain points of difference between public and private trusts. Rules against perpetuity, which are applicable to all private trusts, are considerably modified in reference to public trusts. Secondly, where the object of a public trusts becomes obsolete because people are no longer in need of that kind of charity, the objects of the trust may be varied so as so include things which are currently of public utility. Thirdly, the enforcement of public trusts is in the hands of public bodies, like the Attorney-General. Fourthly, for the encouragement of public welfare and charitable services by private organisations, benefits of tax concessions have been extended to such organizations. Lastly, a private trust may fail for uncertainty of object, but a public trust need not be the victim of such uncertainty. In such cases the author of the trust is only interested in public service. The type of service does not matter much to him. He can leave that even at the discretion of trustees. 510

So long as charity of one kind or the other can be carried on, the trust can go on. The court or other relevant authority can order a scheme of dedication. It is also possible to have trusts for unborn children, although the trusts must vest within the applicable perpetuity period Every private trust must have a designated beneficiary or one so described that his identity can be learned when the trust is created or within the time limit of the Rule of Perpetuity, which is usually measured by the life of a person alive or conceived at the time the trust is created. This rule varies from state to state, is designed to prevent a person from tying up property in a trust for an unlimited number of years. A person or corporation legally capable of taking and holding legal title to property can be a beneficiary of a trust. Partnerships and unincorporated associations can also be beneficiaries. Unless restricted by law, aliens can also be beneficiaries. What is the ”Rule Against Perpetuity”? Rule Against Perpetuity: The rule against perpetuity, simply, means that all devices shall be void which tend to create a perpetuity or place property, forever, out of the reach of the exercise of the power of alienation. So long as the transferees are living persons, any number of successive estates can be created. A transfer can be made to ‖A‖ for life, to ‖B‖ for life, and then to ‖C‖ for life, and so on, provided ‖A‖, ‖B‖ and ‖C‖ are all living at the date of the transfer. But, if the ultimate beneficiary is someone not in existence at the date of the transfer, Section 13 requires that the whole residue of the estate should be transferred to him. If he is not born before the termination of the last prior estate, the transfer to him fails according to Section 14. If he is born before the termination of the last prior estate, he takes the vested interest at birth and possession, immediately on the termination of the last prior estate. However, the rule against perpetuities does not require that the vesting shall take place at the birth of the ultimate beneficiary. What it does require is that the vesting cannot be delayed, in any case, beyond his reaching the age of 18 years. The result of the rule against perpetuity is that the minority of the ultimate beneficiary is the latest period at which an estate can be made to vest Illustration: 1) A fund is bequeathed to ‖A‖ for his life and after his death to ‖B‖ for his life; and after B‘s death to such of the sons of ‖B‖ as shall attain the age of 25. ‖A‖ and ‖B‖ survive the testator. Here the son of B who shall first attain the age of 25 may be a son born after the death of the testator; such may not attain 25 until more than 18 years have elapsed from the death of the longer liver of A and B; and the vesting of the fund may, thus, be delayed beyond the lifetime of A and B and the minority of the sons of B. The bequest after B‖s death is void. 511

Transfer in perpetuity for the benefit of the public: The restriction in the Section does not apply in the case of a transfer of property for the benefit of the public in the advancement of religion, knowledge, commerce, health, safety or any other object for the benefit of mankind. 4.6.4 Trust as Pass-through Entity A trust is a pass-through entity and its taxability is determined by the way in which the trust is organised. These are fiscally transparent entities whereby the obligation to pay tax is on the trustee (as a representative assessee). Though the income generated through the trust is taxable in the hands of the trustee, the burden of tax is effectively borne by beneficiaries to the trust A trust is a pass-through entity for income-tax purpose. As trust property is held by trustees for the beneficiary, the tax burden is effectively borne by the beneficiary. However, for convenience, the obligation to pay tax is on the trustees in the representative capacity. Alternatively, the trust income may be directly assessed in the hands of beneficiaries. The tax rate depends mainly on the type of the trust, income received and legal status of the beneficiary. In the case of a specific trust, if the trust income includes profits from business, the whole income would be taxable at maximum marginal rate (MMR) or in the manner in which the beneficiaries would have been taxed. For a discretionary trust, the trustees are taxed at MMR. Exempt income such as dividend is not taxable in the hands of the trust. In the case of a trust liable to tax at MMR and with income subject to concessional rates, there are contrary views on whether such income should be taxed at MMR or at concessional rate. As the trustee (except in his/her capacity as beneficiary) has no interest in the trust property and holds it for the beneficiaries, there is no tax incidence on the distribution of assets to the beneficiaries. Similarly, there is no tax on the distribution of regular income to beneficiaries. However, in order to minimise litigation related to the distribution of current year income taxed both in the hands of trustees and beneficiaries, all distribution should come from the corpus of the trust, wherein the current year income is not distributed but retained to form the corpus for distribution in subsequent years. 4.6.5 Lower Taxes on Future Earnings and Capital Gains Considering the tax implications, the best time to set up a trust is probably ―as soon as possible‖. There are quite a few advantages that can be availed of if the timing of setting up the trust and transferring the property. For eg.: in case of existing family assets (i) future earnings on those assets could be subject to lower tax; (ii) future capital gains tax on those assets could also be incurred at a lower tax rate; 512

(iii) stamp duty and capital gains tax in respect of the assets being transferred into the family trust at its commencement are likely to be less than later on when these assets might have considerably increased in value; and (iv) in practice, the smaller number of individual holdings likely to be involved in such an early transfer would also be an administrative advantage. As managing a trust involves a learning curve, it is probably better to start off with a small operation than with a large one. 4.6.6 Direct Acquisition of Assets - Benefit of Stamp Duty and Capital Gains Tax Assets acquired directly by a trust do not involve the stamp duty and capital gains tax liabilities applying to assets which are acquired by another party in the first instance and then transferred to the trust only later on. Further, if the tax rules affecting trusts are ever changed by the authorities, then existing trusts may be able to keep some privileges not available to new trusts set up, or to assets acquired, after the date of the change. Also, assets transferred out of an individual‘s name well before any bankruptcy occurs cannot be clawed back by creditors. Transfer of property by the settlor to the trust is not eligible to capital gains where the trust is irrevocable. However, this exemption is not available in case of a revocable transfer in which case clubbing of income may also become applicable and, in case of subsequent transfer of asset by the trust, the cost base may relate to the original cost base of the settlor, thereby resulting in a larger capital gains liability. Apart from this, employing trust structure at an early stage could result in tax savings on future earnings on property and also a lower capital gains tax, if applicable, on transfer of property to the trust, considering possible enhancement in property value. Further, an early settlement can also benefit in the sense that in case of a revocable trust, any further acquisition of assets can be made through trust itself thereby avoiding any possible capital gains tax upon subsequent transfer by the settlor to the trust. Option to settle business properties in a trust can be explored. In a multi-tier holding structure, the option of settling the ultimate holding into a private trust can be analysed so as to avail multifarious benefits offered by a trust structure. Stamp Duty of Trust Stamp duty becomes payable on the settled property in a trust deed. The Trust Deed is required to be compulsorily registered if the Settlor has transferred any immovable property to the Trust. Under most State laws, public/ charitable/ religious trusts are required to be registered. 513

4.6.7 Distributable Net Income Distributable net income (DNI) is a calculation used to allocate income between a trust and its beneficiaries. DNI is used to restrict the amount of the deduction allowable to a trust for distributions to a beneficiary. Beneficiaries are taxed only to the extent of DNI. Distributions made in excess of DNI are treated as tax−free distributions of principal. Here is the DNI calculation:  Total trust income (excluding tax−exempt income)  Less deductible expenses  Plus tax−exempt interest reduced by expenses not allowed in the computation of taxable income and the portion used to make charitable contributions  Plus capital gains if: 1. Gain is allocated to accounting income 2. Gain allocated to principal is required to be distributed or is consistently and repeatedly distributed by the trustee 3. Gain allocated to principal is paid or set aside for charity  Less capital losses if they enter the calculation of any capital gain distributed or required to be distributed For e.g. Trust has let out annual rental income from house property of ₹8,00,000, municipal taxes paid are ₹60,000. Calculate the net income from trust. Rental Income 800000 Municipal Taxes 60000 Annual Value 740000 Less: Allowable deduction u/s 24 (30% of annual value) 222000 Net Taxable Income from Trust 518000 514

SUMMARY • Estate planning refers to the organized approach to managing the accumulated assets of a person in the interest of the intended beneficiaries. • The term ‗estate‘ includes all assets and liabilities belonging to a person at the time of their death. • If person dies without making a will, he is said to have died ―intestate‖ and in such case his property will be inherited by his heirs in accordance with laws of succession applicable to him. • Different personal laws apply as follows: i. The Hindu Succession Act, 1956 (Applicable to Hindus, Buddhists, Jains and Sikhs) ii. Indian Succession Act, 1925 (Applicable to Christians, Jews and Parsis) iii. Mohammedan Personal laws (Governing inheritance of Muslims) ] The prolonged dispute, legal battles and costs can be avoided, if intestate death is prevented through timely estate planning. • Tools for estate planning include Wills, Trusts, Power of Attorney, Insurance, Gift, Power of Attorney and Transfer of property and partition. • ―Will‖ is defined in Section 2(h) of the Indian Succession Act 1925 to mean the ―legal declaration of the intention of the testator with respect to his property, which he desires to be carried into effect after his death.‖ The person making the will is the testator, and his rights extend to what are legally his own. The will comes into effect only after the death of the testator. The person who is named in a will to receive a portion of the deceased person‘s estate is known as a legatee. The person named in the will to administer the estate of the deceased person is termed as an Executor • Probate is defined in section 2 (f) of the Indian Succession Act to mean the copy of a will certified under the seal of a court or competent jurisdiction. A probate certifies that a particular will was proved on a certain date and is given attaching copy of the will of which probate has been granted. • A gift is a transfer of movable or immovable property made voluntarily and without consideration. The person making the gift is called donor; the person receiving a gift is called the donee. • A Power of Attorney (POA) is an instrument by which a person may formally authorize another person to act on his behalf or as his agent on all matter or for a specific transaction or particular types of transactions. There are two parties to a POA – Donor and the Donee. Both the parties to the POA should have attained majority, be of sound mind and competent to contract. Types of POA: (i) General POA: Enables the donee to act on all matters for the donor. The general list of matters covered in this category includes management of bank accounts, sale of property, attending dealings in court, etc. 515

(ii) Specific POA: Restricts the donee‘s authority to act only on a specific transaction, e.g. POA granted to a person to deal with the renting out of an apartment only. • “A trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owners, or declared and accepted by him, for the benefit of another or of another and the owner. {Section 3 of Indian Trust Act, 1882}. Based on the constitution, trusts can be classified as public trust or private trust. Private trusts are increasingly used as a tool for estate planning. • A trust can be set up either as: (i) Revocable: A trust that can be revoked (cancelled) by its settlor at any time during this life; (ii) Irrevocable: A trust will not come to an end until the term / purpose of the trust has been fulfilled; (iii) Discretionary: An arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent; (iv) Determinate: The entitlement of the beneficiaries is fixed by the settlor at the time of settlement or by way of a formula, the trustees having little or no discretion; or (v) Combination Trusts namely: of (i) - (iii)/(iv), (ii)- (iii)/(iv) 516

SELF ASSESSMENT QUESTIONS 1. Mukul has not prepared his Will till today. He wants to know in case he dies intestate, as per prevailing Hindu Succession law in India, which of his existing family member/s can be denied share of his estate in case of a dispute. a) His father. b) His mother and wife. c) His daughter if she is married. d) All members have a share on his property on an equitable basis. 1. A person is said to be the ________________ of another if the two of them are related by blood or adoption, but not entirely through males. a) Agnate b) Cognate c) Escheat d) Testarix 2. Buddhists are covered by a) Indian Succession Act, 1925 b) Shariat c) Hindu Succession Act, 1956 d) Buddhist Succession Act, 1985 3. A will certified by the court is called __________________________. a. Codicil b. Probate c. Testate d. None of the above 4. Your client is unsure of the meaning of the term ‗codicil‘. A codicil is: a) A document use to make an alteration to a will b) A gift of land or real estate in a will c) A term used to cover grants of probate to the legal personal representative d) The statement made at the end of a will that it has been duly attested 517

5. What is the main benefit of estate planning? a) Peace of mind b) To avoid probate c) To ensure property passes to intended person d) To plan health care treatment 6. What are parties to Power of Attorney called? (1) a) Donor and Donee b) Debtor and Receiver c) Client and Attorney d) Testator and Executor 7. Harish‘s father has given him general power of attorney. What does that mean? (2) a) He has disinherited Harish, but Harish has the right to decide who will inherit his father.s estate b) He has given Harish the immediate right to make decisions in all matters and take action on his behalf c) He has given Harish the right to appoint himself as the sole beneficiary of estate d) He has given Harish the right to make decision in all matters and take action on his behalf should he become incompetent 8. Estate Planning typically attempts to eliminate uncertainties over the administration of a _______________ and maximize the value of the estate by reducing taxes and other expenses. a) Bank Account b) Probate c) Demat Account d) Property 9. Your client, a businessman has a house worth ₹4.2 crore (jointly owned by his wife) and a farm house worth ₹85 lakh (owned by him). His business is worth ₹10 crore as per last balance sheet. He has two other partners in the business having stakes of 24% each. He has two cars purchased at ₹40 lakh and ₹20 lakh, both cars are provided by his company. The cars have depreciated/market value at ₹30 lakh and ₹8 lakh, respectively. His joint Demat account, wife being primary holder, has stocks worth ₹1.65 crore. The business has taken Keyman‟s insurance on his life of value ₹1.5 crore. He has himself insured his life for an assured sum of ₹1.5 crore. You evaluate your client's estate in case of any exigency with his life as _____. 518

a) ₹8,41,00,000 b) ₹1,26,100,000 c) ₹85,300,000 d) ₹8,71,00,000 10. As per the Hindu Succession Act, 1956, the following person is not considered as a Class-I heir of the person who dies intestate: (a) Father (b) Mother (c) Son of a pre-deceased son (d) Widow of a pre-deceased son 11. Which one of the following statement is not true about a Will? (a) A Will comes into effect after the testator dies (b) A certified copy of Will is called probate (c) A codicil can be issued to make amendments in the Will made by the testator (d) A Will can be altered after the death of testator 12. Which of the following is not a valid provision for a trust deed to get income tax exemptions? a) Benefits of trust are open to all, irrespective of caste, creed, religion and sex. b) It should be irrevocable and activities of the trust will not be carried out outside of India. c) Some of the proceeds of the trust are to be invested in government securities. d) No portion of the income and the fund will be utilized for payment to the trustees/members by way of profit, interest, dividends, etc. 13. Your client Anamika is divorced and has got the custody of her 2 minor children. You have advised Anamika to do estate planning. According to you, what should be the most preferred way for her estate planning? a) She should devolve all of her personal properties to her personal HUF. b) She should prepare a Will naming her children as the sole beneficiaries in the same. c) She should prepare a will naming her children as the sole beneficiaries as well as designate one or more guardians with their prior consent. d) She should transfer all of her existing properties in the names of her children and nominate her both children equally in all her legal documents. 519

14. Dinesh has many clients who repose faith in him for his skills, knowledge and ethical dealing. One of his clients, Mrs. Usha Mehta who is 70 years of age, has a will in which she leaves her entire estate to her two children, who live separately and never take care of her in any way whatsoever. Dinesh helped her a lot in her medical care during her last days. Before she died, Mrs. Usha Mehta had changed her will to add a ₹10 lakh gift to Dinesh. She hired a different attorney to add the codicil to the will. Upon Mrs. Usha Mehta‘s death her children denied to give the gift to Dinesh stating it was invalid because of undue influence. In the light of the facts cited above which of the following statements is correct? a) The gift to Dinesh is invalid because he used undue influence to induce Mrs. Usha Mehta to change her will. b) The gift to Dinesh is valid because there was no undue influence, a different attorney added codicil, and her act of adding codicil was with her free consent. c) The gift to Dinesh is invalid because he knew Mrs. Usha Mehta was on her last days so he set the circumstances and obtained the gift. d) The gift to Dinesh is valid because the gift was with her consent though he took the advantage of her loneliness and induced her make a favor. 520

ANSWERS TO SELF ASSESSMENT QUESTIONS 1. (A) His Father 2. (B) Cognate 3. (A) Hindu Succession Act, 1956 4. (B) Probate 5. (A) document use to make an alteration to a will 6. (C) To ensure property passes to intended person 7. (A) Donor and Donee 8. (B) He has given Harish the immediate right to make decisions in all matters and take action on his behalf 9. (B) Probate 10. (A) ₹8,41,00,000 11. (A) Father 12. (D) Will can be altered after the death of testator 13. (C) Some of the proceeds of the trust are to be invested in government securities. 14. (C) She should prepare a will naming her children as the sole beneficiaries as well as designate one or more guardians with their prior consent. 15. (B) The gift to Dinesh is valid because there was no undue influence, a different attorney added codicil, and her act of adding codicil was with her free consent. 521

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SECTION-V VEHICLE OF ESTATE PLANNING-FEATURES SUB-SECTIONS 5.1 Intro-Family Business and Property Transfer 5.2 Trusts-Characteristics & Regulations 523

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Sub-Section - 5.1 Intra Family Business and Property Transfer 5.1.1 Estate Planning for Family Business The Indian business environment is largely driven by the family-run businesses, public sector enterprises and professionally-managed companies. Majority of businesses today are family- run but most Indian businesses families do not have succession plans in place for personal and/or business wealth. Estate planning law in India is complex and multi-layered as it requires simultaneous consideration of various laws including community specific succession laws (which treat Hindus, Muslims, Christians and other religions differently for the purposes of testamentary as well as intestate succession), currency control regulations (which impose restrictions on the manner in which non-residents can own/transfer Indian property or Indian residents can plan their offshore wealth) and tax laws (which are constantly changing and broadening in scope). These, combined with conflict of law principles applicable to family members dispersed across countries, makes the structuring exercise complex and challenging. In the light of these complexities in estate planning, building governance models for management of family businesses and wealth of high net-worth individuals assumes great importance. Some of the estate planning objectives are discussed below:  Business Succession Planning  Control: Retaining family control over business, managing overlap between family and business  Governance: Effective governance of family and business holdings  Value: Maintaining value of the business and individual shares of family members  Conflict: Exit options and dispute resolution  Succession Planning for the Family  Balancing personal wishes with bequeathals required by community specific succession laws  Maintenance obligations in a joint family  Provision for and protection of dependents  Religious and charitable endowments  Increasing Global Aspirations  Governance model for multi-jurisdiction business  Achieving tax efficiency and flexibility from an Indian regulatory perspective with beneficiaries and assets across jurisdictions 525

5.1.2 Forms of Family Business Ownership A family business is a commercial organization in which decision-making is influenced by multiple generations of a family—related by blood or marriage—who are closely identified with the firm through leadership or ownership. Owner-manager entrepreneurial firms are not considered to be family businesses because they lack the multigenerational dimension and family influence that create the unique dynamics and relationships of family businesses. Many of the largest publicly listed firms are family-owned. A firm is said to be family-owned if a person is the controlling shareholder; that is, a person (rather than a state, corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the voting rights and the highest percentage of voting rights in comparison to other shareholders. Sole Proprietorship The term ‗sole‘ means single and ‗proprietorship‘ means ‗ownership‘. So, only one person is the owner of the business organisation. This means, that a form of business organization in which a single individual owns and manages the business, takes the profits and bears the losses, is known as sole proprietorship form of business organisation. Joint Hindu Family Business The Joint Hindu Family (JHF) business is a form of business organisation run by Hindu Undivided Family (HUF), where the family members of three successive generations own the business jointly. The head of the family known as Karta manages the business. The other members are called co-parceners and all of them have equal ownership right over the properties of the business. This form of organisation exists under Hindu law and is governed by the law of succession. The joint Hindu family form is a form of business organisation in which the family possesses some inherited property. Partnership A partnership is defined as a relation between two or more persons who have agreed to share the profits of a business conducted by them or any of them, who is acting for the others. The owners of a partnership business are individually known as partners and collectively as a firm or partnership firm. Partnership form of business organisation in India is governed by the Indian Partnership Act, 1932 which defines partnership as ―the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all‖. Private Limited Company A private limited company is a business company owned either by non-governmental organizations or by a relatively small number of shareholders or company members which does not offer or trade its company stock (shares) to the general public on the stock market exchanges, but rather the company's stock is offered, owned and traded or exchanged privately. It is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members. A Public Company is a company whose ownership is dispersed among the general public in many shares of stock which are freely traded on a stock exchange or in over the counter markets. 526

Limited Liability Partnership (LLP) is a new corporate structure that combines the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. 5.1.3 Calculating the Value of the Family Business There are a number of instances when you may need to determine the market value of a business. Certainly, buying and selling a business is the most common reason. Estate planning, reorganization, or verification of your worth for lenders or investors are other reasons. Valuing a company is hardly a precise science and can vary depending on the type of business and the reason for coming up with a valuation. There are a wide range of factors that go into the process -- from the book value to a host of tangible and intangible elements. In general, the value of the business will rely on an analysis of the company's cash flow. In other words, its ability to generate consistent profits will ultimately determine its worth in the marketplace. Here are some of the common methods used to come up with a value. Asset Valuation Asset valuation is used when a company is asset-intensive. Retail businesses and manufacturing companies fall into this category. This process takes into account the following figures, the sum of which determines the market value:  Fair market value of fixed assets and equipment (FMV/FA) - This is the price you would pay on the open market to purchase the assets or equipment.  Leasehold improvements (LI) - These are the changes to the physical property that would be considered part of the property if you were to sell it or not renew a lease.  Owner benefit (OB) - This is the seller's discretionary cash for one year; you can get this from the adjusted income statement.  Inventory (I) - Wholesale value of inventory, including raw materials, work-in-progress, and finished goods or products. Capitalization of Income Valuation This method places no value on fixed assets such as equipment, and takes into account a greater number of intangibles. This valuation method is best used for non-asset intensive businesses like service companies. Owner Benefit Valuation This formula focuses on the seller's discretionary cash flow and is used most often for valuing businesses whose value comes from their ability to generate cash flow and profit. It uses a fairly simple formula -- you multiply the owner benefit times 2.2727 to get the market value. The multiplier takes into account standard figures such as a 10% return on investment, a living wage equal to 30% of owner benefit, and debt service of 25%. 527

Multiplier or Market Valuation This approach finds the value of a business by using an \"industry average\" sales figure as a multiplier. This industry average number is based on what comparable businesses have sold for recently. As a result, an industry-specific formula is devised, usually based on a multiple of gross sales. 5.1.4. Transfer of Business and Inter-generation Wealth Transfer There are many estate planning tools you can use to transfer your business. Selecting the right one will depend on whether you plan to retire from the business or keep it until you die. Preservation of wealth is a challenge, especially during intergenerational shifts. There is therefore a need for systematic estate and wealth planning to effectively preserve and transfer wealth and business assets, irrespective of whether the wealth has been created by ‗first- generation‘ individuals or through family inheritance. Individuals and family businesses typically have three major objectives:  personal/family wealth and estate planning: this requires balancing personal wishes, providing for dependents, fulfilling joint family obligations and providing for philanthropy or other endowments with statutory requirements for succession;  business succession planning: balancing the need for retaining family control over the business (including the value of intangibles like brands and goodwill) with the requirements of the family and the business, effective governance and regulatory compliance; and  optimising tax liability. In India, wealth and estate planning presents unique challenges because it is a pluralistic society comprising of multiple religions, as well as harbouring a legacy of colonial ties to Portugal, France and Britain. Estate and succession rights in India are governed by personal laws which are tied to the religion of the individual. Personal laws also have their own restraints with regard to gifts, bequeathals and intestate succession. This poses a challenge while determining the best structures for wealth and estate planning. Estate and succession rights are governed by personal laws which are different for different individuals. That personal laws are either wholly codified (that is, enacted into statutory law), partly codified or customary has resulted in them being complex and uncertain in some respects. For example, succession for Hindus is governed by The Hindu Succession Act 1956. Muslims (both Shia and Sunni) are governed by Islamic personal laws. People following all other religions are under the purview of The Indian Succession Act 1925, which governs testate succession and creation of wills. Wealth and estate planning is therefore dependent on the religion of the individual whose estate is to be disposed of and as such, can prove to be quite a complex process. One of the biggest drawbacks in India is that limited structuring vehicles are available. 528

Private trusts have become popular due to their flexibility, and foreign trusts are also recognised in India. Unlike other jurisdictions, Indian laws do not provide any real tax benefits to trusts, unless the trust is established for a charitable purpose. Foundations and other asset-holding vehicles such as life insurance policies are not recognised in India, and the courts have set few precedents on the treatment of offshore foundations for resident Indian beneficiaries. Foreign hybrid entities such as limited liability corporations or S corporations (popular in the US) are not recognised in India and any holding of assets in or through such structures may not attract the same pass-through treatment that they might have ordinarily enjoyed. Similarly, a Hindu undivided family (HUF) structure is recognised in India but may be treated differently in other jurisdictions. The difference in structures, their characterisation and recognition affects the regulatory and tax benefits available to a particular structure in the Indian context. As there is no universal or uniform approach to business succession planning, numerous factors must be considered including practical and commercial aspects of the business concerned and circumstances that are unique to an entity. An effective succession strategy balances and harmonizes the interests of all stakeholders. Unfortunately, such efforts are often ignored or improperly executed. The main issues can be broadly categorized under three heads – ownership and passing on of business to second/third generation; takeover of management responsibilities; and Tax planning. As far as succession planning is involved, family-owned businesses face unique challenges. The important question that needs to be addressed in succession planning is the role of family members – what shall be the nature and extent of each member's ownership as well as width of responsibilities, and whether these individuals possess the requisite skills and acumen to run the business competently. Families who consider themselves unequipped/under-equipped to handle the day-to-day running of the business, may opt for external management for executive roles. However, key portfolios as well as managerial positions are generally retained within the family. It is desirable to involve family members from the very outset, to disentangle family feuds from succession planning and to recognize that ownership and management do not have to be necessarily combined. For instance, it may be viable in some cases that ownership of an entity be transferred equally to some family members, even though only one/few are given managerial responsibilities. As family members may have different long-term business aspirations for the entity, drawing up the succession plan in writing and involving them in open dialogue can help prevent misunderstanding leading to bitter disputes and breakdown of the family business. The aim is to ensure the continuity of family's welfare as well as wealth and business legacies. 529

The first step is determination of the most efficient mode of transfer of family stakes (whether wholly or in part) to the next generation. Succession of family-owned assets and interests in a business can be effected through various modes depending on the goals to be achieved and the challenges thrown due to sensitive family dynamics. If desirous of completing the transfer during one's lifetime, outright sale, making a gift and setting up a trust are some popular modes employed. On the other hand is the more traditional mode of bequeathing one's assets under a Will, where the transfer takes effect upon the testator's demise. The Will should clearly set out the specific bequest to each beneficiary and appointment of a competent executor. In the absence of a Will, succession of one's assets is governed by the rules of intestate succession under personal law – these rules may/may not be favorable from the point of view of competency and leadership ability of the beneficiaries. Family trusts are increasingly being used as a more secure vehicle to protect wealth, especially since one can be both Settlor and one of the beneficiaries at the same time. This mode also does away with the apprehension of long-drawn legal disputes on alleged authenticity/validity of Will. Creating a trust fund can act as a buffer against unforeseen contingencies and business failures. A trust can be revocable or irrevocable. Revocable trusts are ideal where the Settlor is desirous of retaining control over the income and/or assets of the trust. Such a trust can be dissolved once it has achieved its stated purpose. Revocable trusts are a popular mode employed for separating one's personal wealth from the business. On the other hand, if the objective is to permanently transfer one's assets in favour of legal heirs, an irrevocable trust is preferable. Other issues to keep in mind include objects of the trust, appointment, remuneration and removal of trustees, powers of trustees, trust property, etc. Keeping in view the complexities of the business and the family hierarchy as well as the goals proposed to be achieved by the family unit, an effective succession structure is required in place and necessary documentation to effect smooth transfer must be drawn up by legal experts. For example, conflict situations amongst family members and management can be prevented by executing a well-drafted Shareholders' Agreement. Tax implications must also be taken into account when framing a business succession strategy. The choice of a mode of transfer of family stakes is also affected by direct tax implications. Long-term and short-term capital gains tax implications as well as tax exemptions/reliefs that are available are some factors that must be considered. For instance, capital gains tax is leviable on transfer of assets by sale, but is not leviable when such transfer is by inheritance/upon death of the benefactor. Further, there are differential tax implications on what is being transferred – whether it is a transfer of shareholding or a transfer of business assets. Though the concept of estate duty/inheritance tax does not exist in India, beneficiaries in certain countries may be liable to pay the same on their inheritance. Further, stamp duty is payable on setting up of Trusts and by transfer of assets by gift or sale. In India, stamp duty rates applicable may also differ from State to State. Keeping such factors in mind, tax-efficient succession structures can significantly reduce tax liability, and the entity can invest its tax savings back into the business or in other avenues. 530

Inter-Generation Wealth Transfer It is important to choose the right vehicles for different asset classes during the process of transfer of wealth from one generation to another and also avoid 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. Will as a Tool for Transfer of Wealth 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 531

published. Thus the effective cost of executing a gift deed is marginal given the significant benefits it offers. 5.1.5. Forms of Property Transfer - Joint Tenancy and Tenancy-in-Common When two or more persons have common ownership of a property, it is termed as co- ownership. In case of a coparcenary, the male members and daughters have a common and equal interest in ancestral property. Any co-owner can transfer his own share in the property to a stranger or another co-owner, and the transferee steps into the shoes of the co-owner. The transferee therefore becomes a co-owner. 'Co-owner' refers to all the owners of a property. If a property is owned by more than one person, it is called joint ownership. One can have co- ownership changed into sole ownership through a partition. The term co-owner is wide enough to include all forms of ownership such as joint tenancy, tenancy-in - common, coparcenary, membership of Hindu Undivided Family etc. The very fact that some parties have certain shares in a property indicates that they are co-owners. Under the law, a co-owner is entitled to three essentials of ownership - right to possession, right to use and right to dispose off the property. Therefore, if a co-owner is deprived of his property, he has a right to be put back in possession. Such a coowner has an interest in every portion of the property and has a right irrespective of his quantity of share, to be in possession jointly with others. This is also called joint ownership. The Following are the Types of Co-ownerships: 1. Tenants in Common When the type of co-ownership is not specifically stated, by default a tenancy in common is likely to exist. Each tenant in common has a separate fractional interest in the entire property. Although each tenant in common has a separate interest in the property, each may possess and use the whole property. Tenants in common may hold unequal interest in the property but the interests held by each tenant in common is a fractional interest in the entire property For e.g. B owns a 25% interest in the property and A owns a 75% interest. Each tenant in common may freely transfer his/her interest in the property. Tenants in common do not have the right of survivorship. Therefore, upon the death of one tenant in common, his/her interest passes via will or through the laws of intestacy to another persons who will then become a tenant in common with the surviving co-owners. 2. Joint tenancy This entails the right of survivorship. On the death of one joint tenant, his interest passes on to the surviving joint tenants and not to the decedent's estate. Joint tenants hold a single unified interest in the entire property. Each joint tenant must have equal shares in the property. Each joint tenant may occupy the entire property subject only to the rights of the other joint tenants. Joint tenancy has several requirements that must be met in order to 532

be properly created. For a joint tenancy to be created, specific clauses must be included in the conveyance such as 'the grantees take the property jointly', 'as joint tenants', 'in joint tenancy', 'to them and their survivor' etc. The clauses in the instrument should show it was clearly intended to create an estate in joint tenancy. These four common legal requirements are necessary to create a joint tenancy: (i) Interests of the joint tenants must vest at the same time (ii) The joint tenants must have undivided interests in the whole property and not divided interests in separate parts (iii) The joint tenants must derive their interests from the same instrument (iv) Each joint tenant must have estates of the same type and same duration. All these four unities must exist. If one unity is missing at any time during the joint tenancy, the form of co-ownership automatically changes to a tenancy-in-common. A joint tenancy may be created by a Will or deed, but can never be created by intestacy because there has to be an instrument expressing joint tenancy. A joint tenancy is freely transferable. 5.1.6. Offshore Trusts and Regulatory Requirements An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction. Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring (or 'settling') assets (the 'trust property') on the trustees to manage for the benefit of a person, class or persons (the 'beneficiaries') or, occasionally, an abstract purpose. Regulatory Requirements The Indian Trusts Act, 1882 governs creation of all private trusts. The Foreign Exchange Management Act, 2000 (FEMA) permits the creation of offshore trusts by Indian individual residents under the Liberalised Remittance Scheme. In case of an Indian family which may have members with individual/joint holdings in various asset classes in India and abroad, viz., shares, immovable property, etc., apart from the Indian Succession and trust laws, various other regulatory and tax aspects will also be need to be taken into consideration.  The transfer of Indian shares will be governed by the Companies Act, 1956  In the event of shares being that of a listed entity, disclosures and compliances under the regulations as enacted by the securities regulatory authority, the Securities and Exchange Board of India (SEBI), will become applicable. These restrictions may range from the quantum of equity being transferred in a listed company, which may trigger off the 533

takeover code, to the extent of holding that a foreign transferee may acquire in the Indian company.  Foreign exchange regulatory issues {Foreign Exchange and Management Act (FEMA)} will come into play while effecting distribution/transfer of income and assets, India and offshore, to various family members, either under a will or through a trust.  While there is a restriction on ownership of immovable property in India by a foreigner, prior approval from the Reserve Bank of India (RBI) may have to be obtained while effecting transfer of capital assets held by Indian residents globally.  Further, limitations for remittances of assets received on account of legacies, bequests, gifts, settlement, etc. from an Indian resident also need to be looked into in this regard. Indian residents can set up Offshore trusts in order to carry out international investments. An Indian resident can set up an offshore trust by sending funds abroad under the Liberalised Remittance Scheme (LRS). Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 250,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Reserve Bank of India has the power to approve settlement or transfer of assets created abroad in case of an Offshore trust. Under the Scheme, resident individuals can acquire and hold shares or debt instruments or any other assets including property outside India, without prior approval of the Reserve Bank. Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the Scheme. Most trusts abroad being set up as discretionary trusts, the Indian resident beneficiaries in this regard would be taxed in India only to the extent of any distributions made by the trust to them. 5.1.7. “Asset Protection” and “Creditor Protection Period” An important estate planning goal for many individuals is to be sure that their money ultimately passes to their heirs, rather than their creditors. One common estate planning tool used for this purpose is the Trust. Trust vehicles, which were earlier essentially being used purely as testamentary vehicles for distribution of assets on the demise of the testator, are now being advantageously used for managing and investing assets, securing the interests of the beneficiaries by providing asset protection and ensuring distribution of income and assets as per the desires of the settlor. One type of trust that will protect the assets from the creditors is called an irrevocable trust. Once the trust creator establishes an irrevocable trust, he or she no longer legally owns the assets he or she used to fund it, and can no longer control how those assets are distributed. By creating an irrevocable trust, the trust maker surrenders the ability to later modify the trust instrument. Due to this change in ownership, a future creditor cannot satisfy a judgment against the assets held in irrevocable trust. This is true even where the trust creator establishes himself as the beneficiary of a discretionary trust. 534

A revocable living trust, on the other hand, does not protect your assets from your creditors. This is because a revocable living trust can, by its terms, be changed or terminated at any time. Due to these terms, the trust creator maintains ownership of his assets. Therefore, a creditor could force the owner of a revocable living trust to terminate the trust and surrender the assets. Importantly, a court can undo an individual‘s transfer to a trust if it finds that the transfer was made with the intention of defrauding creditors. These transfers are considered fraudulent, and in many cases carry significant legal penalties. This is why it is important to practice asset protection planning well before you even anticipate being the subject of any liability. Moreover, it is imperative that you work closely with experienced and credible legal counsel before engaging in any measure of asset protection. A trust can be created only for a lawful purpose. If the purpose of trust is such that if permitted it would defeat the provisions of any law then the purpose cannot be regarded as a lawful purpose. Every transfer of immovable property made with intent to defeat or delay creditors of the transferor is voidable at the option of the creditors. A period of two years for claims has been laid down in the Indian Insolvency Act. There are no provisions with respect to estranged spouses. There is no specific asset protection legislation in India. Section 4 of the Indian Trusts Act, 1882 states that a trust may be created for a lawful purpose only and any purpose which is forbidden by law or is fraudulent or involves injury to others or property of others is void where the trust property is acquired by fraud, such a trust is held to be unlawful and liable to be set aside. The concept of ‗illusory trusts‘ is recognized under Indian law. Illusory trusts are generally created with the motive of evading tax, or defrauding creditors. It has been held that it is the duty of the court to consider the motive of the settlor where the validity of a trust, particularly of a charitable trust, is challenged on the ground of any evil motive or that the trust was a mere guise to defeat the provisions of law. However, nothing shall impair the rights of a third party, which has acquired property from a trust in good faith and for consideration. If the trust is being set up with asset protection as its main objective, a jurisdiction with nil or reasonable limitation period would be most apt than one which may provide a high creditor protection period. Further, a trust created specifically for asset protection may not serve the purpose if the jurisdiction in which the trust has been set up does not recognize or adequately enforce asset protection laws against claims made by creditors. Creditor Protection Period With large business houses in India being family-owned and controlled, a trust can serve as a bankruptcy remote protecting assets from creditor‘s (actual and potential) claims, provided the assets have been transferred two years prior to the bankruptcy being declared. India has a creditor protection period of two years, on completion of which the assets transferred irrevocably to the trust cannot be attached in case of any proceedings against the settlor. 535

Sub-Section - 5.2 Trusts Characteristics & Regulation 5.2.1 The Indian Trust Act-1882 The Indian Trusts Act, 1882 is an Act to define and amend the law relating to private trusts and trustees. The Indian Trusts Act, 1882 defines a trust as being a legal obligation annexed to the ownership of property and arising out of a confidence reposed in the trustee by the settlor, for the benefit of the beneficiaries as identified by the settlor including / excluding the settlor himself. The person who reposes or declares the confidence is called the ―author of the trust‖; the person who accepts the confidence is called the ―trustee‖. The person for whose benefit the confidence is accepted is called the ―beneficiary‖ and the subject matter of the trust is called ―trust property‖; the ―beneficial interest‖ or ―interest‖ of the beneficiary is the right against the trustee as owner of the trust property; and the instrument, if any, by which the trust is declared is called the ―instrument of trust‖. The property in case of a trust is not transferred directly to the transferee but is put in control of the trustee for the benefit of the transferee. The trustee, depending upon the nature of the trust, either transfers the property or its earnings to the transferee at the happening of certain events or applies the property and /or its gains for the benefit of such a transferee. Lawful Purpose A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is (a) forbidden by law, or (b) is of such a nature that, if permitted, it would defeat the provisions of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of another, or (e) the court regards it as immoral or opposed to public policy. Every trust of which the purpose is unlawful is void. And where a trust is created for two purposes, of which one is lawful and the other unlawful, and the two purposes, cannot be separated, the whole trust is void. Explanation: In this section, the expression \"law\" includes, where the trust property is immovable and situate in a foreign country, the law of such country. Who may create trusts A trust may be created- a) by every person competent to contract, and b) with the permission of a principal civil court of original jurisdiction, by or on behalf of a minor, but subject in each case to the law for the time being in force as to the circumstances and extent in and to which the author of the trust may dispose of the trust property. Trustee Requirements Explanation 1 to section 60 of the Indian Trusts Act provides, inter alia, that a person domiciled abroad or an alien enemy, ie a person not domiciled/resident in India or a person belonging to 536

a state which is at war with India, are not proper persons to be trustees and they are not permitted to be trustees of Indian resident trusts. Indian courts have held that a non-resident cannot be a trustee of an Indian resident trust unless he is domiciled in India. The principle behind this is that the trustee at all times must be within the reach of Indian courts in order to ensure the enforcement of the terms of the trust. However, if an Indian trust does not have a resident trustee, then a court application would have to be made in order to invalidate the trust. Further, section 73 of the Indian Trusts Act provides that where a person appointed as a trustee is absent for a continuous period of six months, leaves India for a continuous period of six months, or leaves India for the purpose of residing abroad, a new trustee may be appointed in his place by the person nominated in the trust document for that purpose, if any and in the absence of such person, by the settlor of the trust, if alive and competent to contract or the surviving/continuing trustee, if any, or the retiring trustee himself with the consent of the court. Under the Indian exchange control regime, it is not possible for a trust holding immovable property to have a non-resident trustee. Care Required from Trustee The Indian Trusts Act, 1882 requires the trustees to act in accordance with the directions provided in the trust document provided that this would not be unlawful. Section 15 of the Indian Trusts Act, 1882 provides that unless it has been specifi cally provided for in the trust document either universally for the entire trust corpus or with respect to certain specifi c properties, the trustee cannot be held liable for any loss, destruction, or deterioration caused to the trust property unless the act through which the loss is caused is not bona fi de. The trustee is put on the same level as that of a reasonable person and is expected to exercise reasonable care. Therefore, if the trust fund suffers loss as a result of the trustee‘s actions, the trustee shall not be expected to make good such loss unless the loss has been caused by behaviour which is not bona fi de. Certain standards of care with respect to the trust property have been laid down under the Indian Trusts Act, 1882, which can be broadly summarized as follows:  a trustee must inform himself about the state of the trust property;  a trustee must ensure that title to trust property is protected;  a trustee cannot deal with trust property in a manner which may jeopardize the fi nal transfer of the property to the ultimate benefi ciary of such property;  a trustee must act with reasonable care  a trustee may not deal with property of a wasting nature with a future or reversionary interest unless contrary intention has been expressed in the trust document;  where there is more than one benefi ciary, the trustee must be impartial when exercising its discretions and powers; 537

 where the trust property is in the possession of one of several benefi ciaries, if such a benefi ciary threatens to destroy the property, the trustee is bound to take measures to prevent such an act;  a trustee must invest trust funds consisting of money and manage them prudently;  trustees must act jointly and unanimously, unless the trust document permits otherwise Investment of Trust Money The Indian Trusts Act, 1882 laid down guidelines for trustees making investments in the absence of specifi c instructions in the trust document. Section 20 of the Indian Trusts Act lays down the guidelines, which states that where the trust property consists of money and cannot be applied immediately or at an early date for the purposes of the trust (if provided), the trustee is bound (subject to any direction contained in the trust document) to invest the money in the following assets:  securities such as promissory notes, debentures, stock, or other securities of the central government by notifi cation in the Offi cial Gazette;  units issued by the Unit Trust of India under any unit scheme made under section 21 of the Unit Trust of India Act, 1963;  immovable property situated in India provided that the property is not a leasehold and that the value of the property exceeds by one-third, or, if consisting of buildings, exceeds by one-half any of the mortgage secured over the property Trusts Holding Shares in Trading Entities The Indian Trusts Act, 1882 states that trust assets and liabilities must be segregated from the personal assets and liabilities of the trustees. If the trustees hold entities that trade directly, any action taken in respect of these assets which causes loss to the trust fund will not be held against the trustee unless the actions are not bona fi de. Tracing of Trust Assets Under section 66 of the Indian Trusts Act, 1882, where the trustee wrongfully mingles trust property with other assets held by him, the benefi ciaries are entitled to a charge on the whole fund for the amount due to them. In such a case the onus lies heavily on the trustee to prove the extent of his property Trustees‟ Obligations to Disclose Trust Information Section 19 of the Indian Trusts Act, 1882 requires the trustees to keep clear and accurate accounts and furnish the same to the benefi ciary on his request as to the amount and state of the trust property. Furthermore, section 57 of the Indian Trust Act, 1882 gives a benefi ciary who has knowledge of the trust the right to inspect and take copies of the trust document, the title documents relating 538

to the trust property, the accounts and the respective supporting vouchers, and the cases submitted and opinions taken by the trustee for his guidance in the discharge of his duty. Some of the important provisions of Indian Trusts Act are covered above. The full Indian Trusts Act, 1882 can be referred for details. 5.2.2. Classification of Trust – Revocable/Irrevocable and Simple/Complex A trust can be set up either as: • Revocable Trust: A revocable trust is one that the settlor can terminate at his option. On termination, legal title to the trust assets returns to the settlor. Because the settlor can reassert control over the assets whenever he wishes, the income they generate is taxed to him. • Irrevocable Trust: By contrast, an irrevocable trust is permanent, and the settlor may not revoke or modify its terms. All income to the trust must be accumulated in the trust or be paid to the beneficiaries in accordance with the trust agreement. Because income does not go to the settlor, the irrevocable trust has important income tax advantages, even though it means permanent loss of control over the assets (beyond the instructions for its use and disposition that the settlor may lay out in the trust agreement). • Simple Trust: A simple trust is one that doesn‘t make charitable contributions or allow for any distributions other than those that come from income earned, which must be distributed to beneficiaries in the tax year that it is earned. • Complex Trust: A complex trust can make charitable contributions and is not required to pay out all income in the year that it is earned by the trust. In a complex trust, the principal value of an asset may also be paid out. 5.2.3. Characteristics of Trust – Discretionary and Determinate A Private Trust can be further divided into specific trusts (determinate trust or non- discretionary trusts) and Discretionary Trusts (Indeterminate Trusts) A discretionary trust is a trust in which the individual shares in income or corpus of the beneficiaries are indeterminate or unknown. It is an arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent. Such trusts are essentially used for asset protection. Where the terms of trust deed prescribe the shares of the beneficiaries in respect of income but not in respect of the corpus, the trust will still be a discretionary one. The entitlement of the beneficiaries is fixed by the settlor, the trustees having little or no discretion Determinate Trust: The entitlement of the beneficiaries is fixed by the settlor, the trustees having little or no discretion. 539