Your Succession Toolkit

The Covid pandemic has shown that life is fragile, and tragedy can strike any time. In the course of conversations with clients, we find that most women do not undertake succession planning, and even fewer understand the need for an estate plan. This is mainly due to lack of awareness, and because they usually tend to look to their husbands and/or other family members to deal with their assets. This needs to change, especially at a time when women are becoming wealth creators in their own right and are increasingly running large family businesses. Many women today are also inheriting valuable portions of the family business.

An estate planning exercise involves the execution of a properly discussed plan to ensure that one’s personal assets are transferred to the desired beneficiaries. Some assets may be transferred in one’s lifetime, some post death. This would spare the family and loved ones from the vagaries and hassles of intestate succession law (i.e. what happens if no Will has been left), and to have control over one’s wealth.

Succession laws in India are governed by the religion of the person. For example, a person practising Hinduism would be governed by the Hindu Succession Act, 1956. These also govern the law related to intestate succession, and usually involve a strict set of rules as to who shall be entitled to a person’s entire property upon their death, and in what proportion the assets are to be divided. Only a Will can override intestate succession.

Seat At The Table

For Hindu women, the rules of intestate succession are extremely unfavourable, wherein the heirs of her husband are given preference over her own parents and other family members. However, this can be avoided or altered by putting in place a Will that states how her assets or estate would need to be dealt with upon her death.

The discussion surrounding the succession rights of Hindu women has been fraught with controversy and continues to evolve. For most of India’s legal history, Hindu women were granted partial rights to their property, with limited or no transfer or managerial rights over it. Further, their access to ‘ancestral property’ or hereditary title to certain types of property was non-existent until recently. Since 1956, things have been progressing in the evolution of Hindu succession law. In 1956, women acquired absolute rights to property in their possession, but such rights were not extended to ancestral property. Their brothers and fathers, however, did enjoy this right.

Approximately 50 years later, in 2005, India granted women rights to their ancestral property. The traditional patriarchal law was modified to elevate the status of women to the same bracket as men. Today, they are finally absolute owners of their self-acquired property and have equal rights to their ancestral property. For most intents and purposes, their succession rights are the same as Hindu males’, but certain differences do remain.

The concept of inheritance equality for Hindu women is still evolving. In August 2020, the Supreme Court addressed recent controversies and ruled that Hindu daughters had equal rights in the family’s ancestral property; the same as those of her brothers and father. Recently, in January 2022, the Supreme Court conferred daughters with equal right to their father’s property even prior to the codification of Hindu personal laws and the enactment of the Hindu Succession Act, 1956.

Tools At Hand

While developments in ancestral laws continue to dominate the headlines, the real succession planning happens outside the confines of ancestral properties. For most women, their estate (both self-acquired property and inherited property) would be in their personal names, and they would have the flexibility to deal with it as they deem fit. The two main tools at their disposal are Wills and Trusts.

Wills: At the very least, it is recommended that every woman executes a Will as part of her succession plan to ensure that her assets are passed on to her loved ones in the manner she desires. As this is the most easily understood option available, most people tend to prefer this over other forms of succession planning such as Trusts and gifts.

For certain estates, which are relatively straightforward, such as primarily self-acquired property, this is an attractive option as it requires very few formalities. One can execute a Will just by signing it and having it attested by two witnesses. There is no requirement for having the Will mandatorily registered in India. A Will can be amended easily in the future.

Further, unless the Will is being executed in Chennai, Mumbai or Kolkata or deals with immovable assets located in these cities, it would not be compulsory to obtain a probate (a certified copy of the Will under the seal of a court of competent jurisdiction).

With the 2005 amendment to the Hindu Succession Act, 1956, it is now every woman’s right to bequeath her coparcenary interest in a Hindu Undivided Family (HUF) under a Will. It is important to distinguish between a coparcenary interest in an HUF and a member’s interest in an HUF. A member of an HUF has only limited rights in the said HUF when compared to that of a coparcener. While coparcenary interest can be bequeathed, a member’s interest cannot be bequeathed or transferred.

Post the 2005 amendment, daughters have equal rights in an HUF as that of a son. Thus, a daughter would inherit an equal share in her father’s HUF and will retain such right irrespective of her marital status. She would also be entitled to bequeath her interest by Will, as above.

Trusts: Large business families would require a more complex mechanism of succession planning than just executing Wills to ensure that their wealth is preserved over the future generations and that their assets are sufficiently ring-fenced against creditor claims as well as any unforeseen contingencies in the future.

In reality, most personal wealth, including ownership in valuable family businesses, is either held in the personal names of the patriarch/promoters or in private Trusts or holding companies/limited liability partnerships. In practice, we have noticed most families use private family trusts to safeguard the interests of their married daughters. The ‘older’ business families may continue to hold some ancestral wealth in HUFs, but the scale and materiality of such holdings is usually limited.

Contrary to popular belief, Trusts are also easy to set up and are extremely useful in creating an organised holding structure, as separate Trusts can be established for different kinds of assets. Trusts have been successfully used as succession and tax planning vehicles in numerous countries for many centuries.

Women should ask themselves some of the following questions when setting up a Trust:

• What is the objective of the Trust? Is it long term? Is it for liquidity? Will it actively be used to manage the family business?

• How much personal wealth do you want retained with you? When will the remainder be transferred, if at all?

• Will you also make a Will or lifetime gifts to supplement the succession plan?

•  What degree of control do you want over the Trust?

• Are there any special circumstances to be conscious of? For example, children with special needs or NRI family members.

• Would Trust assets be used for structured financing? If the answer is yes, then the Trust deed would need to be customised accordingly.

Setting up a Trust has the following advantages:

• No requirement of a probate for the assets to be passed on to your beneficiaries.

• Continued management of property and control over assets during your lifetime.

• A Trust deed can be highly customised to meet the specific needs of a family.

• Protection from potential reintroduction of estate duty.

• Insulation of assets from creditor claims and disgruntled heirs.

Women must realise the importance of estate planning and the need to start the discussion regarding the same at an early stage. There is a growing need for women to undertake this planning. Relying on the intestate laws or on her relatives may not produce the best outcome.

The author is Partner and Co-head, Private Client Practice, Cyril Amarchand Mangaldas