The Unfortunate Consequences of Not Making a Will
Did you know that the Indian law does NOT recognize a nominee to be the beneficial owner after the original owner's death?
Also did you know that an ancestral property cannot be passed on by a will?
Or that when someone passes away without making a will, their assets are distributed according to their religion irrespective of what they would've wanted?
As wealth managers, it is not just our job to help you build your wealth, but also to make sure that it is transmitted to the next generation seamlessly. We often find it illogical that most of us spend a lifetime accumulating wealth for loved ones but rarely give any thought to how this wealth will be protected and distributed after the inevitable. Yes, estate planning laws in India are complicated, sometimes downright illogical but ignorance and procrastination cannot be the solution. To give you an idea of the severity and importance of this discussion, allow me to state a few facts.
Rs. 15,167 crores of policyholder's money was lying unclaimed across 23 insurance providers as on 31st March, 2018
Rs. 25,000 crores was lying as unclaimed bank deposits as on 31st March, 2019
Rs. 40,865 crores was lying unclaimed with the provident fund office as on April, 2017
Rs. 857 crores was lying as unclaimed dividend as on March, 2017
Apologies for the inconsistency in dates, but as you can imagine this data isn't reported often and it's difficult to find. The rapid growth of unclaimed wealth in our country is alarming and is a result of poor estate planning (or rather lack thereof). An Indian family's finances are typically centralized and operated by the head of the family. Other members often have little to no information on their family's money, hence a significant loss in transmission of wealth from one generation to the next. What is the point of having the largest life insurance policy in the world if the family is unaware of its existence? After all they're the reason it was bought in the first place. In fact, In our experience this phenomenon is not just limited to lower/middle class but also to HNIs even though they have considerable resources at their disposal (lawyers, advisors, etc.).Fortunately, there is a very simple solution. Make a will.
So what happens when someone dies intestate (i.e. without a will)?
As uncomfortable as this topic sounds, a will's importance is incontestable. It is commonly believed a person's assets will be immediately transferred to the nominees or family members (most probably spouse and/or kids) after the owner's death. And life will just go on. Unfortunately things are far more complicated that. When someone passes away without a will, the assets are:
Transferred to the nominee (after completion of certain formalities). However, the nominee is just a temporary custodian, NOT the owner in the eyes of law. The rightful ownership belongs to the legal heirs. In fact, nominee is expected to hand over the asset to the legal heirs whether its property, mutual funds, shares, PPF, or any other asset. The only exception her is the EPF balance. The nominee in an EPF A/C becomes the beneficial owner and legal heirs cannot lay claim to it.
The legal heirs will be determined as per religion, the Hindu Succession Act (and some provisions of the Indian Succession Act) if the deceased is Hindu, Jain, Buddhist or Sikh. If the deceased is Muslim, assets will be distributed as per the customary personal law (Shariat) and for Parsis, Christians, and Jews, the Indian Succession Act is applicable. It goes without saying that these laws are complicated and can be difficult to interpret. Assets will be distributed according to process given in the act irrespective of what the deceased would've wanted.
The legal heirs (determined by applicable law) will then have to file an application in court to obtain a succession certificate (in case of moveable assets) or letters of administration (in case of moveable and immoveable assets). This process can take upto a year (assuming no disputes) and will cost around 2%-3% of your assets' value, excluding lawyer fees. Therefore if the total wealth is 10 crores, 20-30 lakhs is wasted to just get back what was yours in the first place. This expenditure can be completely avoided by just having a will.
The succession certificate / letters of administration has to be filed with the respective authorities for transfer of asset. For example in case of mutual funds, the succession certificate would have to be filed with the respective asset management company (AMC) to transfer the assets.
Of course, assets which are unknown to the family members become a part of the statistics given above and are most likely lost.
The above described process is hardly exhaustive and assumes there is no dispute or things go smoothly. As you can see, process of transmission without a will is tedious, time consuming, costly, and can be a very stressful affair. A will overrides all of the above. It gives legal clarity, and most importantly saves the family members a ton of hassle. Guidelines when making a will There are several misconceptions people have when it comes to drafting a will, some of which I've tried to counter below:
It’s complicated and costly - It is merely a simple document listing all assets and the who they should be bequeathed to after the unfortunate event. Of course, it is recommended that someone with a more complex family structure and considerable assets take professional help. Even then a reasonably skilled lawyer can hep you out at a reasonable price. Dishing out lakhs of rupees is not necessary.
I am too young - Life is uncertain (grim, but true). Anyone who has build a corpus (irrespective of the amount) and has a family to take care of, they have a moral responsibility to protect their loved ones by making a will.
The family will figure it out - as you've already read, the family goes through a lot of trouble just to "figure it out". The most famous example we have is of the Ambani family. We're all aware of the feud that followed between the brothers after Dhirubhai Ambani passed away inestate. Of course, his assumption was that the brothers would continue to be united.
Here are some other guidelines that are important when making a will:
Medical Evidence - Attach a medical certificate to the will to give proof of a sound mind or procure a doctor to act as a witness to the signing. Preferably the doctor should be a family doctor, someone who is well acquainted with the family.
Register it - although not mandatory, registration of a will with a sub registrar is seen as an important factor supporting a will's genuineness. This reduces (but does not eliminate entirely) any scope of claim, perhaps by a disgruntled relative in the future as to the authenticity of the signature.
Appoint an executor - an executor is the person who disposes of or oversees the settlement of the assets of the deceased person in accordance with the wishes of the deceased. Ideally the executor should be a trusted friend, a confidante, or a legal representative and someone who is not a beneficiary under the will.
Communicate to your family - Having a will is of no use if nobody knows of its existence.
Synchronize the nominations with the will - For example if you'd like a particular property to be transferred to your wife, make sure the nominee in the property is your wife. This just makes life easier and reduces confusion.
Make the will easy to understand - a will should be easy to interpret. Complicated wills reduce their efficiency and just aggravate the problem they set out to solve in the first place.
There are a lot of other tools for effective estate planning like making a private family trust, ensuring joint ownership of assets, gifting, all of which haven't been discussed in this piece. A combination of these along with a will make your estate foolproof from any transmission loss. However a will is an exigent starting point. It is uncomplicated, inexpensive, and has widespread applicability. It is the best way to keep control over your assets during your lifetime as well as ensuring they are taken care of after. This article is an attempt to bring your attention to a topic that is often overlooked and I hope it has done that. For any queries, please feel free to get in touch with our team.
Siddhanth Jain | Partner