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Navigating estate and succession planning in India: A guide for NRIs
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Importance and considerations of estate and succession planning
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Tax implications for estate planning
The below content is purely for informational purposes and is not intended to constitute advisory of any kind. Please note, these are in-depth articles which are best viewed on large screen devices like laptops, desktops and tablets. The position reflected in this article has been updated as of December 15, 2024
Estate and succession planning are important aspects relating to inheritance for Non-Resident Indians (NRIs). These ensure financial management or devolution of your estate and wealth (including your business) to the successor of your choice. While they share the same components, the implications could be different depending on the situation.
Understanding estate and succession planning
Estate and succession planning ensure that after your demise, your wealth gets distributed as per your wishes. Broadly, an estate and succession plan will help you with:
- Avoidance of family conflicts
- Transfer of your business, wealth and assets in India to persons identified by you as your successors; and
- Tax efficiency and benefits for the beneficiaries with respect to the transfer of your estate
Estate planning ensures your wishes are met for managing assets in India, distributing wealth and caring for loved ones in case of your unfortunate demise.
On the other hand, by way of succession planning, you can ensure that a suitable individual is selected as per your wishes to carry on your business after you decide to step down from your current roles/responsibilities with respect to your business. Succession planning is important to secure continuity of your business once you decide to leave your business. Lack of succession planning in such cases could lead to disputes among the family members causing disruptions in business.
Common modes of estate and succession planning
These involve making a will, creating a trust and more. Let’s explore some of the common modes of estate planning in detail.
(A) Writing a Will
A will is a written legal document that allows you to state the way your assets are to be distributed after your demise. If a person desires to leave his/her property to certain persons/relations, he/she can do so by means of writing a will. A will would specify how the assets of an individual upon his/her demise are to be distributed in favour of the desired beneficiaries. Wills can help avoid intestate succession i.e. the assets of the deceased being distributed among the surviving heirs in accordance with the relevant succession laws applicable to the deceased. To know more about the process, key elements and eligibility of the foreign wills, please click here.
Did you know?
While Will is a legal document that provides instructions of the testator regarding the distribution of his/her property after death, trusts are legal structures that protect and direct the use and disposition of assets as per the settlor’s intentions. Further, a Will takes effect only upon death of the testator, but a private/family trust can be created during the lifetime of the settlor. Accordingly, depending on the facts and circumstances, you could choose to make a Will and/or a trust. You should consult your tax advisor and legal expert for assisting you with the structuring of your estate planning.
Creating a private trust
Creating a private/family trust is considered an effective mode for estate planning. Private trusts are governed by the Indian Trusts Act, 1882. Some useful definitions are as under:
- The person who creates a trust and transfers his/her assets to the trustee is called the ‘author of the trust’ or the ‘settlor’
- The person who manages and holds the property or assets of the trust for a beneficiary is called the ‘trustee’
- The person for whose benefit the property or assets are held and managed by the trustee is called the ‘beneficiary’
In simple words, a trust is a legal arrangement where a settlor creates a trust and transfers his/her assets in India to the trustee who holds and manages those assets for the benefit of the beneficiaries, as specified by the settlor in the trust deed.
Did you know?
In terms of the Indian Trusts Act, 1882*, every person capable of holding property can be a trustee, and where the trust involves the exercise of discretion, a person cannot execute it unless he/ she is competent to contract. Accordingly, you could even consider appointing a trusted family member as a trustee of your trust.
Trusts are helpful in situations where one prefers the beneficiary to own or handle the settlor’s assets in India spread over a period of time instead of one go; or where one wishes for the underlying assets to be managed for the benefit of minors till they achieve majority.
You may consider creating a private trust and transferring your shares in a business or assets in India to such trust and appointing a trustee of your choice who would manage these for you in accordance with the directions recorded by you in the relevant trust deed. You could also create multiple trusts with respect to different assets, businesses and beneficiaries as per your choices. Trusts can be set up as under:
Did you know?
The Estate Duty Act, 1953 was abolished in India in 1985. Currently, there is no estate tax payable in India.
Please note, tables are best viewed on desktops or in landscape mode on mobile phones. On mobile phones, please swipe to view all content.
| Types of trusts | Particulars | Revocable Trusts | Irrevocable Trusts |
|---|---|---|---|
Non-Discretionary/ determinate trust |
As per Section 17 of the Indian Trusts Act, 1882, such trusts do not give trustees the decision-making power on how the assets of the trust are to be distributed among the beneficiaries. |
As per Section 77 of the Indian Trusts Act, 1882, such trusts provide the settlor the flexibility to revoke/cancel the trust before the property or assets of the trust are transferred to the beneficiary |
Such trusts do not allow the settlor to revoke/cancel the trust other than revocation as per conditions set under the Indian Trusts Act, 1882.* |
Discretionary trust |
As per Section 17 of the Indian Trusts Act, 1882, such trusts give trustees the power to decide how the assets of the trust are to be distributed among the beneficiaries. |
*Section 78 of the Indian Trusts Act, 1882, provides for revocation of trust as follows: A trust created by will may be revoked at the pleasure of the testator. A trust otherwise created can be revoked only— (a) where all the beneficiaries are competent to contract—by their consent; (b) where the trust has been declared by a non-testamentary instrument or by word of mouth—in exercise of a power of revocation expressly reserved to the author of the trust; or (c) where the trust is for the payment of the debts of the author of the trust, and has not been communicated to the creditors—at the pleasure of the author of the trust.
Did you know?
The trust deed should clearly capture information such as details of the beneficiaries and the trustee, assets in India to be managed by the trust, powers and any restrictions on powers of the trustees, rights and obligations of the beneficiaries, procedure for addition or removal of beneficiaries, etc. It is preferable to seek assistance from relevant experts for choosing the right mode of estate planning along with drafting of the underlying documents.
Tax implications for various types of trusts
Please note, tables are best viewed on desktops or in landscape mode on mobile phones. On mobile phones, please swipe to view all content.
| Types of trusts | Revocable Trust | Irrevocable Trust |
|---|---|---|
Discretionary |
Income would be taxed in the hands of the transferor at their applicable slab rate |
Income would be taxed in the hands of the trustee as representative assessee at Maximum Marginal Rate (MMR). |
Non – discretionary |
Income would be taxed in the hands of the trustee at the same tax rate as applicable to the beneficiaries in case of income other than business income. In case of business income, the MMR should be applicable. If the beneficiary is a minor and the tax officer taxes the income in the hands of the beneficiary, the income shall be clubbed in the hands of the parent as per the clubbing provisions of the income tax laws. |
While trusts may not offer tax benefits to the transferor/settlor/beneficiary/ trustee, they can be:
- Created during the active lifespan of the transferor
- Created in favour of minor beneficiaries
- Can be used to distribute the wealth and assets at regular intervals as per the wishes of the transferor as specified in the trust deed
Please consult a tax and legal advisor to understand the type of trust and its taxability in more detail.
Gift of assets
Subject to the applicable laws, you can also evaluate gifting your assets in India to your relatives for the purposes of succession planning. If an NRI is gifting assets or receiving under will or by way of inheritance, the same is not taxable in the hands of the NRI in both the situations as per income-tax laws. Additionally, as an NRI or an Overseas Citizen of India (OCI), you can transfer any immovable property in India (other than agricultural land or plantation property or farmhouse) to an NRI or an OCI who is your relative**.
NRIs can also receive assets in India subject to terms of the foreign exchange regulations. In terms of the Foreign Exchange Management Act (FEMA), 1999, and regulations thereunder, an NRI or an OCI may acquire, by way of gift, any immovable property (other than agricultural land/plantation property/farmhouse) in India from a person resident in India or from an NRI or an OCI who is a relative**.
*Master direction number 12/ 2015-16 titled “Master Direction – Acquisition or Transfer of Immovable Property under Foreign Exchange Management Act, 1999” as updated on 01 September 2022
**Relative as defined under the Companies Act, 2103 means with reference to any person, anyone who is related to another, if (i) they are members of a Hindu Undivided Family, (ii) they are husband and wife, (iii) one person is related to another in such manner as prescribed under rule 4 of the Companies (Specification of definitions details) Rules, 2014.
Important aspects for estate and succession planning as an NRI
In the event a person passes away without carrying out any estate or succession planning in respect of his/her assets in India, such as, if a person passes away without writing a will, the assets of the deceased would be distributed among the surviving heirs in accordance with the relevant succession laws applicable to the deceased. For instance, assets of the deceased in India would be distributed as per the Hindu Succession Act, 1956, if the deceased is a Hindu, Sikh, Jain or Buddhist.
- FEMA, 1999 and regulations made thereunder: In the event a trust is formed where the beneficiaries are NRIs, then from the perspective of FEMA, it would be vital to evaluate the nature of assets in India that the trust is expected to hold and its permissibility, type of trust, the benefits envisaged for the beneficiaries, etc. Please seek expert opinion in this regard prior to setting up the trust
- Tax considerations: Inheritance tax in India is zero. Considering this, you may want to structure your estate in a feasible manner
Conclusion
Estate and succession planning holds significant importance in terms of managing your assets in India or progression of your business in India, avoiding any internal family disputes with respect to your estate and ensuring that the distribution of your estate is aligned to your wishes. While selecting the relevant mode for your succession, you should consider factors like status of residence and domicile, applicability of FEMA and tax efficiency. For better understanding of the mode that suits you the most, it is advisable to consult a lawyer along with a tax expert who understands NRI estate planning.
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