This article written by me was originally published in The Hindu Business Line on 2 feb’2015
Intelligently planning your estate can help save a lot of tax for your successors and also result in better money management.
No clubbing
Creating separate tax files in the names of different family members may not be possible during your lifetime, as it may attract income tax clubbing provisions. But distributing your wealth or estate after your passing away can be a tax-efficient proposition for your heirs. For example, if you create a fixed deposit in your grandchild’s name, this will not reduce your tax liability. Whatever interest that fixed deposit generates will be clubbed with your income and taxed as per your income tax slab. But if your grandchild receives these fixed deposits as inheritance through your will, then the interest income will be treated as your grandchild’s income. There would be no clubbing with anyone else’s income.
Similarly, if you gift money to your daughter-in-law or your spouse during your lifetime and they invest this money and earn returns, the income generated out of these investments will be clubbed in your income and taxed accordingly. But if they receive this money through a will, then this is counted as their personal wealth. If you bequeath your entire estate to a single person — be it your son or spouse — the entire wealth will go into their personal estate. The complete tax liability on the returns generated from that wealth falls on that single person.
But if the wealth gets distributed across the family, every one of them can take the benefit of a minimum ₹4 lakh each (₹2.50 lakh under income tax slab, plus ₹1.50 lakh of Section 80C savings). This transaction is of great help when most of the members to whom you are bequeathing wealth, have no other income.
HUFs and private trusts
You can also create a Hindu Undivided Family (HUF) or private trust through your will and bequeath your assets to these entities. These will be treated as separate tax entities. HUF tax calculations would be similar to an individual and thus, it can also take advantage of basic exemption limits and tax deductions available to all taxpayers. Generally HUF is used for taking care of joint family property. A private trust is formed when you don’t have confidence in the capability of your successors.
For instance, if you want to bequeath to your wife but are not sure that if she would be able to manage the finances well and also wants to protect her future. In that case, you can either form a private trust in your life time or through a will.
This trust can have your wife as beneficiary and some trustworthy person as trustees to manage the wealth and support your family in accordance with the conditions laid down in the trust deed. You can bequeath the amount to the trust.
A private trust is a legally-accepted entity with the tax structure of an individual.
