Most of us want to enjoy our wealth and pass it on to our next generation. But, what if someone tells you that while handing your wealth over to your next generation, the government may collect some tax for such a transfer - inheritance tax.
An inheritance tax/ estate duty is a tax you pay when you receive money or property from the estate of a deceased person. The beneficiary (inheritor) of the property is responsible for paying the tax, not the estate. Currently, there is no inheritance tax in India. India had the estate duty regime from 1953 to 1985. However, it was removed in 1985 with the realisation it had failed to bring equilibrium in the society and the yield from the inheritance tax was much lower than its cost of administration.
Though each country has their own state laws for inheritance tax, in simple terms, once the executor of the estate has divided up the assets and distributed them to the beneficiaries, the inheritance tax comes into play. The tax amount is calculated separately for each individual beneficiary, and the beneficiary must pay the tax.
If planned well in advance, inheritance tax may be legitimately minimised to a significant extent. Depending on tax incidence and the assets involved, the planning could vary from simple nomination or gifting to setting up an advance structure like family Trust. Such cases should be evaluated by experts.
In simple terms, if you put certain assets into a family Trust then, provided certain conditions are met, they no longer belong to you. This means that upon your passing away, the assets transferred into the Trust will not be considered as your assets and thus will not be counted when the bill is worked out.
A private trust is a means of retaining control and asset protection for the beneficiary. By way of a trust, one can avoid handing over valuable property, cash or investment whilst the beneficiaries are still relatively young or vulnerable.
Family Trust is an effective vehicle for succession planning, gives flexibility and control, assets transferred through Trust do not require probate, the Trust provides for incapacity, you can plan for different phases of life, among others.
The writer is head of Trust and estate planning, Motilal Oswal Private Wealth Management Ltd
