Foundation — What estate planning is, what an estate contains, and the five elements of a plan

A traveller leaves twelve bags at a cloakroom. On eleven he ties a tag saying who should collect them. On the twelfth he forgets.

When he does not return, the eleven tagged bags go where he directed. The twelfth goes wherever the railway's standing rules say it must go — perhaps to a person he would never have chosen.

That is why the workbook defines intestacy asset by asset: a person is deemed to die intestate IN RESPECT OF ALL PROPERTY of which he has not made a testamentary disposition WHICH IS CAPABLE OF TAKING EFFECT. And it follows that INTESTACY MAY EITHER BE TOTAL OR PARTIAL.

Worse, a tag can be written badly. If the writing is illegible or the instruction impossible, the bag is treated as untagged — the disposition is not capable of taking effect on account of invalid bequest or illegal bequest.

And collecting an untagged bag is not simple. The legal heirs have to APPLY TO THE CIVIL COURT for obtaining a SUCCESSION CERTIFICATE, issued according to the succession law applicable to the deceased.

Eleven tags cost nothing to write. The twelfth costs a court application.

A family going abroad leaves the house keys with a neighbour. He can enter, collect the post, switch off a dripping tap. Nobody imagines the house is now his.

That is a nominee, and the workbook says it in one line: the rights of nominee are LIMITED TO HOLDING THE ASSETS AS A CUSTODIAN till it is transferred to the RIGHT LEGAL HEIRS.

This is among the most costly misunderstandings in Indian personal finance. A man names his brother as nominee on a large deposit, dies, and the family assumes the brother inherits. He does not. He holds the money until it reaches whoever the Will, or the succession law, says it belongs to.

But there is one keyholder who does own the house. In life insurance a BENEFICIAL NOMINEE is the legal recipient of the proceeds, and under the new Insurance Act, PARENTS, SPOUSE AND CHILDREN — if any one of them is the nominee — AUTOMATICALLY BECOME THE BENEFICIAL NOMINEE AND HENCE CAN CONSUME THE MONIES TOO.

So: brother named on a policy — custodian. Wife named on the same policy — owner.

And keys get forgotten. The legal beneficiaries can change in situations like marriage, which is why nominations must be periodically reviewed — the one document nobody ever reopens.

A ration shop has two queues. Everyone in the first queue is served — and only when the first queue is completely empty does anyone from the second queue reach the counter.

Section 9 of the Hindu Succession Act says exactly this: those in Class I shall take SIMULTANEOUSLY and TO THE EXCLUSION OF ALL OTHER HEIRS.

And the second queue itself has nine sub-queues, served strictly in order: those in the first entry in Class II shall be PREFERRED to those in the second entry, those in the second to the third, and so on in succession.

The workbook's own caselet shows the machinery working. Mr XYZ dies unmarried with one brother and two sisters. There is nobody in Class I at all — no son, no daughter, no widow, no mother. So the first queue is empty.

In Class II, Entry I is the father, who is not surviving. Entry II contains son's daughter's son, son's daughter's daughter, BROTHER and SISTER. The brother and two sisters are there, and section 11 provides that heirs specified in ANY ONE ENTRY SHALL SHARE EQUALLY.

Answer: all three take one-third each.

And note the oddity the queue reveals: the FATHER is not a Class I heir at all — he stands first in Class II, behind every son, daughter, widow and mother.

A village elder leaves twelve sacks of grain. Two of his sons have already died: one left four children, the other left one child.

Counting heads (PER CAPITA): five grandchildren, so each takes two and a half sacks — the lone grandchild and each of the four cousins get exactly the same.

Counting families (PER STRIP): two branches, six sacks each. The single grandchild takes six sacks; each of the four cousins takes one and a half.

Both methods are defensible, and Muslim law recognises both — but on different sides. The workbook: the PER CAPITA distribution method is majorly used in the SUNNI law... the estate gets EQUALLY DISTRIBUTED AMONG THE HEIRS, therefore the share of each person depends on the NUMBER OF HEIRS. Whereas the PER STRIP distribution method is recognised in the SHIA law... the property gets distributed AMONG THE HEIRS ACCORDING TO THE STRIP THEY BELONG TO, so the quantum depends on the branch and the number of persons in that branch.

The Hindu Succession Act uses the per strip idea in Rule 3 of section 10: the heirs in the branch of each pre-deceased son or daughter shall take BETWEEN THEM one share.

One lone grandchild can be four times richer or exactly equal, depending on which rule governs — and nothing about his own circumstances changes the answer.

A shopkeeper is told he may personally decide where one-third of his stock goes, while two-thirds must be divided by the trade association's fixed formula among his family.

That is a Wasiyat, a Will under Muslim law. The workbook: Muslim law recognizes that a person CANNOT DISPOSE OFF MORE THAN ONE THIRD OF HIS NET ASSETS BY WILL, while the REMAINING TWO THIRDS SHOULD BE MADE AVAILABLE FOR DISTRIBUTION AMONG THE HEIRS.

Compare a Hindu or Christian Will, which can direct the whole estate wherever the testator pleases. The Muslim testator directs a third; the law directs the rest.

The formalities are strikingly light, and that too is examinable: any person who is MAJOR (15 YEARS AND ABOVE) and is of SOUND MIND can make a will. Muslim law requires NO FORMALITIES of creating a Will. A will can be made IN WRITING, ORAL OR EVEN BY GESTURES.

Fifteen, not eighteen. And a gesture will do.

Revocation is equally informal: a Muslim Will or any part thereof can be revoked by the testator AT ANY TIME BEFORE HIS DEATH, either EXPRESSLY — tearing or burning the Will — or IMPLIEDLY, as where the testator transfers the same property by sale or gift subsequently to another.

A husband's business fails. Creditors arrive, and the tax department follows. They look at the family's assets and ask which they may take.

They may not touch what is hers. The Married Women's Property Act, 1874 was enacted TO PROTECT THE PROPERTIES OF WOMAN AGAINST THE CREDITORS. Under this Act, ALL THE PROPERTIES OF A WOMAN GET INSULATED FROM ALL THE OTHER COURT ATTACHMENTS OR ANY INCOME TAX DEPARTMENT ATTACHMENTS THAT THE HUSBAND HAS RUN UP.

What is hers is defined generously: her WAGES AND EARNINGS from any employment, occupation or trade CARRIED ON BY HER AND NOT BY HER HUSBAND; money earned through the exercise of any LITERARY, ARTISTIC OR SCIENTIFIC SKILL; and all SAVINGS FROM AND INVESTMENTS of such wages and earnings.

And the Act builds a second wall, which is the one an adviser actually uses. A policy of insurance effected by any married man on his own life, and EXPRESSED ON THE FACE OF IT TO BE FOR THE BENEFIT OF HIS WIFE, or of his wife and children, SHALL BE DEEMED TO BE A TRUST for their benefit, and SHALL NOT, so long as any object of the trust remains, BE SUBJECT TO THE CONTROL OF THE HUSBAND, OR TO HIS CREDITORS, OR FORM PART OF HIS ESTATE.

The policy stops being his. It never enters his estate, so no creditor and no legal heir can reach it — which makes an MWP Act policy the single most reliable protection a businessman can give his family.

A man buys a flat and has the electricity, water and municipal tax records changed into his name. He now receives every bill. Does that make him the owner?

It does not. Those records exist so the authorities know whom to bill — nothing more.

That is mutation, and the workbook is emphatic about both halves of the proposition. It is a process whereby a property is transferred from one person's name to another... by ALTERATION OR SUBSTITUTING A NAME in REVENUE RECORDS, and its purpose is administrative: since state or central government has to COLLECT TAXES on properties, the records have to show the rightful owner SO THAT TAX LIABILITIES CAN BE FIXED.

And then the warning: though mutation can hold significant relevance, IT IS STILL NOT A PROOF TO CONFER TITLE of the property in the name of person in whose name property is mutated. The proceedings before the revenue authorities ARE NOT CONSIDERED AS JUDICIAL PROCEEDINGS. THE TITLE OF ANY PROPERTY SHOULD BE THE BASIS ON WHICH AN OWNER ACQUIRES LAND AND NOT MUTATION ENTRIES. THE SOLE OBJECTIVE OF MUTATION IS TO COLLECT REVENUE.

It is not useless, though. If there are CO-OWNERS of the property, the value of the mutation will NOT ALLOW ONE PERSON TO CLAIM THE PROPERTY ALONE.

Evidence of who pays. Not evidence of who owns.

A trader in Surat owns a house and a shop. They need two completely different plans, and confusing them is the commonest error in this chapter.

The shop needs a plan that works while he is alive. Who will run it when he stops? Is the next generation interested, or capable? Should the business be sold if no one is interested? That is SUCCESSION PLANNING — planning for one's business WHICH TAKES EFFECT WITHIN ONE'S LIFETIME, so that the business is transferred to the next generation WHEN ONE DECIDES TO QUIT.

The house — and the bank accounts, the jewellery, the insurance — needs a plan for what happens on death or incapacity. That is ESTATE PLANNING, which is a PERSONAL estate plan, which involves ONE'S PERSONAL ASSETS.

The timing differs too, and the workbook is precise: the succession of business plan MAY START LATE IN LIFE BUT ESTATE PLAN NEEDS TO BE PREPARED AS ONE ACCUMULATES ENOUGH ASSETS.

And the coverage differs most of all. EVERY INDIVIDUAL NEEDS TO HAVE AN ESTATE PLAN WHETHER THERE IS A SUCCESSION PLAN FOR BUSINESS OR NOT.

A salaried employee with no shop still needs the house plan. Everyone does.