Why You Need Wealth Transfer Planning

What Is wealth transfer planning?

Legacy or wealth transfer planning, also known as estate planning, involves planning for seamless transfer of a person’s wealth such as mutual fund investments, to heirs after demise. Of course, wealth transfer can also be done through gifting. However, with ever increasing retired life, planning for bequests is preferrable.

Here are major reasons why you need wealth transfer planning covering all investments including mutual funds.

Wealth preservation:

Legacy or estate planning ensures that wealth is transferred to designated people, typically loved ones like grandchildren, with minimum loss through costs and taxes.

Seamless and expeditious transfer:

It prevents disruption in meeting immediate needs such as regular expenses of spouse and future goals like higher education of grandchildren.

Protecting interests of heirs:

Wealth transfer planning ensures that assets end up with the right people and in the desired proportion, in accordance with the wishes of a person. It effectively addresses the danger of claimants with malevolent intentions like relatives and friends that often cause delays in wealth transfers besides lengthy and costly litigations.

Common Tools of Wealth Transfer

Let us now discuss three of the most common tools to transfer wealth.

Nomination

For every investment, you need to designate nominees who hold the investments for the heirs. This is a critical first step of wealth transfer. For mutual fund units, while the regulator, Securities and Exchange Board of India (SEBI), provides the option of not opting for nominees, it is important to have nominees to ensure smooth transfer of the units to heirs.

Mutual fund nomination process

Nominations for mutual fund investments can be done online or in person at the time of investments. The division among nominees needs to be specified. Else the claim will be split equally amongst all the nominees.. During annual reviews of investments, check whether mutual fund investments require updates of nominee details. Review nominees after major life events like marriage and the birth of a child.

Online update of nominee details

This requires you to visit the websites of relevant mutual funds, RTA or mfcentral.com. Log in to your account and specify the folio that requires update of nominee details. Thereafter, fill in the nominee details along with other mandatory details.. As part of 2 factor authentication, after receiving OTPs, digitally sign it.

Updating nominee details offline

Here, one needs to fill up the relevant sections of the common application form/nomination form, providing key information such as name, % of share, relationship, address, email, mobile number and Identity numberalong with account or folio information. The common application form/nomination form needs to be signed by all holders in case of joint holding and submitted along with key documents like PAN.

Like mutual fund investments, nominee details need to be updated for other investments and financial products too. Create a checklist for your benefit.

Important things to remember When choosing a nominee or nominees, consider persons or people capable of managing the investment as they need to hold them for the heirs, and eventually transfer to them. To ensure wealth gets smoothly distributed, supplement nominations with a Will, a document that, among other things, earmarks investments to different heirs. This includes investments like stocks, mutual funds, besides gold and property.

Wills

Why you need a Will -

One of the most common mistakes people make in estate or wealth transfer planning is not making a Will. Some media reports mention that less than 10% of Indians have a Will*. A common misconception is that a Will is for the extremely rich. The truth is that it is essential for smooth transfer of anyone’s accumulated assets.

Wills

Apart from earmarking assets to heirs, Wills also typically provide directions on the use of assets. For instance, which heirs will receive what proportion of an asset. Thus, Wills protect the interest of beneficiaries by ringfencing them from unwanted claimants.

Another common misconception is also that drafting a Will is a complex activity. The truth is that it can be done on any piece of paper. However, a Will needs to appoint an executor, a trustworthy person who will oversee the distribution of the assets according to the person’s wishes. The Will can be registered, but not necessarily so, also needs two witnesses.

Wills can be revised and typically need to be amended after changes in family and financial conditions. One can take the help of online platforms besides lawyers in case of substantial and complex asset holdings and many potential claimants. Registering the Will in such cases is desirable.

Trusts

Trusts In the context of a person nearing, or in retirement, a trust is a legal relationship or structure. Here, the assets are transferred to another party i.e., typically to some people or an institution, called trustees. Trustees have the legal responsibility of ensuring that the assets transferred by the individual, termed as trustor or settlor, are used for the benefit of beneficiaries, typically family members and loved ones for purposes like grandchildren’s higher education.

How trusts help

There are many types of trusts. However, trusts where the income of beneficiaries from the trust’s assets are not defined—like private discretionary trusts, where trustees determine the income distribution—are separate taxable entities. They are taxed, and not the beneficiaries, making wealth transfer more tax efficient for individuals. Trusts, by their very establishment for a purpose, ensures that the money is used only for that specific purpose. This also keeps malevolent claimants out of bounds.

At the same time, trusts require expert guidance to be set up and then managed. You also need capable trustees to implement a trust’s objectives. Trusts makes sense only when the legacy or estate is of a certain size and trust’s income can meet its operational expenses.

To sum up, wealth transfer planning ensures that your love and care for your loved ones in the form of financial support continues long after you, and they continue to get comforted by your presence through your financial legacy.

Source Reference

* https://www.theweek.in/news/biz-tech/2023/03/11/will-writing-succession-planning-segment-gains-popularity-in-india.html; https://1finance.co.in/blog/how-to-make-a-will-in-india/