Succession Planning: Understanding Wills vs. Gift Deeds

A prominent business group recently made headlines when the current chairman announced the division of the group’s various businesses among key family members. This strategic move reflects the growing trend of succession planning within family-owned businesses in India. As India’s wealthy and business families prepare for the future, succession planning becomes essential in ensuring smooth transitions and preserving wealth across generations.

Succession planning, along with creating a will, a gift deed, or a trust, forms the cornerstone of estate planning. Estate planning essentially involves making decisions in advance about how an individual's assets or wealth, and in some cases, businesses, should be systematically divided or distributed.

In this article, we’ll explore the key differences between a will and a gift deed, and how each can be beneficial depending on the situation.

What is a Will?

A will is a legal document that outlines how an individual’s assets will be distributed after their death. The person creating the will, known as the testator, can designate beneficiaries who will receive specific assets.

What is a Gift Deed?

A gift deed is a legal document executed during an individual's lifetime, allowing the immediate transfer of ownership of assets to the designated beneficiaries. These beneficiaries could be family members, relatives, or charitable organizations.

Comparing a Will and a Gift Deed

a. Purpose

Will: The primary purpose of a will is to distribute assets after the individual's death.

Gift Deed: A gift deed facilitates the transfer of assets during the lifetime of the individual, with the legal procedures and execution taking place while they are alive.

b. Changes

Will: A will can be modified as many times as needed throughout the individual's life, accommodating changes in circumstances or wishes.

Gift Deed: Once a gift deed is executed, it cannot be revoked, meaning that the gifted asset cannot be reclaimed under any circumstances.

c. Taxation Impact

Will: Assets inherited through a will are not subject to taxes in the hands of the recipient.

Gift Deed: While gift deeds can be structured to be tax-efficient depending on jurisdictional laws, they generally attract taxes.

d. Loss of Control

Will: A will ensures that the individual's assets remain under their control until death, providing security and preventing financial dependence on the next generation. This is crucial if there is uncertainty about how the beneficiaries might behave after receiving the assets.

Gift Deed: Transferring assets via a gift deed during one's lifetime results in the immediate loss of control over those assets.

e. Privacy

Will: The contents of a will are made public during the reading, which can lead to potential conflicts if some beneficiaries receive less than expected.

Gift Deed: A gift deed offers more privacy, as the transaction is typically not disclosed to others.

f. Procedure

Will: Although not mandatory, registering a will can help avoid disputes after the individual's death. The execution of a will is handled by an executor chosen by the testator.

Gift Deed: A gift deed does not require an executor, as the transfer of assets is completed during the individual's lifetime. Wills can be contested in court, while gift deeds are generally less likely to be challenged.

Can a Gift Deed Override a Will?

Yes. Since a gift deed is executed during the individual’s lifetime, it takes precedence over any instructions in a will. If an asset mentioned in the will has already been transferred through a gift deed, the recipient of the gift deed retains ownership, even if the will designates that asset to someone else.

What Should You Choose?

Will: If the primary goal is to ensure the systematic distribution of assets after death while maintaining control over them during one’s lifetime, a will is the better choice. A will is particularly useful for individuals who want to retain security and control over their assets while they are alive.

Gift Deed: A gift deed is ideal for those who wish to transfer assets during their lifetime, especially if the beneficiary needs the assets sooner rather than later. A gift deed also offers simplicity in execution and greater privacy.

Conclusion: Making the Right Choice in Estate Planning

Estate planning is a crucial aspect of financial management, especially for individuals and families with significant assets. Both wills and gift deeds play vital roles in ensuring that wealth is transferred according to the individual’s wishes. However, choosing between a will and a gift deed depends on various factors, including the individual's goals, the timing of asset transfer, and the desired level of control.

For individuals who wish to maintain control over their assets until death and ensure a systematic distribution afterward, a will is the recommended route. It offers flexibility and can be revised multiple times to reflect changes in circumstances. On the other hand, a gift deed is suitable for those who want to transfer assets during their lifetime, especially when immediate ownership by the beneficiary is preferred. It provides a more straightforward process and can help address urgent financial needs of beneficiaries.

As estate planning becomes increasingly important in today’s complex financial landscape, consulting with legal and financial professionals is essential. They can help navigate the intricacies of wills, gift deeds, and other estate planning tools, ensuring that the chosen method aligns with the individual's long-term goals and provides peace of mind.

By making informed decisions about estate planning, individuals can protect their wealth, support their loved ones, and leave a lasting legacy.