Gift Deed or Will? Which option is right for succession and estate planning

The choice between a gift deed and a will depends on specific circumstances and requirement including financial situation, relationships with potential heirs, and tax considerations.

Deciding how to distribute your assets after death is a crucial aspect of wealth and estate planning. In India, you primarily have two options: a gift deed and a will. Choosing between the two involves several considerations, including legal, financial, and personal factors. Here’s an overview of how they compare, along with examples, tax implications, and potential risks:

Gift Deed is a legal document that voluntarily transfers ownership of property from one person (the donor) to another (the donee) without any exchange of money. The transfer of property is immediate upon the execution and registration of the gift deed. once a gift deed is executed and registered, a gift deed is generally irrevocable. Registration is mandatory by paying appropriate stamp duty to the appropriate authority to be legally effective document.

Alay Razvi, Partner, Accord Juris explains with the following example:

-  Mr. Prasad decides to transfer his house to his daughter while he is still alive. He executes a gift deed, gets it registered, and hands over the property to his daughter immediately. Mr.Prasad cannot revoke or cancel the Gift Deed. It can only be cancelled through a Court Decree by filing a Suit for Cancellation of Gift Deed.

Tax Implications 

 Gift Deed: 

• Gift Tax:  The recipient may be subject to gift tax depending on the jurisdiction and the relationship between the donor and the donee. In some regions, gifts to close family members may be exempt from tax.
•  Capital Gains Tax:  The donee may have to pay capital gains tax if they sell the gifted property in the future. The cost basis for the property is typically the original purchase price by the donor.

Disadvantages:

•   Loss of Control:  Once the gift deed is executed, the donor loses control over the property.
• Family Disputes:  Other potential heirs might contest the gift, leading to family disputes.
•  Financial Implications:  The donor might face financial difficulties if they give away significant assets during their lifetime.

 Will is a legal document that specifies how a person's assets will be distributed after their death. The transfer of property occurs only after the death of the testator (the person making the will). In respect of Will, a Will can be changed or revoked at any time during the testator's lifetime. Wills generally need to go through a legal process called probate to be validated after death.

 Examples :

  Mr. Shyam decides that his house will be transferred to his daughter after his death. He includes this in his will, which specifies all his other asset distributions as well. After his demise, the WILL will be effective . However, to avoid any depute, his daughter must apply for probate before the competent court.

 Tax Implications 

 Estate Tax:  The estate may be subject to estate tax based on the total value of the assets and the laws in the jurisdiction.

Disadvantages:

 Probate Process:  The will must go through probate, which can be time-consuming and costly.

Contestation:  Wills can be contested by disgruntled heirs, leading to legal battles.

Validity:  If not executed properly, a will can be declared invalid, causing the estate to be distributed according to intestacy laws.

A comparison of the two: 

A gift deed lets you give away your things while you're still alive. This means you don't have to go through the legal process called probate when you pass away. However, once you give something away, you can't take it back. Also, giving away a lot of things might bring attention from the tax authorities.

A will is a legal document that says what you want to happen to your things after you die. It gives clear instructions on who gets what. But, after you die, the will needs to go through a legal process called probate, which can take time and money. It's important to write a clear will and make sure it's done correctly to avoid problems.

"However, it is crucial that the Will written by the Testator is robust to prevent any unintentional ambiguity. Essential that the Will written pays attention to the advisable hygiene checks such as ensuring independence of the Witnesses (two in count) in whose presence the Will is being signed, enclosing a Medical Certificate (in case of senior citizens making the Will) stating that the person making the Will is mentally fit of sound mind, registration of Will to enhance its authenticity etc. It may further be ensured that no other record suggests your intentions to the contrary," said Keshav Singhania – Head, Private Client Singhania & Co.

Gift Deed

•  Assets are transferred to the recipient during the donor's lifetime.
•  Assets bypass the probate process, which can be time-consuming and expensive.
• :Gift tax is generally not applicable in India, but there could be implications under the Income Tax Act.
• Once the gift is made, it cannot be taken back.
•  Large gifts might attract scrutiny from tax authorities, and there's a risk of the donor being left without financial security in old age.

Will

• Assets are transferred after the testator's death.
• The will must be probated, which can be time-consuming and expensive.
• The will can be modified or revoked at any time during the testator's lifetime.
• Provides clear instructions for asset distribution.
• Contested wills can lead to legal disputes and delays in asset distribution.

When comparing Wills and Gift Deeds, it is essential to have clarity on the intent and the objective with regards to the date of effectuating the transfer of immovable and movable assets. If the intent is to transfer the assets with immediate effect, then it can be attained through the execution of a gift deed, whereas, if the intent is to transfer the assets post one’s lifetime, then executing a Will is advisable. 

"Another factor that needs to be considered when comparing the two documents is the irrevocability factor. While a Will can be revoked at any time during the lifetime of the Testator, a gift is generally irrevocable in nature, i.e., a donor cannot revoke the transfer made through a gift deed once it has been effectuated, unless the donee fails to fulfil some preconditions for the gift or the gift has been made for a certain period of time. 

A key consideration while comparing the two documents would be the difference in stamp duty implications in case of immovable properties. While real estate transferred through Will does not attract stamp duty outgo and does not technically require to be stamped or registered (though it is advisable), a gift deed, on the other hand, would have to be mandatorily be registered under the provisions of the Indian Registration Act, 1908, if it is a gift of immoveable property. The applicable stamp duty on the gift deed would be determined by the state laws where the immovable property is situated. The stamp duty implications on registration of gift deed are not exorbitant, certain states (such as Punjab, Haryana etc.) provide for concessional stamp duty for gifts between blood relatives," said Singhania. 

In addition to the stamp duty implications, one also needs to be mindful of the tax implications while considering a transfer through either of these documents. 

Tax implications of both

From Income Tax lens, a Will, in itself, has no tax consequences since the assets are transferred to beneficiaries only after the testator’s death. In contrast, gifts are subject to tax implications, including clubbing and capital gains tax on sale profits, which are taxed in the recipient's hands. However, since the transaction would be undertaken between relatives, the personal effects of the transaction are exempt from capital gains tax and the same shall not attract adverse tax implications. 

What are the risks? 

There are certain risk factors associated with the transfer of assets through a Will. 

"Since the Will is executed posthumously, there is a possibility of legal challenge to the validity of the Will, if it is drafted in an ambiguous manner or does not address all the assets of the testator are not listed and specified in minute detail. Additionally, another factor is that comes with the risk of a lengthy and complex probate process, which also compromises privacy since the document becomes public record. If the familial conditions of the testator making the Will are are contentious or adversarial, then there are chances that it could be prone to disputes and legal challenges, delaying the distribution of assets to beneficiaries," said Singhania. 

On the other hand, a gift comes with the risk of the loss of control over the asset due to the irrevocable nature of the transfer. Additionally, a gift may incur tax and stamp duty liabilities for both the donor and the recipient.

Ultimately, the decision between creating a will or gifting assets should be made after considering the individual circumstances and priorities. It is advisable to consider seeking the advice of a legal professional, who can assist with the requirements of a valid Will or Gift Deed and thereby avoid errors that can invalidate a Will. Furthermore, a legal expert can assist in structuring the gift transaction to minimize stamp duty and tax implications for both the donor and recipient.