Will or gift: The better way to transfer assets to the next generation

A gift deed comes into play when finalised and a will for transfer one the death of property owner

Actor Amitabh Bachchan gifted his Rs 50-crore bungalow 'Prateeksha' in Mumbai’s Juhu to his daughter Shweta Nanda last month. The ownership transfer was formalised through two separate gift deeds, which were signed on November 8. A little less than a decade ago, a billionaire industrialist gifted his 37 per cent stake in his business, worth almost Rs 1,041 crore, to his son. The older man was allegedly driven out of his house in Mumbai a few years later.

Hearing stories like these is not easy for parents who want to bless the next generation with their wealth. "Planning for the transfer of assets to the next generation is an important aspect of financial and estate planning. One common dilemma faced by parents is whether to gift their assets to children during their lifetime or through a will. This decision involves family dynamics and an income tax perspective," says Naveen Wadhwa, deputy general manager, Taxmann.

It is difficult to choose an instrument for passing on one’s hard-earned wealth. "The main difference between the two is that a gift deed comes into play as soon as it is executed and the assets vest (given) in the donee during the lifetime of the donor," says Keshav Singhania, head, private client, Singhania & Co..

A will, which is operative only on the death of the testator, and a gift deed have their pros and cons

Gift

If you opt for gifting, you are part of the transfer process that will be done in your presence it. "It reduces the chances of dispute amongst legal heirs. The Senior Citizen Act allows conditions that the donee will take care of the donor; otherwise, the gift can be revoked," says Rohan Taneja, senior associate, Kred Jure.

There's no Capital Gain tax. Wadhwa says, "Any profit or gain arising from the transfer of a capital asset is taxable during the previous year in which such transfer occurs. However, each transfer of a capital asset does not give rise to taxable capital gain."

Such a situation arises if a transaction is not treated as a transfer. As per Section 47(iii) of the Income Tax Act, any transfer of a capital asset under a gift, inheritance, or will is excluded from the ambit of transfer. Thus, the distribution of capital assets to the legal heirs will not give rise to capital gains.

"Both ad valorem stamp duty and registration fees are payable on the gift deed for immovable property," says Sucharita Basu, managing partner at AQUILAW.

Will

A will is a legal document that records how a person wants to distribute her estate to family and others. "In India, if you don’t create a will, then the assets will get distributed as per the religion. Hence, it is important to make a will to draw a clear map of distributing your assets," says Jinal Mehta, a certified financial planner and founder of Beyond Learning Finance. It creates legal evidence for the transfer of your estate the way you want.

Mehta says, "You may alter or cancel the will if you think you made a wrong choice or if the asset is no longer a part of the estate." Similarly, new assets can be added. The will does not have to be compulsorily registered.

Taneja says, "Risk of potential time-consuming litigation amongst the legal heirs by disputing the existence of the will. In case of any litigation or registration, the contents of the will, including asset details and beneficiaries, may become accessible to the public."

Legal heirs need to transfer assets after a person dies in whose name they are registered to secure their inheritance. The process is tedious and may need bribes. According to media reports, 86 per cent of families are forced to pay a bribe to property officials for the deceased's asset transfer, reveals a recent survey by Local Circles, a community social media platform.

India does not have an inheritance tax. "Money received under the will by way of inheritance does not come with tax implications under the Income Tax Act, 1961," says Siddharth Joshi, senior associate, SKV Law Offices. Transfer of assets through a will does not attract any tax liability for the recipient (i.e., the children).

The better option

A challenge to the validity of a will can embroil the entire estate in litigation for decades. Taneja says, "If there is any bleak possibility of a dispute amongst legal heirs, it is always advisable to gift properties during your lifetime along with the execution of a family settlement, recording everyone else’s no-objections to the same."

Singhnia says senior citizens / parents must use a will and give their immovable properties, family homes, and real estate to their children only after their death. When an asset is gifted, the donor loses economic ownership and rights.

Narang says that if the individual making the transfer intends to enjoy the property in question during their lifetime, it may be better to transfer it via a will.

If you have a huge estate, then you can choose both ways to transfer different assets during different timelines. Mehta says, "You may need some assets now, which you may include in the will. Whereas some assets on which you have a clear intention of being gifted can be gifted immediately."

What if cases where the donee or recipient is not a specified relative of the donor? Singhania says, "A will might be better suited since assets received on inheritance, regardless of one’s relationship, are tax exempt."

Go beyond wills and gifts. "In case the assets to be transferred include multiple assets, including shares in the family business, and there are multiple inheritors involved, one should also examine using family trusts to ensure continuity of business and the well-being of all family members," says Pallav Pradyumn Narang, partner at CNK.

Consider factors like retirement security, family dynamics, liquidity, and income while choosing between gifting assets or succession.

Tax liability

Once the assets are gifted to the adult children, any income generated from those assets will be taxable in the hands of the recipient (i.e., the children)

This includes rental income from properties, dividends from investments, or interest income from fixed deposits.

The children will be responsible for reporting and paying taxes on this income

When they sell the asset, they would be liable for capital gains tax, potentially at a lower rate if they are in a lower tax bracket than you

This will allow the parents to reduce their tax liability by claiming the maximum exemption limit available to the children

Asset transfer to children: Harvest tax-saving potential

>  Once assets are gifted to adult children, they must report and pay taxes on income streams generated from them  

>  These include rental income from properties and dividends and interest income from investments

> When they sell the asset, they would be liable for capital gains tax, potentially at a lower rate if they are in a lower tax bracket than their parents

> Transferring assets can potentially be a route for parents to reduce their tax liability by claiming the maximum exemption limit available to the children

Source: Taxmann