Nilesh is a retired senior professional and lives with his son’s family. He accumulated a good amount of wealth during his life. His children, including his two sons and a daughter, are aware of the personal wealth he holds and hope to inherit it. He is now 72 years old and is considering a fair distribution of his fortune between the three, without dispute or procedural hassle and in a tax-efficient way. He wonders what might be the best way to achieve this and explores various options.

Appointment is a simple way to ensure that investments are passed on to children. There is documentation involved all the same. The gift to children is simpler but irrevocable. A will that seeks the formation of a Hindu undivided family (HUF) or trust is tax-efficient. Nilesh needs to look for flexible options while saving taxes. The inheritance itself is still not subject to tax, although the income from the inherited estate is taxable.

Nilesh may not be able to avoid documentation issues related to the transfer of his wealth. If he chooses the nomination as his route, he can change nominations as many times as he wishes during his life. In order to get the investments transferred to themselves, his children will need to provide the required documentation. It is also important to note that the transfer does not amount to a final settlement under the laws of succession.

The trustee holds the wealth only as a trustee, until any disputes are settled. He can consider writing a will, which can also be changed at any time. The will can include all his patrimony, including movable and immovable assets, which do not have appointment facilities.

To optimize the taxation of inherited income, children of Nilesh can create a Hindu undivided family structure (HUF). Inheritance is the basis for the creation of a HUF, whose income and wealth could grow over time and be taxed in the hands of the HUF. Creating a relationship of trust with his children as beneficiaries will also allow such separation of income.

(Content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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