Estate Planning – Wills, Nominations, Trusts & Succession – NISM Series XA Short Notes (Part 11)
Welcome to Part 11 of the PassNISM short notes series for NISM Series XA – Investment Adviser (Level 1). Estate planning is the process of arranging for the orderly transfer of a person's wealth and assets to their heirs after death. It is a key part of holistic financial planning that investment advisers must understand and discuss with clients.
← Back to Part 10: Tax Planning
What is Estate Planning?
Estate planning involves making legal and financial arrangements to ensure that a person's assets are distributed according to their wishes after death, in the most tax-efficient manner and with minimum legal complications for survivors. It also covers planning for incapacity (mental or physical) during one's lifetime.
Key objectives of estate planning:
- Ensure assets reach the intended beneficiaries
- Minimise estate taxes and legal costs
- Avoid disputes among heirs
- Protect assets for minors or dependants with special needs
- Provide for charitable giving
Will (Last Will and Testament)
A Will is a legal document in which a person (the testator) specifies how their assets should be distributed after their death. Key features:
- The testator must be of sound mind and 18 years or above
- A Will must be signed by the testator and attested by at least two witnesses (witnesses should not be beneficiaries)
- A Will does not require registration, but registration makes it more authentic and reduces risk of challenge
- The Will can be changed at any time during the testator's lifetime through a Codicil
- A person appointed to execute the Will is called an Executor
- If a person dies without a Will, they are said to have died intestate and succession is governed by applicable personal law
Probate
Probate is a legal process of proving in court that a Will is valid. In India, probate is mandatory in certain cities (Mumbai, Kolkata, Chennai) for immovable property. A probated Will gives the executor legal authority to distribute assets.
Letter of Administration
When a person dies intestate (without a Will), the court issues a Letter of Administration to the legal heir, authorising them to manage and distribute the deceased's estate.
Nomination
Nomination is the process of appointing a person (the nominee) to receive assets from an account, policy, or investment in the event of the account holder's death. Important distinctions:
- For bank accounts and deposits: The nominee receives the money as a trustee for the legal heirs, not as the absolute owner. The legal heirs can subsequently claim the money from the nominee.
- For shares and mutual funds: Under the Companies Act and SEBI's recent amendments, nominees are treated as the beneficial owners (not just trustees). However, legal heirs may still have succession rights depending on the situation.
- For life insurance policies: The nominee has the right to receive the claim amount. However, if the nominee is not a beneficial nominee (immediate family: spouse, parent, child), legal heirs can claim through the nominee.
- SEBI's 2023 mandate: All demat account and mutual fund folios must either have a nominee registered or a signed opt-out declaration.
💡 Key Exam Point: Nomination does NOT override a Will. A nominee receives assets in trust for legal heirs unless specified otherwise (e.g., insurance beneficial nominee).
Joint Accounts and Survivorship
Joint accounts can be operated in the following modes:
- Either or Survivor (E or S) – Either holder can operate the account independently; on death of one, the surviving holder gets full access
- Former or Survivor (F or S) – Only the first-named holder can operate during lifetime; survivor gets access on death
- Anyone or Survivor – Any of the joint holders can operate; survivor(s) get access on death
- Jointly – All holders must sign for any operation; on death of one, the account freezes until legal succession is established
Trusts
A trust is a legal arrangement where one person (the Settlor/Trustor) transfers assets to another person or entity (the Trustee) to hold and manage for the benefit of specified persons (the Beneficiaries). Trusts are governed by the Indian Trusts Act, 1882.
Types of Trusts
- Revocable Trust – Settlor can modify or revoke the trust at any time. Assets remain in the settlor's estate for tax purposes.
- Irrevocable Trust – Cannot be modified once created. Assets are out of the settlor's estate; useful for asset protection and estate planning.
- Living (Inter Vivos) Trust – Created during the settlor's lifetime; assets bypass the probate process on death
- Testamentary Trust – Created through a Will; becomes effective only on the testator's death
- Charitable Trust – Established for charitable purposes; eligible for tax exemption under Section 11 and 12A of the Income Tax Act
- Special Needs Trust – Created to provide for a beneficiary with a disability without disqualifying them from government welfare benefits
Why Use a Trust for Estate Planning?
- Avoids probate process (faster asset distribution)
- Provides privacy (unlike a Will, trusts are not public documents)
- Protects assets for minor beneficiaries until they reach a specified age
- Allows for staggered distribution of wealth
- Continuity: trust continues after the settlor's death
Succession Laws in India
If a person dies without a Will (intestate), assets are distributed according to applicable personal law:
| Religion | Applicable Law |
|---|---|
| Hindus, Sikhs, Buddhists, Jains | Hindu Succession Act, 1956 (amended 2005) |
| Muslims | Muslim Personal Law (Shariat) Application Act, 1937 |
| Christians, Parsis, Jews, others | Indian Succession Act, 1925 |
Hindu Succession – Key Points
- A Hindu male dying intestate: assets pass to Class I heirs first (widow, sons, daughters, mother, etc.); if none, then Class II heirs
- 2005 Amendment: Daughters have equal coparcenary rights in Hindu Undivided Family (HUF) property, applicable even to daughters born before 2005
Power of Attorney (PoA)
A Power of Attorney is a legal document authorising one person (the Attorney or agent) to act on behalf of another (the Principal) for financial or legal matters.
- General PoA – Broad authority for multiple matters
- Specific PoA – Limited to a specific transaction (e.g., sell one property)
- Durable PoA – Remains valid even if the principal becomes mentally incapacitated
A PoA becomes void on the principal's death. It is not a substitute for a Will.
Checklist: Estate Planning for Clients
- ✅ Draft and register a Will
- ✅ Update nominations on all bank accounts, demat accounts, MF folios, insurance policies, EPF/PPF
- ✅ Consider joint account modes carefully
- ✅ Evaluate whether a trust is appropriate for complex assets or dependants
- ✅ Keep a record of all assets, liabilities, and policy documents accessible to family
- ✅ Review and update estate plan after every major life event (marriage, children, divorce, death in family, major asset acquisition)
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