Estate Planning for CFP – 4

In a Trust, a person transfers his property to another person i.e. the Trustee to hold it for the benefit of certain beneficiaries or it can be for the benefit of beneficiaries and himself. By adopting a Trust Route a person can avoid the issues which arise in a Will and make a ring fenced structure to ensure that the person’s future generations are well protected through a vehicle created by him and according to his directions.

Types of Trust

Parties

• Author of the Trust/ Settlor :A person who settles the Trust or the author of the Trust
• Trustee: The person who is appointed by the Settlor to administer the Trust and who accepts the responsibility of acting as a Trustee
• Beneficiary: The person for whose benefit the Trust is created is called the Beneficiary
• Trust-property or Trust money: The subject matter of the trust is called the Trust property or trust money. Trust property can be in the form movable or immovable property viz. cash, jewellery, land, investment instruments etc.

Will Substitutes (Revocable Trusts or Entities)

• India recognises both testamentary and living trusts. Since India does not have death taxes (abolished in 1985), trusts were never used by families as a tax and succession vehicle. Most families would use a Will in order to pass on wealth.
• Wills however could be very easily challenged in authenticity by estranged or unhappy heirs leading to long-drawn and expensive litigation.
• It was in light of this situation that living trusts became very popular with Indian families since they helped bypass the probate process and were not vulnerable to the whims of the family members.
• Family (private) trusts may be set up either during a person’s lifetime (inter vivos trust) or under a will (testamentary trust), either orally or under a written instrument, except a trust of immovable property that must be declared by a registered written instrument.

Classification

• A trust can be set up either as:
  • Revocable: A trust that can be revoked (cancelled) by its settlor at any time; or
  • Irrevocable: A trust will not come to an end until the terms of the trust have been fulfilled; and either as a
• Discretionary: An arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent; or
• Determinate: The entitlement of the beneficiaries is fixed by the settlor, the trustees having little or no discretion.
• Simple Trust:
  • Trust that is required to distribute all of its annual income to the beneficiaries.
  • Beneficiaries cannot be charitable.
  • Income of the trust is taxable to the recipient, even if left in the trust to accumulate.
  • Not allowed to distribute corpus (principal).
  • Capital gains are considered part of the corpus.
• Complex Trust (must have one of the following):
  • Retains current income in the trust.
  • Distributes corpus.
  • Distributions to charitable organization

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Estate Planning for CFP – 3

Power of Attorney

 

• Power of attorney is a formal agreement by which one person gives another person authority to act on his behalf and his name
• The person who gives power of attorney is referred to as the donor
• The person who acts on behalf of the donor is the attorney

 

General Power of Attorney

• It is a document by which one person appoints another person to represent him/her and act on behalf of himself to manage, attend or to carry out certain works like management, sale of property and dealings in the court etc.

 

Special Power of Attorney

• A power of attorney conferring on the agent or attorney the authority to act in a single or specified transaction in the principal or donor is known as special power of attorney
• Example: Special power of attorney for a particular court case

 

Durable Power of Attorney:

• A Power of Attorney which specifically says otherwise, agent’s power ends if principal become mentally incapacitated.
• However, a power of attorney may say that it is to remain in effect in the event of future incapacity of the principal. A power of attorney that says this is called a durable power of attorney.

 

Legal Powers Which Can Be Granted To The Attorney:

Broadly speaking a power of attorney provides an agent “all powers that the principal has” to manage the principal’s financial affairs or make health care decisions may be enough for many purposes. An agent may be authorised to:

• To execute all contracts, deeds, bonds, mortgages, notes, checks, drafts, money orders.
• To manage, compromise, settle, and adjust all matters pertaining to real estate.
• To lease, collect rents, grant, bargain, sell, or borrow and mortgage.
• To sell any and all shares of stocks, bonds, or other securities.
• To file, sign all tax returns, insurance forms and any other documents.
• To enter into contacts, and to perform any contract, agreement, writing, or thing to make, sign, execute, and deliver, acknowledge any contract, agreement.
• To make health-care decisions for the donor or his minor children.
• To sue on behalf of the principal.

 

Stamp Duty

A power of attorney is chargeable under Section: 48 of Schedule 1 of the ‘Indian Stamp Act, 1899’. A stamp duty has to be paid compulsorily by the principal or donor in the jurisdictional registrar’s office.

 

Registration

A power of attorney is not compulsorily registrable unless it creates an interest in any immovable property i.e. charge in favour of donee. Registration of power of attorney is optional In India, where the ‘Registration Act, 1908’, is in force, the Power of Attorney should be authenticated by a Sub-Registrar only, otherwise it must be properly notarized by the notary especially where in case power to sell land is granted to the agent. If a power of attorney is in respect of an immovable property of value more than Rs100 it must be registered. Registration of power of attorney authenticates the deed of power of attorney.

 

Qualifications of an Attorney

• It is the duty of the Principal to appoint a responsible person as agent who should act with utmost good faith. An attorney is a person who has been appointed by the donor to act on his behalf.
• An ideal attorney is that who must be willing to act in that capacity and he has to be impartial having integrity.

An attorney should be loyal to the donor and should not disclose any confidential matters related to the business.