Inheritance and Tax

Jaikishenji is a retiree and has accumulated a good amount of wealth. He is now 75 and lives with his son's family. Jaikishenji wants to ensure that his wealth is equitably distributed among his three children—two sons and a daughter—without any dispute or procedural hassle, in a tax-efficient manner. What are his choices?

Nomination is a simple way to ensure that investments are transferred to the children. There is documentation involved, all the same. Gifting to children is simpler but irrevocable. A will that seeks formation of a trust or a Hindu Undivided Family (HUF) is tax efficient. Jaikishenji needs to seek options that are flexible and save tax. Inheritance itself is not subject to tax, though the income earned from the inherited wealth is taxable.

Jaikishenji may not be able to avoid the documentation issues involved in the transfer of his wealth. If he chose nomination as the route, he can change the nomination any number of times during his lifetime. For his children to have the investments transferred to them, they’ll have to submit the required documents. It is also important to note that
transfer does not amount to a final settlement under succession laws.

The nominee only holds the wealth as a trustee , until disputes, if any, are settled. He can consider writing a will, which can also be amended anytime. The will can include all his wealth, including house property and gold which do not have nomination facilities.

If the tax of inherited income is to be maximised, his children can create an HUF structure. Inheritance is the basis for creating an HUF, whose income and wealth could grow over time and be taxed in the hands of the HUF. Creating a trust with his children as beneficiaries will also enable such separation of incomes.