Deed of gift or will? Which option is best for succession and estate planning?

Alay Razvi, Partner at Accord Juris, explains this using the following example:

– Mr. Prasad decides to transfer his house to his daughter while he is still alive. He executes a gift deed, gets it registered and immediately transfers the property to his daughter. Mr. Prasad cannot revoke or cancel the gift deed. It can be cancelled only by a court order by filing a suit for cancellation of gift deed.

Tax implications

Deed of gift:

• Gift tax: The recipient may be subject to gift tax, depending on the jurisdiction and the relationship between the donor and donee. In some regions, gifts to immediate family members may be exempt from tax.
• Capital gains tax: The donee may have to pay capital gains tax if he/she sells the donated property in the future. The cost of the property is usually the original purchase price by the donor.

Disadvantages:

• Loss of control: Once the deed of gift is signed, the donor loses control over the property.
• Family disputes:Other potential heirs may contest the gift, which can lead to family disputes.

• Financial implications: The donor may experience financial difficulties if he or she gives away significant assets during his or her lifetime.

A will is a legal document that specifies how a person’s assets will be distributed after their death. The transfer of assets only occurs after the death of the testator (the person who makes the will). With respect to wills, a will can be changed or revoked at any time during the testator’s lifetime. Wills generally must go through a legal process called homologation in order to be validated after death.

Examples:

Mr. Shyam decides that his house will be transferred to his daughter after his death. He includes this in his will, which also specifies all his other asset distributions. After his death, the will will come into effect. However, in order to avoid a delegate, his daughter must file a request for homologation with the competent court.

Tax implications

Inheritance Tax: The estate may be subject to inheritance tax based on the total value of the assets and the laws in the jurisdiction.

Disadvantages:

Probate Procedure: The will must be probated, which can be time-consuming and costly.

Dispute: Wills can be contested by dissatisfied heirs, which can lead to legal proceedings.

Validity: If a will is not drawn up correctly, it can be declared invalid. The estate must then be distributed according to the law on inheritance.

A comparison of the two:

With a deed of gift, you can give away your belongings while you are still alive. This means that you do not have to go through the legal process called homologation when you die. However, once you give something away, you cannot take it back. Furthermore, giving away a lot of stuff can attract the attention of the tax authorities.

A will is a legal document that states what you want to happen to your belongings after you die. It gives clear instructions about who gets what. But after you die, the will must go through a legal process called probate, which can take time and money. It is important to write a clear will and make sure it is done correctly to avoid problems.

“However, it is crucial that the Will drafted by the testator is robust to avoid inadvertent ambiguity. It is essential that the Will pays attention to the recommended sanity checks like ensuring the independence of the witnesses (two in number) in whose presence the Will is signed, attaching a medical certificate (in case of senior citizens drafting the Will) stating that the person drafting the Will is of sound mind, registering the Will to enhance its authenticity, etc. It can further be ensured that no other document suggests your intentions to the contrary,” says Keshav Singhania – Head, Private Client Singhania & Co.

Deed of gift

• Assets are transferred to the recipient during the donor’s lifetime.

• Assets bypass the homologation process, which can be time-consuming and expensive.

• :Gift tax is generally not applicable in India, but there may be implications under the Income Tax Act.

• Once a donation has been made, it cannot be taken back.

• Large gifts may be scrutinized by the tax authorities and there is a risk that the donor will be left without financial security in old age.

Shall

• After the death of the testator, the assets are transferred.

• The will must be probated, which can take a lot of time and money.

• The will can be changed or revoked at any time during the testator’s lifetime.

• Provides clear instructions for asset distribution.

• Contested wills can lead to legal disputes and delays in the distribution of assets.

When comparing wills and deeds of gift, it is essential to be clear about the intention and purpose with regard to the date of effecting the transfer of immovable and movable assets. If the intention is to transfer the assets with immediate effect, then this can be achieved by executing a deed of gift, whereas, if the intention is to transfer the assets after one’s lifetime, then executing a will is advisable.

“Another factor to be considered while comparing the two documents is the irrevocability factor. While a will can be revoked at any time during the testator’s lifetime, a gift is generally irrevocable in nature, i.e. a donor cannot revoke the transfer made through a deed of gift once it has been executed unless the donee fails to satisfy certain conditions for the gift or the gift is made for a specified period.

An important consideration while comparing the two documents would be the difference in stamp duty implications in case of immovable property. While immovable property transferred through a will does not attract any stamp duty expenditure and technically need not be stamped or registered (though it is advisable), a gift deed, on the other hand, would mandatorily have to be registered under the provisions of the Indian Registration Act, 1908, if it is a gift of immovable property. The applicable stamp duty on the gift deed would be determined by the state laws where the immovable property is situated. The stamp duty implications on registration of the gift deed are not excessive, certain states (like Punjab, Haryana etc.) provide for concessional stamp duty for gifts between blood relatives,” Singhania said.

In addition to the stamp duty implications, you should also consider the tax implications if you are considering a transfer using one of these documents.

Tax implications of both

From an income tax perspective, a will in itself has no tax implications, as the assets are not transferred to the beneficiaries until after the testator’s death. In contrast, gifts are subject to tax implications, including clubbing and capital gains tax on capital gains, which are taxed in the hands of the recipient. However, as the transaction would be between family members, the personal effects of the transaction are exempt from capital gains tax and will not have any adverse tax consequences.

What are the risks?

There are certain risk factors associated with transferring assets through a will.

“Since the will is made posthumously, there is a possibility of legal challenge to the validity of the will, if it is drafted in an ambiguous manner or does not mention all the assets of the testator and is not specified in detail. In addition, there is another factor that carries the risk of a lengthy and complex homologation process, which also compromises privacy, as the document becomes public. If the family circumstances of the testator making the will are disputed or contradictory, then there is a chance that it will be subject to disputes and legal challenges, thus delaying the distribution of assets to beneficiaries,” Singhania said.

On the other hand, a gift carries the risk of losing control over the property due to the irrevocable nature of the transfer. In addition, a gift may give rise to tax and stamp duty liabilities for both the donor and the recipient.

Ultimately, the decision between making a will or gifting assets should be made after considering individual circumstances and priorities. It is advisable to consider seeking advice from a legal professional, who can assist with the requirements of a valid will or deed of gift and thus avoid errors that could render a will invalid. In addition, a legal expert can assist in structuring the gift transaction to minimize stamp duty and tax implications for both the donor and recipient.