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  • Writer's pictureAkshay Nayak

What Not To Pass On

Most of the focus when it comes to estate planning and wealth transmission is placed on deciding a legal process and structure for our assets which are to be passed on. The process of transmission is usually effected through a legally enforceable will, and occasionally a trust. But a common mistake that is made in the estate planning process is that we invariably pass on all of our assets to our beneficiaries blindly, without thinking whether our beneficiaries actually have any use for the assets that are being handed down to them. Knowing which of our assets should not be passed on is therefore an equally important aspect of the estate planning process. So today, I will talk about those assets which ideally should not be passed on as part of our estate plan, why they should not be passed on and nhow those assets can be dea with so as to make our estate plans more effective.

The love affair that most Indians enjoy with real estate is well documented. It is the most commonly found asset in the balance sheet of almost every single Indian household. But purely as an investment, real estate is one of the most inconvenient and illiquid assets available. And in today's world where all members in a family rarely live in the same area, excessive property ownership makes very little sense, if any. Therefore owning and passing on multiple properties to our beneficiaries would actually place an unnecessary burden on them. Exposure to real estate should therefore be restricted to the house we live in, and one additional residential property at the most to serve as a safety net, in case we find ourselves needing to relocate. We also have to realise that we may live for longer than we expect to, which means that by the time our beneficiaries gain ownership of the house, they may find it inconvenient from the standpoint of accessibility, especially if our homes have multiple levels within them. For instance, let us say I pass away at the age of 90 and by that time my beneficiary is 65. There is a very real possibility that the layout of my home may not be the most feasible in light of the likely physical condition of a 65 year old. Add to this the fact that real estate needs to be passed on by means of a legally drafted and registered will, with a nominee in place and also a certification from a court of law in some cases, and it's not hard to see why real estate is a complicated and inconvenient asset to pass on.

Another asset class that is a hot favourite among most Indians is gold. In India gold is usually given as a sentimental gift in the form of jewellery, especially when our daughters get married. But anyone who possesses a reasonable amount of financial nous would realise that physical gold is not an asset worth passing on across generations. Firstly, holding gold physically does not enable us to track the price of gold on a real time basis. Physical gold therefore cannot be considered an investment. Also, we cannot be assured of getting a fair sale price for our gold jewellery if we find ourselves needing to sell it off. This is especially true if we have jewellery that is a few decades or more old. Therefore physical gold is better left outside the pool of assets we wish to pass on across generations. Gold ETFs would instead be a much better medium through which to pass gold on across generations, for reasons given in the graphic that follows.

Non term life insurance policies such as endowment plans and plans which claim to provide for children’s education are also quite popular among most Indian individuals. Such plans are most commonly sold to parents and senior citizens, on the pretext that they would be able to secure the futures of their families and grandchildren. But insurance as I have already mentioned repeatedly in the past, is not meant to serve as an investment. And most non term life insurance products achieve very little in a real sense for us as investors, be it in terms of life cover or investment returns. Not to mention the disproportionately high premium payments that such policies usually involve. Therefore, parents and senior citizens must remain aware of these facts at all times and avoid purchasing such policies, regardless of how enticing the product being offered sounds. And even if such policies are purchased for some reason, they must not form part of the pool of assets we wish to pass on at any cost.

A portfolio of high quality stocks and other market linked assets represents a much better option to pass on wealth compared to most other assets. But when equity holdings haven't been properly dematerialised, it may end up being a significant challenge for our beneficiaries to enjoy the benefits of the portfolios handed down to them. This is especially true for those who pass stocks that are 4-5 decades old, since the concept of dematerialisation came into existence fairly recently. While there is no problem holding shares in physical form, SEBI regulations currently mandate that stocks must be dematerialised before they are sold. This hampers the liquidity of our market linked assets, which is usually one of the most important advantages associated with such assets. And the process of dematerialisation involves a number of steps and procedures as set out in the graphic that follows (In context of the graphic DP stands for Depository Participant, which means the stock broker with whom we have a demat account).

A portfolio worth lakhs or crores would be of little use to our beneficiaries if they are unable to realise the value of the portfolio as and when the need arises. Therefore, those of us passing on stocks or any form of market linked assets must therefore ideally ensure that everything is appropriately dematerialised before being passed on. If not, we must at least see to it that our beneficiaries are well versed in the process of dematerialisation, so that they can complete the process once they recieve any market linked assets that are bequeathed to them.

Convenience must be given priority over size when creating an asset pool with the intention of passing it on to our beneficiaries. It would be a good practice to pass on most of our wealth in the form of reasonably liquid financial and market linked assets, with physical assets representing an insignificant portion of the asset pool that we pass on. An even better thing to do would be to involve our families while formulating our estate plans and ask them which of our assets they would be comfortable handling, and which ones they would have a hard time dealing with. This would make our estate planning exercise a lot more relevant. Passing on a large asset pool to our beneficiaries would be of little use if most of those assets were to be beyond the comprehension and capacities of our beneficiaries. In such a case neither we nor our beneficiaries would enjoy the fruit of years and decades of painstaking labour. Knowing what should not go into our inter generational asset pool is therefore just as important to the formulation of an effective estate plan as any other aspect it entails.

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