Gift Deed Vs Will

Planning for the transfer of assets to the next generation is a critical element of financial and estate planning. Parents often grapple with the decision of whether to gift their assets to their children during their lifetime or through a will. This choice involves considerations of family dynamics and an income tax perspective.

Gift Deed vs. Will: The primary distinction between the two approaches lies in the timing of asset transfer. A gift deed takes effect immediately upon execution, transferring ownership to the donee during the donor’s lifetime. In contrast, a will becomes operative only after the testator’s death. Both methods have their advantages and disadvantages.

Gift:

Reduces the likelihood of disputes among legal heirs.
Allows for specific conditions, such as the donee taking care of the donor, with potential to revoke the gift.
Excludes capital gains tax, as per Section 47(iii) of the Income Tax Act.
Requires payment of ad valorem stamp duty and registration fees for immovable property.

Will:

Provides a legal record of how estate distribution should occur, preventing distribution based on religious norms.
Allows for alterations or cancellations if circumstances change.
May lead to time-consuming litigation among legal heirs, potentially making the contents of the will public.
Requires legal heirs to transfer assets after the testator’s death, which can be a cumbersome process, often involving bribes.
In India, there is no inheritance tax, and money received under a will is tax-exempt under the Income Tax Act, 1961.

Preferred Approach:

If there is a possibility of disputes among legal heirs, it’s advisable to gift properties during the donor’s lifetime alongside a family settlement.
Immovable properties, family homes, and real estate should ideally be transferred to children through a will after the donor’s demise.
If the donor intends to enjoy the property during their lifetime, using a will may be more suitable.
For individuals with substantial estates, a combination of gifting and testamentary transfer for different assets and timelines can be considered.

Consider Additional Strategies:

In cases involving multiple assets, including shares in a family business and multiple inheritors, exploring family trusts can ensure business continuity and family well-being.

Factors to Consider:

While choosing between gifting assets or succession planning, consider factors like retirement security, family dynamics, liquidity, and income.

Tax Implications:

When assets are gifted to adult children, any income generated from those assets becomes taxable in the hands of the recipient (children).

This includes rental income, dividends, or interest income.

The children are responsible for reporting and paying taxes on this income.

When the assets are sold, capital gains tax may apply, potentially at a lower rate if the children are in a lower tax bracket.

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