Strategies for minimising estate tax: Practical tips for wealth preservation

Estate planning is a non-negotiable component of wealth management for High-Net-Worth Individuals (HNIs). It involves creating a comprehensive strategy about how your assets will be preserved, managed, and distributed after your passing. This process helps make sure that your loved ones receive what they rightfully deserve from your estate.

Estate planning is not just about allocating your assets. It is equally important to consider the tax implications. India does not currently impose an estate tax or inheritance tax as it was abolished in 1985. However, wealth transfer still involves legal complexities and potential financial implications such as capital gains tax. All this can erode the value of the inheritance.

Practical strategies to minimise estate tax liabilities and preserve wealth

Take a look at some strategic measures to mitigate estate tax liabilities and ensure the preservation of your wealth for future generations.

Use gifts wisely

Gifting is an effective wealth management and tax saving strategy. Section 56 of the Income Tax Act, 1961 allows individuals to give any amount to their spouse, children, and certain relatives without any tax implications. Gifts received under will by way of inheritance are also tax free.

Therefore, strategic gifting during your lifetime can reduce the size of your estate and minimise legal complexities for your heirs. However, note that friends don’t come under ‘relative’. Thus, any gifts received from them are taxable.

Invest in life insurance

Life insurance policies offer tax-saving opportunities under the Income Tax Act. Under section 80C, premiums paid towards life insurance qualify for tax deductions. Section 10(10D) decides whether the benefits received from these policies, either at maturity or upon the policyholder’s death, are exempt from tax.

By purchasing a life insurance policy, you can create a tax-efficient mechanism to transfer wealth to your heirs. The payout from life insurance can provide liquidity to your estate, settling any outstanding debts or obligations without needing to sell off assets and incurring capital gain taxes.

Create an irrevocable trust

An irrevocable trust creation can be a prudent strategy in estate planning to minimise tax implications and preserve wealth across generations. An irrevocable trust is a legal arrangement where assets are transferred out of the grantor’s possession. The terms cannot be changed once established without the approval of the beneficiary or court’s order.

Under section 47(iii) of the Income Tax Act, capital assets transferred to an irrevocable trust don’t attract capital gains tax, as it is not considered as a transfer. Also, section 56(2) exempts assets received by trusts from income tax, provided they meet specific criteria. This protects the assets from possible taxes and preserves them for the chosen beneficiaries.

Take assistance from experts

Estate planning is a complex journey that involves several legal, financial, and tax aspects. Hence, it is wise to consult professionals such as estate planners, financial advisors, wealth management experts, and tax attorneys to get personalised strategies that align with your requirements. They can also keep you informed about any changes in tax laws that could impact your estate planning.

To conclude

Although there is no inheritance tax in India, it is still paramount to prepare for all eventualities and understand how other taxes impact inheritance. Strategies like creating a will, gifting during your lifetime, buying life insurance, setting up an irrevocable trust, and working with estate planning professionals can be helpful.

These steps can help you pass your hard-earned wealth and legacy to the right heirs with minimal tax impact. So, integrate these approaches into your estate planning today and safeguard your legacy for future generations.