Where there is a will, there is tax saving. Many tax advantages are possible only through a will. For example, a separate income-tax file for a Hindu Undivided Family (HUF) can be established by transfer of property through a will.
Similarly, bequests can be made to minor children and minor grand children through a will in such a manner that there is no clubbing of income under the provision of Section 64(1).
Transfer of assets can be made by will to one's wife or one's daughter-in-law without any consideration, and without attracting the clubbing provisions of Section 64(1).
Where a person is interested in the creation of a charitable trust or the transfer of property after his demise for the benefit of the public for charitable purposes, this, too, can easily be done through the will. The different tax planning aspects through will are described below in some detail.
1. Tax saving by creating a Hindu undivided family (HuF) through a will
One of the important means of tax planning which can be adopted through a will is the creation of a Hindu Undivided Family. Under the provisions of Section 64(2) of the Income Tax Act, where a member of a Hindu family impresses his self-acquired property with the character of a joint family property, the income therefrom is to be clubbed with his other income.
This disadvantage can be overcome by transfer of property in favour of the coparcenary of a Hindu governed by the Mitakshara School of Hindu Law so that a separate Hindu Undivided Family comes into existence which is recognised as an independent and separate taxable entity under the income tax law.
For example, let us assume that you wish to transfer certain property to your son, his wife and his children. One can then make a will and transfer the property to the Hindu Undivided Family of one's son, stipulating in unequivocal terms that the property transferred would belong only to the son's Hindu Undivided Family, and not to individual family members.
The property would then get bequeathed to the Hindu Undivided Family which would be a separate tax entity. The newly-created HUF would be able to enjoy separate exemption limit applicable to an individual taxpayer under the Finance Act for the time being in force.
2. Tax planning for bequests to minor children or grand children through a will
Under the provisions of Section 64(1) if a person makes a gift to his minor children, minor grand children (paternal side) then the income accruing or arising to the minor children or minor grand children (other than disabled children) as the case may be, would be clubbed with the income of the donor.
This would not, however, be the case if one were to make a bequest to one's minor children or minor grand children through a will.
The reason is obvious. After the demise of the testator, the assets given to the minor child would result into separate funds of the minor child, income from which would not be clubbed once the minor attains majority.
It is possible to avoid clubbing of income of the minor by setting the funds to a trust for the minor based on the principles of a Supreme Court decision [C.I.T. vs. Mr Doshi, (1995) 211 AIR 1 (SC)]. Thus, a will can be adopted as a proper device for transfer of property by way of bequest through a will leading to a lot of tax saving.
3. Tax planning for transfer of funds to one's spouse through will
During a taxpayer's lifetime, any gifts made to one's spouse are liable to be included in the income of the donor under the provisions of Section 64(1). However, when bequests are made in favour of one's spouse through a will, obviously there is no question of clubbing of income.
This can result in a lot of tax saving. With the abolition of the estate duty this device, as well as other modes of transfer of property through wills can be very profitably adopted.
4. Tax planning for transfer to daughter-in-law by a will
Under the provisions of Sections 64(1)(vi) and (viii) of the Income Tax Act, it is provided that where a transfer of property is made in favour of the daughter-in-law either directly or for her benefit to the trustees of a trust, the income from the transferred assets would be clubbed with the income of the donor.
Hence, during one's lifetime, it is not possible to make gifts in favour of one's daughter-in-law even through the medium of a trust for the daughter-in-law. This handicap can, however, be overcome through the will.
Thus, a bequest can be made in favour of one's daughter-in-law, so as to confer on her an absolute title, and make her a taxable entity if she is not already one, after the testator's demise.
There would not be any clubbing of the income of the daughter-in-law with the income of the executor of the estate of the deceased person after the testator's death.
A discretionary trust can be created through a will which could be charged to tax at normal rates. It is provided in clause (ii) of the first proviso to Section 164(1) of the IT Act, that if there is only one trust declared by a will, then the income of the discretionary trusts would be chargeable to income tax as if it were the total income of an individual. Make sure only one discretionary trust is created through the will.
From the above description of the various aspects of Wills, it is clear that a considerable amount of tax saving is possible through proper drafting of wills. The proverb 'where there is a will, there is a way' can be altered to 'where there is a will, there is tax saving.'