Gifting Assets During Lifetime: Benefits and Considerations

A friend inherited his parents’ wealth after his elderly widowed mother’s demise a few months ago. He admired his father’s wisdom in creating and managing assets: the paperwork and processes were so well thought out that his mother lived comfortably and without financial worries.

My friend hadn’t been so fortunate. For most part, he struggled with an unstable career, a broken marriage, and the burden of responsibility towards his children. Finally, he has inherited a fortune, except that it has come too late. He is 65, and wondering whether he has any choice but to pass on the wealth to his children. We were talking about doing that while it still mattered. Should one bequeath assets while still alive?

We are staring at higher life expectancy. Inheritors, without doubt, would be happier to get some of the assets before they become too old to use and enjoy them meaningfully. We also live through relatively prosperous times. It is not uncommon for the middle class to own property as well as to have savings and investments accumulated and appreciated in value. Both these point to the possibility that we can give with our own hands while still alive, and also be secure about our finances.

The joy of giving and mentoring

When one begins to give assets to the inheritors or in charity to other relatives or other causes, the joy of seeing how those assets are being utilised and enjoyed is immense.

One also gets to mentor the beneficiary about managing the assets—property or investments. The process and paperwork is simple and straightforward. There is no need for a will, probate, painful execution process, or multiple iterations. Nor is there a question of verifying and guessing your true intent after your time. I remember the gleam in my mother-in law’s eyes when she handed over cheques from her bank account to all of us on her 80th birthday. We were running from pillar to post to claim the large balances in the single-holder pension account of my deceased father-in-law at the same time.

The first step is to list assets and allocate them for your use and for bequest. In many cases, properties are left behind for children. This category of assets is rarely, if ever, sold; it is mostly passed on. Investments such as mutual funds, bonds, stocks and deposits tend to be partly utilised and partly left behind.

Make an assumption that you would live for 100 years. Work the math to see what you need. Answer the honest question about how much you need and will realistically spend in your lifetime. If you find a surplus, pass it on. Consider gifting away, even if conservatively. Your assets will be used when your children need it most—to buy homes, to educate their children, to start a business, to live freely, to upgrade their lifestyles. The tax implications are fairly simple in the Indian context. One can make gifts to adult relatives as defined in the Income Tax Act, without limit, and without any tax implications for the giver and receiver. Gifts to minors and spouse will attract clubbing provisions (the rent and income from the asset will be added to your income for tax purposes). As you age, owning the one property you now live in, might be adequate for your use. Write a gift deed to give away other properties. Register and transfer it while alive. Every inheritor will swear that this is simpler than running pillar to post after your time.

Tax rules across borders

If your children live abroad, the equation changes somewhat. If they live and work in America, for example, they enjoy a benefit called “stepped-up basis.” This means, the cost of the assets they inherit is reset to the date of their inheritance. This means, the capital gains on the asset, until the date of inheritance, is not added to their income. In India, the date of acquisition is also inherited and capital gains apply on the original purchase price (or reset to April 2001 if bought earlier). This means, your American inheritors will lose the benefit of lower capital gains if they receive the property before your time. If you sell the property in your lifetime, and gift the cash, not any asset, to your American inheritor, they can invest it and use it as they wish. Short of converting this into a tax planning piece, the benefits of early gifting and transfer is worth serious consideration, anyway.

Financial assets, especially liquid cash (strictly no reference to unaccounted money, but liquidated genuine cash), is much simpler and easier to use and gift in your lifetime. Lavish Indian weddings are a testimony to parents’ wealth being utilised by prospective heirs, in their lifetime, even if the pomp and ostentatious spending raises many eyebrows. Gifting and charity, in cash and kind, during one’s lifetime offers the scope for creating shared experiences of celebration, travel, entertainment and eating out together, for both generations. The caveat is the inability and perhaps unwillingness of seniors to make spending decisions. We have discussed that earlier in this column. It is good to reiterate that cash and liquidity rank at the very top of all choices to share your wealth with your children.

Passing on financial wealth

How about financial assets like stocks, bonds, deposits, and mutual funds? These are easy to use and the process to transmit after your time is simpler. These days nominations are mandatory for most of these assets. If your children and inheritors live in India, the process is easy. If they live abroad, they will invariably liquidate these after your time, and repatriate them for reinvesting again. That makes it tax efficient, and procedurally easy as they are subject to a different set of tax rules aboard. In summary, do not choose the default option of nomination or will and postpone the use of your assets after your lifetime by your children and inheritors. Consider giving away in your lifetime. Contrary to what you may believe, liquidate property while alive, spend cash while you still can, and leave behind financial assets if you must. Give while your arms are still warm and participate in the joys your wealth can bring.