WEDDING AND SUCCESSION PLANNING
The Impact Of Marriage On Inheritance Rights Of Hindus
A wedding is after all a momentous occasion in a person’s life, and planning is key. It might be safe to say, however, that the thought of how marriage will impact one’s inheritance rights and succession planning in anticipation are usually not top of the list.
We discuss this important but rarely discussed topic the effect of marriage on inheritance rights and planning in anticipation of marriage. As this is a vast topic and issues vary depending on the facts of each case.
Marriage Between Hindus
Impact On Married Person - If a Hindu marries another Hindu, there is no impact on the right of that person or his/her progeny to inherit from their relatives. Moreover, a Hindu woman continues to remain a coparcener in her father’s Hindu Undivided Family, although she does not become a coparcener in her father-in-law or husband’s HUF. In case the husband dies intestate (without a Will), she will be entitled to a portion of his personal assets but not his HUF.
Impact On Succession To A Person’s Estate - There will, however, be an impact on succession to such a person’s estate should he or she pass away. For example, if an unmarried Hindu man dies intestate, then his entire estate is inherited by his mother as his Class I heir, but after his marriage, his wife and mother receive an equal share (after his children are born, they also get equal shares).
If an unmarried Hindu woman dies intestate, then her entire estate is inherited by her parents equally. However, post marriage, her parents lose their inheritance rights.
After marriage, a Hindu woman’s estate is first inherited by her husband (till they have children), and after the husband passes away, by the heirs of the husband. This would be the position even with respect to the property/properties that she may have inherited from a grandparent or property received on partition of her father’s HUF.
Inter-Religious Marriages
Marriage between a Hindu and a person belonging to another religion may be validly solemnised in two ways. Under the procedure laid down by the Special Marriage Act, 1954, without religious conversion of either of the parties; or Under personal law of a religion by religious conversion of one of the parties to such religion, if required.
Inter-Religious Marriages Under Special Marriage Act
Impact on married person: If a Hindu is a coparcener in an HUF, then the solemnisation of his marriage with a person of another faith (except a person professing the Buddhist, Sikh or Jain religion) under the Special Marriage Act (i.e. before the Marriage Officer) will sever his status as coparcener of such an HUF. In effect, the person’s share in the family properties becomes defined at once and vests separately. He or she cannot later claim any right of survivorship in family properties. This is particularly relevant if a significant portion of the family’s estate, particularly the family home or business, is held by an HUF.
However, he or she will continue to be able to inherit property (personal, not held by an HUF) from his or her family through intestate succession.
Impact On Succession To Person’s Estate: Succession to such a person’s property if the person passes away intestate, will be governed by the Indian Succession Act, 1925 and not the Hindu Succession Act, 1956. The same principle applies even to intestate succession to the property of the children of such persons. This principle does not apply, however, if a Hindu has married a person who professes Buddhist, Sikh or Jain religion.
If a Hindu male passes away intestate, then his mother would be entitled to his entire estate under the Hindu Succession Act.
However, if he passes away after having solemnised his marriage under the SMA, then (if he does not have children), his property will be divided between his widow and father under the Indian Succession Act and the mother loses her inheritance rights.
Inter-Religious Marriages By Conversion Impact on married person - If instead of solemnising the marriage under the SMA, a Hindu converts to another religion (Islam or Christianity, in most cases), then the impact on inheritance rights varies from that occurring on solemnisation of marriage under the SMA.
Hindu Converts To Another Religion Before Marriage - If a Hindu converts to another religion before marriage, there will not be any implication on his or her ability to inherit from his or her Hindu relatives. This position has been confirmed by Indian courts on the ground that renunciation of a particular religion and converting to another is a matter of choice, and it cannot cease relationships that exist by birth.
However, the conversion of a coparcener creates a deemed partition of an HUF under Hindu law and therefore the converted person’s right of survivorship in the HUF does not survive.
Impact on descendants of married person : Although the convert himself/herself is not prejudiced, children born to the convert after his/her conversion and their descendants will not be able to inherit property of their Hindu relatives under Hindu law on intestate succession. That said, this prohibition is removed if the children of the convert or their descendants revert to Hinduism before the succession opens.
Example, if a Hindu woman converts to Christianity, she will be able to inherit property from her father if the father passes away intestate; subsequently, after her demise, her children will be able to inherit this property from her.
However, if the Hindu woman dies before her father, her children will not be able to inherit the property from her father (their grandfather) if he passes away intestate, unless they have converted to Hinduism before their grandfather’s demise.
If The Person Converts To Christianity
Impact On Succession To A Person’s Estate : There is also an impact on succession to the estate of the convert themselves. If the person converts to Christianity, he/she may bequeath their entire estate by Will – as they would have been able to do as Hindus, but if they pass away without a Will, then their property will devolve as per the Indian Succession Act and not Hindu law.
If The Person Converts To Islam
The impact on succession is greater if the conversion is to Islam. Firstly, under the forced heirship rules of Sharia law, a person’s ability to bequeath his estate by Will is limited (only one-third of the property may be bequeathed without the consent of all heirs). This is unlike the position for Hindus, who may bequeath their entire estate by Will to any person of choice.
Thus, if a Hindu has executed a Will of his/her estate before marriage, then there could be an impact on the bequests under the Will, depending on the Islamic sect of the convert.
Secondly, if the person passes away intestate, there would also be an impact on the heirs who will inherit from him/her as succession will be as per Sharia law rather than Hindu law. In this regard, Indian courts[4] have held that as per Muslim law, a Hindu cannot be a successor to a Muslim’s estate; therefore, the convert’s birth family, being Hindus, would not be entitled to inherit from the estate of the convert if he or she passes away intestate.
Muslims & Will - In case of Muslims, the law applicable is shariat. Under shariat, a Muslim can make a Will for maximum of one third of his estate. The same can be bequeathed to any person whether he is or is not a legal heir of the Muslim i.e. who may be a complete stranger. This rule also defers in case of Hanafi and Shia Law.
In order to bequeath the 1/3rd estate to a legal heir consent is required from the other legal heirs. Under Shia Law the consent can be obtained either before or after the death of the Testator. Under Hanafi Law the consent has to be obtained only after the death of the Testator.
In the event, the bequest is in excess of 1/3rd then the same would be invalid unless the other legal heirs give their free consent after the death of the Testator. In the event, the legal heirs do not consent to the bequest of more than 1/3rd estate then such a Will would be valid only with respect to the 1/3rd estate. For the balance, his estate will succeed as per Shariat.
Within India, if a Muslim has married under Special Marriages Act & not as per Muslim customs; he is permitted to make a Will.
Succession Planning In Anticipation
The impact is not only on the person’s ability to inherit from his or her relatives and vice-versa, but also the children’s ability to inherit from such person and their Hindu relatives. Hence, it is advisable that each family undertakes the exercise of putting in place estate and succession plans or revisiting them upon the marriage of a close family member.
This exercise could involve preparing or updating Wills prepared prior to the marriage to ensure that a person who might otherwise be disinherited continues to receive their share of inheritance. Lifetime gifts of a property may also be considered, bearing in mind taxation and stamp duty implications.
Alternatively, a private trust which provides the twin benefits of consolidation and long-term holding of wealth - may be established to hold property for the benefit of the married person and their future children.
Further, if a person is likely to cease being a coparcener of an HUF, the family may consider partitioning the HUF prior to the marriage and distributing the property representing his or her share to the person.
Succession Planning in Business
When most people start their small business, the last thing on their mind is thinking about what will happen to their business Many people in our industry reach burn-out, retirement, etc. and literally just walk away from their business.
It is a tragedy after all of the hours of work, blood, sweat and tears that these entrepreneurs have invested in their companies.
With a little planning, this is something that is easily avoidable through a strategy called “succession planning.” In simple terms, this means “who is going to take over your business after you’re done?”
Many organizations have little or no succession planning in place and if they do, it is shrouded in secrecy with very few “in the know”. Although many say they value succession planning, the management literature suggests that up to 67% don’t utilize the process. Organizations without succession plans don’t realize that ultimately it will cost them more to replace key leaders and deal with constant turnover of talent than if they had taken the time to develop a succession plan.
Managing the succession of talent is an important strategic process that helps to minimize gaps in leadership and enable companies to develop and retain their best employees. Succession Planning needs to be a priority for every organization that wants to be successful in an ever-changing business environment.
What Is Succession Planning in Business - Succession Planning is a deliberate and systematic effort by an organization to ensure leadership continuity in key/critical positions. It is a key proactive management practice that identifies, develops, and retains a pipeline of leaders for the critical organization positions in an attempt to drive operational success. It also helps to enhance the organization’s opportunity to retain and develop intellectual and knowledge capital for the future. Most practitioners would go as far as to say that Succession Planning reduces risk and is vital to the long-term survival of any business. Yet some organizations choose NOT to do succession planning for Many reasons are given for not doing it but most ring hollow.
What It Isn’t - Sometimes, knowing what something isn’t may be more helpful than knowing what it is. In this case, Succession Planning isn’t just something that is done when the CEO or another Key Leader is exiting the organization and a mad scramble takes place to find an internal candidate. It is not just done to meet some type of Board of Directors requirement. And it shouldn’t be treated as some type of top secret intelligence report with only a select few knowing the details. It isn’t an assumption that the next in line in a given department or corporate structure is the successor. Yet, we have all worked at organizations that do all of this. Again, why take such unnecessary risk?
When to Create a Business Succession Plan - Every business needs a succession plan to ensure that operations continue, and clients don’t experience a disruption in service. If you don’t already have a succession plan in place for your small business, this is something you should put together as soon as possible.
While you may not plan to leave your business, unplanned exits do happen. In general, the closer a business owner gets to retirement age, the more urgent the need for a plan. Business owners should write a succession plan when a transfer of ownership is in sight, including when they intend to list their business for sale, retire, or transfer ownership of the business. This will ensure the business operates smoothly throughout the transition.
Why Plan for Succession In Business - For a business, working without a succession plan can invite disruption, uncertainty, and conflict, and endangers future competitiveness. For companies that are family owned or controlled, the issue of succession also introduces deeply emotional personal issues and may widen the circle of stakeholders to include non-employee family members. The long term survival of those businesses, and the preservation of the wealth they have built, will depend upon a clear and early focus on strategic succession planning.
Succession Planning is important because at the heart of the Talent Management process is identifying key roles and mapping out ways to ensure the organization has the right people with the right skills, capabilities, and experiences, in the right place at the right time.
The number of people in leadership roles who plan to retire in the next few years is higher than the number of people entering the workforce.
Organizations need to prepare for this phenomenon to happen and prepare the next generation of leaders to move up. The loss of organizational memory (tribal knowledge) is not to be underestimated.
Why Business Succession Is Not So Simple - Succession planning is a complex process that draws upon many business disciplines. Many privately held businesses display solid professionalism and enviable profits in their daily operations, yet fail to properly plan for and complete the transition to the next generation of leaders. Even the most sophisticated and knowledgeable business professionals can get caught in a web of complicated issues.
In fact, many business owners do not carry out a managed transition to a successor leadership team. In the case of family-owned businesses, only 30 percent survive into the second generation, 12 percent survive into the third, and only about 3 percent operate into the fourth generation and beyond.
An owner-manager usually has a personal vision to retire and sell the business “someday,” but he or she may not have adequately considered what it will take to make that vision a reality. Even leaders who profess they’ll never retire have to acknowledge that no one remains at the helm forever.
An unprepared new management group, or even a poorly managed transition to competent management, can trigger significant loss in value. If leaders want their businesses’ intrinsic value to remain intact for the benefit of their successors, they should begin the planning process sooner rather than later.
In some cases, a careful planning process may reveal that selling the business instead of maintaining successor ownership really is the answer for their situation. Not all succession plans are created equal.
Succession Planning is also important because executive search is expensive. Having the foresight to develop the top talent you currently have, actively recruiting top talent, and making sure they have the proper experiences to prepare them for the future is an important strategy. The complexity involved at the most senior leadership levels is significant. Preparing top talent to take on these roles and challenges is essential to organizational success.
a) Anticipated demographic changes and scarcity of true talent.
b) Need for a tool to identify skill gaps and training needs.
c) The criticality of knowledge retention in a knowledge economy.
d) The effects of retention and morale from investing in employees.
Points To Remember In Succession Planning Process:
a) How long do I see myself actively working in my business
b) Do I want to always be involved to some extent in my business. Maybe continue owning the company and have someone else run/manage it?
c) Do I want to sell it. If so, what do I need to work on in order to make my business attractive to potential buyers or investors?
d) Do I have anyone on my team who could take over my business. If so, what is my plan to “groom” them to be prepared to take over? If not, what is my plan to find someone who will take over the business?
Business Succession planning is a multidisciplinary process - When you engage in succession planning, you’re not just focusing on the future, because it’s impossible to plan for the future without a deep understanding of the present. Leaders have to know the current reality of their businesses how they operate, where the value lies, what their needs are, who their most vital customers are and why in order to prepare for new leadership and new structures that can provide continuity in the ways that matter.
One most cover the following crucial components:
Family
a) Goal articulation
b) Family information and communication
c) Estate and gift planning
d) Life insurance analysis
e) Investment advisory services
f) Family offices
Shareholder
a) Shareholder agreement
b) Disability planning
c) Compensation planning
d) Stock transfer technique
Business
a) Business strategy assessment
b) Management talent assessment
c) Corporate structuring
d) Current business valuation
e) Retirement planning
Business Succession Planning & Privately Held Business
The owners of privately held businesses face complex planning issues. For some, the first order of business is the long-term success of business operations, which encompasses a host of distinct issues. For others, the priority is the preservation of family wealth through estate, gift tax, retirement, insurance and investment planning an equally complex challenge that may not always align perfectly with the aim of perpetuating the business.
These issues should be part of a long-term strategic plan that accounts for the needs of the business as well as the needs of the business owner.
Strategic succession planning becomes even more complicated when family issues such as legacy, birthright, communication, personalities, and interpersonal dynamics are added to the mix.
Even an apparently simple succession scenario can become more complex when family interests mingle with business concerns. Even without any explicit disagreement among those involved, the goals of the business to generate profits, exploit market opportunities, reward efficiency, develop organizational capacity, and build shareholder value can come into direct conflict with the recognized goals of the family.
Business Ownership Transfer & Ways To Transfer
Business succession planning is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. To write a succession plan, the first step is to identify the ideal successor to take over the business, then determine the best selling arrangement. This usually involves a buy-sell agreement, secured with a life insurance policy or loan.
Ways to transfer ownership
1. Selling Your Business to a Co-owner - If you founded your business with a partner or partners, you may be considering your co-owners as potential successors. Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase their business interests from their next of kin. This type of agreement can help ease the burden of an unexpected transition for the business and family members alike. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A buy-sell agreement ensures they’re given fair compensation, and allows the remaining co-owners to maintain control of the business.
Precaution - A buy-sell agreement with a co-owner requires a lot of cash kept on-hand. Your co-owner should be prepared to buy-out your shares, theoretically, at any moment. Many businesses will fund this plan with life insurance. Term life insurance is relatively inexpensive and can offset a lot of costs in the event of an owner’s death.
Permanent life insurance is a bit more expensive with the added benefit of a payout in the event of retirement or disability. If you choose to draft a buy-sell agreement with your co-owner, you’ll want to make sure a life insurance policy is stipulated in the agreement. The company can also purchase key person insurance that pays out in the event a key member of the business dies or becomes disabled.
2. Passing Your Business Onto an Heir - Choosing an heir as your successor is a popular option for business owners, especially those with children or family members working in their organization. Passing your business on to an heir is not without its complications. Some steps you can take to pass your business onto an heir smoothly are,
a) Determine who will take over - This is an easy decision if you already have a single-family member involved in the business but gets more complicated when multiple family members are interested in taking over.
b) Provide clear instructions - Include instructions on who will take over and how other heirs will be compensated.
c) Consider a buy-sell agreement - Many succession plans include a buy-sell agreement that allows heirs that are not active in the business to sell their shares to those who are.
d) Determine future leadership structure : In businesses where many heirs are involved, and only one will take over, you can simplify future discussions by providing clear instructions on how the structure should look moving forward. If a future leadership structure is not implemented, and the business passes on to more than one heir, the resulting power struggle may negatively impact the business.
Precaution - Making business decisions within a family can get messy. Emotions can run high, especially after an untimely death or disability. Further, second-generation businesses rarely survive the transition, as they’re often sold by the inheriting family member, or fail outright.
If your successor is skilled and business savvy, passing Your Business then inheritance is the best idea. If not, you may consider selling your business to a co-owner, key employee, or outside buyer instead.
3. Selling Your Business to a Key Employee - When you don’t have a co-owner or family member to entrust with your business, a key employee might be the right successor. Consider employees who are experienced, business-savvy, and respected by your staff, which can ease the transition. If you’re concerned about maintaining quality after your departure, a key employee is generally more reliable than an outside buyer.
Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business.
Precaution - A common drawback to key employee succession is money. Most employees aren’t in the financial position to buy the business they work for. Even if they are, having enough liquid cash on hand is another challenge. One solution is seller financing, in which your employee pays you (or your family) back over time. There’s typically a down payment of 10% or higher, then monthly or quarterly payments with interest until the purchase is paid for in full.
4. Selling Your Business to an Outside Party - When there isn’t an obvious successor to take over, business owners may look to the community. Is there another entrepreneur, or even a competitor, that would purchase your business? To ensure that the business is sold for the proper amount, you will want to calculate the business value properly, and that the valuation is updated frequently.
You should prepare your business for sale well in advance; hire and train a great general manager, formalize your operating procedures, and get all your finances in check. Make your business as stable and turnkey as possible, so it’s more attractive and valuable to outside buyers.
Precaution - The main drawback to an outside sale succession plan is the unexpected: You can’t predict exactly what a new owner will have in store. The business’s mission could pivot; staff could change; customer relationships could dwindle. Also, as with the other types of arrangements, you’ll need to draft a buy-sell agreement. Depending on the buyer’s capacity, you may also need to work with them to secure an acquisition loan.
5. Selling Your Shares Back to the Company - An “entity purchase plan” or a “stock redemption plan” is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each surviving owners a larger share of the business.
Precaution - In most circumstances, a cross-purchase is more financially viable. When co-owners purchase shares directly, they get a “step-up in basis,” which means the stock’s basis is revalued at its current price. With an entity purchase, the original basis remains, and your co-owners will be liable for potentially higher capital gains.
Benefit of Business Succession planning - There are many benefits for companies and owners who plan properly and strategically for an orderly transition of management and ownership:
a) Survival and growth of the business or its assets under the current structure or after sale or restructuring.
b) Preservation of harmony when the business is family owned.
c) Reduction or elimination of estate and income taxes.
d) Facilitation of retirement for the current leadership generation.
e) Ability to retain control of the process instead of having someone else make decisions.
Ideas That May Help You
1. Transfer knowledge and experience from the top. This aids in educating and developing future leaders.
2. Build relationships across generations. Skills, talents and values from a diverse group strengthens overall leadership.
3. Strengthen leadership peer relationships. Helps leaders break down “silos” and learn from each other.
4. Develop succession plans. Don’t wait until the need for a leader is obvious.
5. ID and nurture high-potential employees. This group can be the most likely to leave.
6. Provide needed cross-departmental learning and exposure. This develops understanding of the organizational system.
7. Offer executive coaching. Look for fresh ideas from outside experts.
8. Include more leaders in succession planning. Foster strategic thinking early in the career path.
9. Provide mentoring support for new managers. Helps to acclimate them to their new roles.
10. Assess talent. Give leaders insights to help them increase their effectiveness.
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BN - 19122019
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