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Posts Tagged ‘estate planning’

Just the thought of retirement can cause anxiety and many feel overwhelmed and unprepared. People who have planned their retirement early and saved enough regularly throughout their earning years are comfortable and plan their retirement better. However, in case you have not done so,  here’s how you can plan your retirement when you are in the last decade before your retirement age.

  1. How much money would you need?

The first question one must ask is ‘how much income would I need to maintain my current lifestyle in retirement?’

If the assumption is too high, the goal of retirement may seem absolutely unattainable, and the entire planning process is discouraging.  If the assumption is too low, which is most often the case, the retiree could run into a difficult financial situation later in life and have to make drastic, unwanted changes.

Keep in mind that retirees spend more on travel, entertainment and eating out especially earlier on in retirement, when they have the time and good health to enjoy those activities.

  1. Consider Health care cost:

One of the most overlooked areas of retirement planning is estimating what health care costs could be in retirement, and including this in the calculation of income needs.

Please remember that these could be a combination of recurring and one time costs, and medical inflation tends to be much higher than regular inflation. By overlooking this large potential outlay, retirees could feel strapped for cash in their most vulnerable years.

  1. Choosing the right investment product

It is important to save for retirement, but it is equally important to choose the right investment product. Since the tenure to retirement is in the range of 5 to 10 years, one should look at the mix of growth assets which give inflation beating returns and fixed income instruments which provide stability in returns and liquidity.

 

  1. Estate Planning:

Many people think they don’t need to do any sort of estate planning. Estate planning in necessary to eliminate uncertainties over the administration and inheritance of all your assets and to maximize the value of the estate by reducing taxes and other expenses.  Writing a Will and creating a trust if necessary are some form of Estate Planning.

 

Remember that this phase could coincide with some big expenses for your children, but don’t compromise your retirement in the process. Remember there are no retirement loans, so avoid emotional decisions that could create a challenge in your retirement.

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NRIs need to give serious thought to estate planning to ensure that the wealth they have accumulated through a lifetime’s hard work gets transferred smoothly to their heirs. The challenges in estate planning are greater for NRIs since they are likely to have assets in two geographies: India and the country of their residence. They, therefore, need to navigate the succession laws of two countries.

The challenges in estate planning are greater for NRIs since they are likely to have assets in two geographies: India and the country of their residence.

 

 

 

will.jpg

Image Source: propertyupdate.com.au

 

Write a Will

The most important point to keep in mind is to write a Will. For NRIs it is advisable to write a separate Will for their assets in India and another one for their assets in their country of residence. In the absence of a Will, the assets get distributed among heirs according to the succession laws of the country. In India the law of succession depends upon the religion you belong to. A person must write a Will if he wants his wishes to take precedence over the inheritance laws.

For NRIs it is advisable to write a separate Will for their assets in India and another one for their assets in their country of residence.

Know the difference in inheritance laws

inheritance.jpg

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NRIs must acquaint themselves with the succession laws of the country where they reside. In the UAE, for instance, two laws are applicable in the matter of succession: Personal Affairs Law No. 28 of 2005 and the UAE Civil Code. If a person of any religion dies intestate (without leaving a Will), his assets will be distributed according to Sharia laws. The Personal Affairs Law No. 28 of 2005 allows non-Muslim expatriates living in the UAE to opt to use the law of their own countries to distribute their assets in the UAE. However, the UAE Civil Code says that the law of the home country of expatriates will apply only to determine how movable assets are distributed. Regarding immovable property, Article 17 (5) of the code states that “the law of the UAE shall apply to Wills made by aliens in disposing of their real property located in the state”.

In the UAE, for instance, two laws are applicable in the matter of succession: Personal Affairs Law No. 28 of 2005 and the UAE Civil Code.

US-based NRIs should be aware that if they receive inheritance from a non-US based person whose value exceeds a certain amount in a given calendar year, they have to file information in this regard with the Internal Revenue Service (IRS). Inheriting property in India could also give rise to inheritance tax liability in the US. US-based NRIs should consult a tax advisor if they receive assets in India that are worth a lot of money.

US-based NRIs should be aware that if they receive inheritance from a non-US based person whose value exceeds a certain amount in a given calendar year, they have to file information in this regard with the Internal Revenue Service (IRS). Inheriting property in India could also give rise to inheritance tax liability in the US.

If US-based NRIs receive assets in India which subsequently start generating income, they will need to pay tax in the US on that income. There are also very strict rules for US taxpayers regarding declaring the existence of foreign accounts. They need to file an FBAR (foreign bank and foreign account) report every year. If they have inherited a bank account or an investment account, they need to report it, even if they plan to close the account shortly. Failing to do so can invite severe penalties.

Inheritance of real estate in India

While there are restrictions on the types of property that NRIs can buy in India (they are not permitted to buy agricultural land, plantation or farm property), there is no restriction on the type of property they can inherit. Both resident Indians and NRIs can bequeath a property in India to an NRI. The only condition is that the property should have been purchased in adherence to FEMA (Foreign Exchange Management Act) guidelines.

While there are restrictions on the types of property that NRIs can buy in India (they are not permitted to buy agricultural land, plantation or farm property), there is no restriction on the type of property they can inherit.

NRIs do not need to pay any inheritance tax in India on the real estate they have inherited. They will first have to get the title of the inherited property transferred in their name. If a Will exists, their right to the property cannot be disputed. But if no Will exists the NRI will have to get a succession certificate from a court. The ownership documents of the property must also be available. Next, the NRI will have to get the mutation of revenue records done, so that his name gets entered in the books of the development authority as the owner of the property. The NRI will also have to get his name recorded in the municipal records. The services of a local lawyer or a professional agency may have to be used to get the title transferred. Power of attorney may have to be given for this purpose.3

NRIs do not need to pay any inheritance tax in India on the real estate they have inherited.

Once the title has been transferred, the NRI can choose to rent or sell the property. If he decides to rent it, 30% TDS will be deducted on rental income. He will also be entitled to 30% deduction on the rental income (for maintenance of the property). If the NRI is also liable for taxation on this income in their country of residence, he should try to avail of the benefit of double taxation avoidance agreement (DTAA).

If he decides to rent it, 30% TDS will be deducted on rental income. He will also be entitled to 30% deduction on the rental income (for maintenance of the property)

If the NRI decides to sell the property, he will be liable to tax. If three years have passed since the date of purchase, he will be liable to long-term capital gains tax at the rate of 20% with indexation. In case of inherited property, the date and cost of purchase for the purpose of computing the holding period and the cost of purchase is taken to be the date and cost to the original owner.

In case of inherited property, the date and cost of purchase for the purpose of computing the holding period and the cost of purchase is taken to be the date and cost to the original owner.

If the NRI sells before three years, short-term capital gains tax will be incurred. Here the gains will be taxed depending on the tax slab to which the NRI belongs.

NRIs can get exempted from payment of capital gains tax by reinvesting the capital gains either in another property or in tax-exempt bonds.

For repatriation of the money obtained from sale of house, it has to be first deposited in an NRO account. Up to US$ 1 million can be repatriated in a financial year from this account.

For repatriation of the money obtained from sale of house, it has to be first deposited in an NRO account. Up to US$ 1 million can be repatriated in a financial year from this account.

NRIs should pay attention to the income tax implications of the sale of inherited property in their country of residence. Some countries tax their residents irrespective of where the capital gains have originated from, while others provide total or partial exemption on capital gains earned outside their geography.

Inheritance of financial assets

When NRIs inherit financial assets, they may have to sell some of them immediately as they are not allowed to invest in certain assets, such as National Savings Certificates (NSC), Senior Citizens Saving Scheme (SCSS), Post Office time deposits, and PPF (which they can’t open or extend but can hold the current one till maturity). Next, they must decide whether they want to hold these assets or sell them. If an NRI leaves his financial assets in India, he will have to manage them and also file annual income tax returns in India, and may also have to declare that income in his country of residence. If he decides to repatriate the money, again he can do so up to $ 1 million in a financial year. He must also provide documentary proof that he is the lawful inheritor of those assets.

Estate planning could also include the use of trusts in certain cases, and the use of financial guardians for dependants. It is critical to think through each of these items carefully as a part of your estate and succession plan.

When NRIs inherit financial assets, they may have to sell some of them immediately as they are not allowed to invest in certain assets, such as National Savings Certificates (NSC), Senior Citizens Saving Scheme (SCSS), Post Office time deposits, and PPF (which they can’t open or extend but can hold the current one till maturity).

 

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NRI final

Image Source: dir.indiamart.com

Most NRIs typically have assets both in their country of residence and in India. These are typically a mix of both financial and real assets. Managing the assets in India can pose a number of challenges due to the fact that NRIs live thousands of kilometres away and visit the country after long gaps. These should be kept in mind whilst managing your personal finances. Here are a few tips they can use.

Avail of DTAA: If you live in a geography with which India has a double taxation avoidance agreement (DTAA), then you will typically be taxed at the lower of the two rates (the rates applicable according to the Income Tax Act in India and the DTAA rate) on, say, interest income on your bank deposits in India. But to avail of DTAA you will have to submit a tax residency certificate (TRC) verified by the government of the country in which you reside and Form 10F. You will also have to submit a self-declaration cum indemnity form, self-attested copy of PAN card, and a copy of your passport and visa. These documents have to be submitted every year. Unless you submit these documents in advance, the bank will deduct tax on interest income at the highest tax rate in India.

To avail of DTAA you will have to submit a tax residency certificate (TRC) verified by the government of the country in which you reside and Form 10F.

Don’t omit to file tax return: NRIs need to file tax return in India if their income here exceeds the basic exemption limit. You also need to file tax return if the tax deducted at source (TDS) exceeds the tax payable and you wish to claim a refund, or you have a loss that you want to carry forward.

Salary received in India or salary for services provided in India, rental income from property, capital gains on sale of assets in India and interest from deposits will all be taxable in India. Any income that you earn outside India is not taxable in India if you are an NRI.

NRIs need to file tax return in India if their income here exceeds the basic exemption limit. You also need to file tax return if the tax deducted at source (TDS) exceeds the tax payable and you wish to claim a refund, or you have a loss that you want to carry forward.

Be practical about asset selection: Like their resident brethren, NRIs too have an inordinate fondness for investing in real estate. Before you do so, however, give thought to how the property will be looked after and maintained. Avoid investing in a plot as it is most vulnerable to encroachment. Even the maintenance of an apartment can sometimes prove burdensome. While facility management is fairly common overseas —you can entrust the maintenance of your apartment to a professional agency, that is not very common in India.. You may have to depend on an individual to act as caretaker. This person must be reliable. If you lock up the apartment for years together, its condition will invariably deteriorate. In this context, investing in financial assets provides a more hassle-free alternative, even if it may not provide the same emotional satisfaction as investing in real estate.

Investing in financial assets provides a more hassle-free alternative, even if it may not provide the same emotional satisfaction

final power of att

Image Source: http://www.gummerelderlaw.com

Use power of attorney, but judiciously: While NRIs can handle many transactions online, some require their presence. In such cases, it may become essential to appoint an agent to act on their behalf. By giving a power of attorney (PoA), you can empower someone to do so. A general PoA allows a person to undertake all transactions on your behalf. A special/specific PoA, on the other hand, empowers the person to act only in a specified matter. While granting a PoA is useful, it can also be dangerous as there is a risk of these powers being misused. Remember that you will be responsible for any liability arising from your agent’s actions. Avoid giving a general PoA as this increases the scope for misuse. The PoA should be given only to someone who can be trusted absolutely.

In the field of real estate, PoA can be used to lease property, collect rent, sell the property, etc. In the financial markets, PoA can be given to someone to buy and sell stocks, bonds and other securities. In banking, PoA can be given to someone to deposit or withdraw money from the account. Your agent can even sign your tax returns, insurance forms, etc on your behalf.

While granting a PoA is useful, it can also be dangerous as there is a risk of these powers being misused. Remember that you will be responsible for any liability arising from your agent’s actions. Avoid giving a general PoA as this increases the scope for misuse. The PoA should be given only to someone who can be trusted absolutely.

estate planning

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Don’t ignore estate planning: NRIs are as guilty as resident Indians of not writing a will. In their case, the consequences of passing away without a will be even more onerous for their loved ones as the latter will have to deal with the jurisdictions of two countries. It may also mean that your assets may not be distributed in a manner that is to your liking. If you pass away without a will, the laws of succession of the country in which you reside could apply. In countries where Sharia laws apply, for instance, your male successors could have an advantage over female. The absence of a will also means a lot of paperwork, bureaucratic hassles and legal expenses for loved ones before they are able to gain control of your assets.

Remember that while there is no estate or inheritance tax in India, it does exist in many other countries and it could take away a sizable chunk of your wealth.

It may be a good idea to create a separate will for your assets in your country of residence and for your assets in India. After creating the will, inform the executor about where to find it. Also, create a list of your assets and share the information with your family.

It may be a good idea to create a separate will for your assets in your country of residence and for your assets in India. After creating the will, inform the executor about where to find it. Also, create a list of your assets and share the information with your family.

Use software to get single view of assets: The benefits of using aggregation software is that you will be able to know the value of all your assets at a single glance. You will also be able to see the date of purchase and sale of assets and the capital gain or loss made, quite easily. This is also critical for your family in case something happens to you.

Distance and dealing with the laws of two jurisdictions do make the NRI’s task of managing assets difficult. He can only do a competent job if he is aware of the challenges, informed about his options, and disciplined in execution. NRIs should be open to seeking professional expertise wherever needed.

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