A Complete Guide to Estate Planning For NRIs

For all the NRIs who are living abroad, it can be very financially beneficial for them because there are many earning opportunities there. But it also brings with it so many complex challenges while protecting your assets in two countries. If an NRI doesn't have proper estate planning, then his family could spend years paying unnecessary taxes, navigating legal complications, and dealing with frozen assets. 

Understanding Estate Planning For NRIs

Estate Planning is the process of managing your assets and how they are going to be distributed after your death or if you become incapacitated. For the Non-Resident Indians (NRIs), this whole process becomes a lot more complicated because they own their assets across multiple countries with different tax regulations and succession laws. 

The apartment you own in Delhi follows the Indian succession laws, and your 401K follows the US laws. Without doing the proper planning, your legal heirs have to face the dual-country legal proceedings, which can eventually lead to the potential double taxation and delay of many years in accessing your assets. 

Importance of Estate Planning For NRIs

The need for estate planning and succession is increasing day by day as more NRIs are now living and working abroad. The cross-border tax laws and inheritance/succession laws are quite complex, and most of the NRIs working abroad want to pass on their assets easily to their heirs and want to avoid potential disputes or future issues. 

Issues in Managing Wealth Across Different Jurisdictions

There are multiple challenges that you might have to face in managing your wealth across various jurisdictions because each of them has its own inheritance and taxation laws. It can also leave your portfolio unorganised if you don't clearly mention your asset succession.

How Good Estate Planning Ensures Financial Security For Upcoming Generations?

A proper estate plan makes sure that your assets are allocated correctly and you appoint the trusted people to manage your future circumstances. Hence, your future generations can inherit the assets easily without any disputes related to the cross-border laws.

Understanding Tax Implications For NRIs

Here's how you can understand the tax implications for NRIs related to estate planning:

US Estate Tax Problem

Let's understand the problems in the US Estate taxation by using an example:

Ramesh has a condo in New Jersey worth $400,000, US stocks cost $150,000, and a car worth $30,000. His total US assets: $580,000. 

The total taxable estate is $520,000 after the exemption of $60,000. Tax on Estate: approximately $200,000. His heirs have to pay the one-third as teh taxes and need to pay within 9 months. 

For the estate taxes, life insurance can give you some liquidity. A $250,000 policy can help you pay the taxes without forcing you to sell the assets. The DTAA between the US and India can give you some relief through foreign tax credits. 

Indian Capital Gains Tax

The inheritance tax was abolished in India in 1985. The heirs don't have to pay the taxes on the assets they are inheriting. The taxes are applied later on when they try to sell the inherited property. 

For the property you have held for more than 24 months, the long-term capital gains tax is applied at the rate of 12.5% without indexation. 

The exemptions under Section 54 help in taxation. You can get the full exemption if you reinvest the capital gains in the residential property within the 2 years of sale. You can also invest in REC/NHAI bonds under section 54EC to get the exemption up to Rs 50 lakhs. 

There are higher TDS rates for the NRIs, 30% on the short-term gains and 20% for the long-term. If your real liability is lower, then yoy can apply for the lower TDS by using the Form 13. 

Using DTAA

The Double Taxation Avoidance Agreement (DTAA) prevents the individual from paying double taxes on the same asset. The primary benefit of the DTAA is the foreign tax credit. If you have already paid the tax on the assets in the US estate as well as in India, then you are eligible to claim a credit.

To claim the tax treaty benefits on the Indian tax returns, you have to obtain a tax residency certificate from the US (Form 6166). 

Also Want to Know About TDS on Property Purchase from NRI? Check Now!

Required Documents For NRIs While Planning an Estate

Here is the list of all the documents that are required for the NRIs who are planning their Estate:

Wills

•  A single comprehensive will is enough to cover all your global assets, but you need to obtain a probate for each country where you own any assets.
• The separate wills for each country are better for the quick distribution as they allow simultaneous probate. Your US will should contain this sentence: " This will applies only to my assets in the United States and does not revoke any will for assets in India."
• You can also register your will in India. It costs around Rs 2000-Rs 5000 for reguistration and it also amkes your will harder for you to be challenged by anyone. You should update your will after every 3-5 years or after any major life event happened.

Trusts

• The Private Discretionary Trust provides your assets with protection and avoids probate. The assets in trusts pass directly to the beneficiaries without court proceedings. 
• You will require professional help in setting up a trust and drafting a deed as per the Indian Trusts Act, 1882. The trusts are more appropriate for the complex situations, large estates, and minor children.

Power of Attorney

• A Power of Attorney allows someone to manage your Indian assets on your behalf remotely. The General POA provides the broad authority to the individual. Special POA has some limitations, and they manage the tasks for specific transactions. Durable POA remains valid if you become incapacitated. 
• You need to execute your POA at the Indian Embassy of your country. The POA must be notarized and attested by the consulate. You have to send this POA to India via registered post and get it stamped within 3 months. In case of property transactions, the registration of a POA is mandatory.
• You should select your POA carefully. Also, keep in mind that a POA terminates automatically when you die, so you require both a POA and a will.

Nominations or Beneficiaries

• A nomination will provide someone with the authority to own your assets after your death. Although the nominee is similar to a trustee for the legal heirs established by your will or the succession laws.
• Example: Priya nominates her sister for her Rs 50 lakhs FD. Her sister gets the proceeds just after her death, but if the will specifies, then it must transfer to her son. 
• The best thing you can do is to align your nominations with your will. In case of the life insurance with children/spouse/parents as nominee, then they become the actual beneficiaries under the section 39 of the Insurance Act. 

Techniques For Estate Planning For NRIs 

There are some common techniques for planning an estate for the Non-resident Indians (NRIs). They are as follows:

1. Making a Will: One of the most basic yet important steps for estate planning is to make a valid will. A will allows the NRIs to clearly mention their legal heirs, and they can also write the way in which they want to divide their assets in India. You should draft your will by keeping in mind the requirements of the Indian Succession Act. One more important thing that an NRI must do is hiring a executor who will make sure to carry out the wishes written in the will.
2. Choosing a domicile: A domicile of an individual is very important as it tells the inheritance rules and personal laws applicable to them. The NRIs need to establish that they want a new domicile in the foreign country, or they want to just retain their Indian origin domicile. It can impact the distribution of global assets as per the laws of different countries. 
3. Setting up a trust: For all those NRIs who want an efficient succession of assets, the trusts can work as an alternative to wills. A Private Discretionary Trust can be made with the help of a lawyer. It is created to hold their Indian assets, and the key terms used are trustees, settlors, and beneficiaries. 
4. Saving from double taxation: The deceased NRI may face double taxation on their income in both the countries, once in the country of residence and once in the country of citizenship (India). You can prevent it by understanding the tax treaties between the countries and getting tax credits to sense some relief from double taxation. NRIs should structure their affairs by keeping the tax treaties in mind. 
5. Investing through the method of nominations: The NRIs should use nominations while they invest in assets, such as mutual funds, insurance policies, fixed deposits, bank accounts, etc. The claims of a nominee are made faster on death, and the transfer of the assets happens quite smoothly without the stress of a succession certificate. Also, the nominations have some limitations, and they may not cover all the assets.
6. Utilising gift deeds: The gift deeds are one of the most convinient way to transfer the immovable assets in India to their nominated legal heirs during their lifetime, and they don't have to go through a succession process after their death. They might have to pay the taxes on the gifts as per the timeframe and the relationship with the recipient. 
7. Obtaining a Probate: A probate is a process that establishes the legitimacy of a will and recognises the authority of the executor. The probate must be obtained from the competent court for those wills involving immovable assets or property located in the regions of Mumbai, Delhi, etc. The Probates and foreign wills are also recognised after they are deposited and proven in the Indian court of competent jurisdiction. 

Common Mistakes While Planning an Estate 

Some of the common mistakes that NRIs make while Estate planning are given below:

1. Ignoring the Digital Assets: You should create an inventory of digital assets, including cryptocurrency, email, and online business accounts. You should also use the legacy contact features on the online platforms, such as Facebook and Google.
2. Delaying until it's too late: Any individual with assets costing more than Rs 50 lakhs requires an estate plan. You should start immediately and not wait for the health crisis.
3. Using the DIY templates: The templates presented online don't address US estate tax planning, cross-border complexities, or FEMA compliance. You should work with the attorneys in both countries. 
4. Not Updating the Beneficiaries: If your will mentions that your assets go to your spouse, but your 401K lists your ex-spouse. The designations of the beneficiaries override wills, so you should review them annually.
5. Not Registering the Indian will: The registration of the Indian will cost around Rs 2000 - Rs 5000, but it can provide you with strong proof against all the challenges. You can register for it at the Sub-Registrar's office.

Final Thoughts

Estate planning is essential for all NRIs if they want to smoothly distribute their assets to their beneficiaries. It helps in avoiding the complications and potential disputes related to cross-border taxation and inheritance laws. The NRIs can bring a strong financial foundation to their generations by starting estate planning during their earning years. 

You can also get legal assistance from the experts who have knowledge about the laws and can help you in a better way. Visament is a trusted platform that offers such services to the NRIs and can help them in managing their assets in each country. Our prices are also very affordable, considering the quality of services we are providing.