When it comes to estate planning, every well-meaning lawyer or financial adviser advocates writing a will to avoid family disputes over inheritance. However, it may not always be an efficient way to transfer assets to legal heirs because a will, registered or not, can not only be challenged by family members in the court of law, but is also an expensive, tedious and time-consuming process to settle family discords. A good way to overcome these issues of could be a family agreement, also known as family settlement or arrangement.
What is a family agreement or settlement?
Though a family agreement has not been defined statutorily under Indian laws, Halsbury’s Laws of England define it as ‘an agreement among members of the same family, intended to be generally and reasonably for the family's benefit, either by compromising doubtful or disputed rights or by preserving the family property or its peace and security by avoiding litigation or by saving its honour’. What it effectively means is that the members of a family arrive at an amicable understanding, written or verbal, regarding movable or immovable property to avoid any existing or future disputes.
What is the format like? Is it taxable?
When it comes to distribution of property, a family agreement need not be a single legal document, but can be a series of documents delineating the property rights of each member. As for taxation regarding inheritance, since an agreement is not considered a gift or transfer under the income tax laws, it does not entail any capital gains tax.
Is it legally valid?
A family agreement is a valid, legally binding and enforceable contract and is applicable to all the signatories. An oral agreement recorded as a memorandum is also readily admissible in court. If it is a written agreement, it should be signed by all the family members involved and preferably be attested by two witnesses.
Should it be registered?
According to Section 17 of the Indian Registration Act, if it is a written agreement, it should be registered to be admissibile in court. In case of a written agreement, which is intended to serve as a proof for a particular arrangement or where legal rights of the members change or the transfer or distribution of immovable property is involved, the document needs to be mandatorily registered.
Can an agreement be challenged?
An agreement, once it has been executed, cannot be revoked without a court decree but can be challenged in court. It can be challenged on the grounds of fraud, coercion, misrepresentation of facts and improper execution, among others.
How do a will and an agreement differ?
Neither instrument is legally superior or better than the other because the purpose and execution of both are completely different. While a will decides how a person wants his assets to be distributed after his death, the purpose of an agreement is to avoid disputes over inheritance through an amicable consensus among the family members. So an agreement often helps deal with contentious issues arising from a will. While there are more strict legal requirements for drawing up a will as compared to an agreement, the latter enjoys high sanctity and credence in courts.
Disclaimer: The advice in this column is not from a licensed healthcare professional and should not be construed as psychological counselling, therapy or medical advice. ET Wealth and the writer will not be responsible for the outcome of the suggestions made in the column.