Shielding your inheritance: 4 strategies to defend against taxes

High-Net-Worth Individuals (HNIs) in India generally conduct legacy or estate planning in their forties. The primary goal of estate planning is to ensure the seamless transfer of an investor’s wealth to the next generation while minimising the burden of taxes. Estate planning for HNIs can be more inclusive and comprehensive if they choose to leverage efficient private banking and estate planning services to do the same. Today, HNIsare maximising their returns while planning their inheritance instead of solely focusing on minimising taxes and risks.

Four strategies that can help shield HNIs’ inheritance from taxes

1. HNIs must start their estate planning by creating a will

Creating a legally sound and comprehensive will should be the very first step in estate planning for HNIs. A will is a vital document that outlines how an individual’s assets should be distributed upon their demise. Moreover, drafting a will allows investors to take advantage of exemptions and deductions available under Indian tax laws, thereby reducing the tax liability on their estate. Investors must consult with legal experts to draft a will that is in line with their objectives.

2. Establishing a trust must be the second priority

A trust is a legal entity that holds and manages assets on behalf of beneficiaries, often with specific terms and conditions. Investors can retain control while mitigating estate taxes by transferring their assets to a trust.Trusts can be structured in various ways like charitable trusts or family trusts, depending on an investor’s goals and philanthropic aspirations. Properly structured trusts can provide tax advantages, asset protection, and long-term financial security for an investor’s loved ones.

3. HNIs should consider setting up HUFs, LLPs, and more

The strategic use of legal entities like the Hindu Undivided Family (HUF) and the Limited Liability Partnership (LLP) can help with taxsaving for HNIs. An HUFallows families to consolidate their resources and navigate taxation with greater efficiency. It is treated as a separate tax entity with a separate basic tax exemption of Rs 2.5 lakh. This is in addition to the separate tax exemption for each of its members. LLPsare also a good option as they offer flexibility in profit sharing and distribution, making them an attractive option for those seeking to minimise tax liabilities while maintaining operational agility. These structurescan not only safeguard family wealth but also pave the way for a more tax-efficient financial future.

4. HNIs with an international income must know aboutDTAAs

For HNIs with international income sources, understanding Double Taxation Avoidance Agreements (DTAAs) is crucial. DTAAs are bilateral agreements between two countries designed to prevent double taxation on the same income. India has entered into DTAAs with several countries, and these agreements can significantly impact tax liability. HNIs should seek professional advice to navigate the complexities of international taxation and ensure compliance with the respective agreements.

How can estate planning help HNIs grow financially?

Estate planning helps HNIs grow financially and helps them shield their wealth from taxes. Efficient estate planning can facilitate the preservation and growth of wealth over generations. Moreover, estate planning allows for the seamless transfer of assets to heirs, enabling them to continue building upon the family’s financial legacy. Through careful planning and prudent investment strategies, estate planning becomes a powerful tool for wealth accumulation and preservation.

Ending note

HNIs can successfully shield their inheritance from taxes while optimising their financial growth by implementing strategies like creating a will, establishing a trust, setting up structures like an HUF and LLP, and understanding DTAAs. Moreover, efficient estate planning empowers HNIs to leave a lasting legacy for their heirs and future generations. Therefore, HNIs must prioritise estate planning as a strategic financial endeavour that safeguards their wealth and ensures its continued growth.