Legacy & Inheritances: The Risks from Family Settlements Nobody Told You about
What happens when a will, registered or otherwise, an intestate demise (where there is no will), or a combination of factors causes a family to come apart over differences in the resolution of a person’s estate because mutual cooperation becomes impossible? Even when the legatees, beneficiaries and heirs are in broad consensus, there are many small points over which beneficiaries/inheritors fall out.
 
It often happens that wills and similar documents do not cover every possible complexity and wrinkle that can stall an amicable resolution of your legacy. I have witnessed this often enough, even in close-knit families. Some of the reasons can be:
 
1) The person who made the will (the testator) and heirs (legatee / beneficiary / inheritors) do not necessarily die in sequence. This brings in a different class of heirs as defined under the law.
 
2) Across different jurisdictions, people understand their 'rights' differently, and then try to impose their understanding from perceived positions of strength.
 
3) Assets have been alienated or have withered away, and counter-claims are made.
 
4) Beneficiaries try to change the jurisdiction to one that they find more convenient.
 
e) Multiple other reasons, even when wills are not being contested.
 
An upwardly mobile middle-class today, whether rural or urban, has greater moveable and immoveable assets to leave behind. At the same time, they do not have the time, inclination or skillsets to plan their legacy or even make a will, forget about anticipating possible problems. This makes it all the more important to work at avoiding typical pitfalls that could stall an equitable distribution of inheritances. Before running off to consultants, a little bit of study is well worth the effort.
 
In the Indian context, it is important to know that many communities have their own personal laws. Which one do you fall into? With an increasing number of inter-community marriages and people living under different jurisdictions, domestic as well as international, determining this itself can take a long time unless one writes a will and specifies that it will be under the Indian Succession Act; otherwise settlements often falter on this point.
 
So what next? 
 
The broad term 'family settlement' comes into play as the important document for future resolutions and not the documents which were made in the first place by the venerable ancestor. A 'family settlement' pre-supposes that normal oral communications are unable to resolve issues and, therefore it is required to place things in writing broadly under the head of 'as per Indian laws' if it pertains to India. And to try to resolve issues without going in for litigation. It often then supersedes as well as reduces the rights of the unwary and uninformed.
 
I have often observed that the number of failed settlements is directly proportional to the value of the real estate involved. In hindsight, it then appears that a partition suit may be a quicker option, even while admitting that a clear will would have been the best choice.
 
People tend to go in for settlements because they appear to be a cheaper method. Family settlements make sense only for large joint families which are in business and have enormous assets that are jointly managed.  Otherwise a will is always a superior option. A will enunciates the wishes for the person, but the language of the will or lack of clarity in understanding what the testator had wanted, could lead to disagreements. So family settlements are recommended as a way to avoid long and expensive litigation. But even a formal settlment has pitfalls which I shall endeavour to describe.
 
Once it is prepared, a family settlement becomes the base document to divide assets, or in case of a disagreement, to move into the legal arena. Therefore, a badly written settlement becomes a cause for more litigation rather than a means to reduce litigation, and favours the person or persons who are sharper. Settlements signed on the basis of 'trust' between potential adversaries are often an oxymoron.
 
Here is a check list of things to consider while understanding why a family settlement is risky.
 
1) Check if all heirs and assets are under the same jurisdictions – if some are located abroad, tax laws in different countries or even different states can make a big difference. Wills are better options here because all heirs / beneficiaries can move ahead with their shares of the proceeds separately, while judgements and decisions from courts keep matters in one jurisdiction.
 
2) A family settlement, when made as a part of the family’s sccession planning, often becomes weak because of circumstances like death, marriage, birth—a family tree by definition, keeps evolving. 
 
3) Understand the concept of 'class of Heirs' very carefully as defined under the law and even more so if the settlement is under a personal law specific to a religion/community. Also, be prepared for more ‘potential claimants’ jumping out of the woodwork. Heirs who have been divorced, re-married, have changed citizenship, offspring born out of wedlock, or who were minors at the time of the settlement, are possibilities that need to be considered and solutions planned in advance.
 
4) The concept of equal division of assets and liabilities, costs and effort, is flawed. Whilst the asset side may be easily divisible by allocating the share of entitlement of heirs, the expense and liability sides, not to mention human connections, are usually totally different. Heirs bring to the negotiating table different tax laws, to start with, but also unknown liabilities by way of their own fiduciary responsibilities and problems. Be very careful before placing all of these together. Each heir has to be responsible for their own costs and liabilities. 
 
Examples of costs and liabilities that cannot, and should not, be shared are given below: 
 
a) One heir may have to travel from another country whilst another may have to take just a local bus for the legal work involved in claiming inheritance. How can these costs be shared?
 
b) Attesting, documentation and more varies by city, state, country. These costs can add up substantially. The cost of getting documents attested by embassies, for example, should be borne by that beneficiary who lives abroad—these costs are pretty stiff.
 
c) The difference in costs should also depend on the class of the heirs. Sort this out clearly while writing a settlement. For instance, class-1 heir resident in India vs a class-2 heir, who is a citizen of a foreign country, is just one example. To elaborate, a class-1 Heir who is an Indian citizen needs to simply present his ID, residence proof and the required Indian affidavits. One of the points in the affidavit is that there will be no encumbrance or alienation till the assets are distributed. 
 
A class-1 or 2 or more heir who is a foreign citizen will need to prove bonafides and also obtain attestation by respective embassies, and often also provide indemnities acceptable and enforceable in the country and/or state of jurisdiction of the suit.
 
d) Taxation and liens of an individual nature are certainly going to be different. An heir abroad usually has some sort of mortgages. Sometimes, people avail of loans abroad by offering assets in India as a collateral. Permitting this, in case of a joint family is a huge risk that you wake up to learn about only when the fat yellow envelope lands up at your home. What happens if the family member living abroad dies suddenly leaving behind a fat mortgage with a claim on a jointly held asset? There is no easy way for heirs in India to find out if the foreign citizen has other claims/encumbrances, which can be enforced on jointly held Indian assets. It is also difficult for those living in India to check on divorce proceedings, bankruptcy, liens of any sort in the foreign country which can be then applied here, if the person fails to reveal them while making a settlement. 
 
The risks of expense and liability side falling on whosoever is left behind in the jurisdiction of the settlement is huge. Consider it carefully. Indemnities may not help here.
 
5) There is a tricky word called 'assigns' which can be seen in many settlement deeds. What does 'assign' mean? Legal definitions are available all over, but broadly it means that a participant in a settlement can part with the rights and obligations and more of what is his/her share—even if he or she does not own it at that juncture. Do not accept the word 'assigns' in any form till the assets and liabilities have been sorted out and you have got your share in your bank.
 
6) There is always a 'narration' of facts included in a settlement deed. If your understanding of the narration is different, it can become the basis of future litigation. Ideally, write your own narrative, match it with what is suggested in the ‘settlement document’ and seek changes if required before agreeing to the settlement. In many family settlements, the narrative is imposed upon the rest by family elders, so be watchful of your rights.
 
Remember, a written settlement is made to avoid disputes and differences, so contribute to this effort by reading each word of the draft carefully while the settlement is being prepared. And never be rushed into any sort of settlement. 
 
If you can research the subject online, there is a wealth of information available on what can go wrong with distribution of immoveable properties. 
 
Finally, beware the snowflakes in your own family - it is not necessary that their interests are aligned with yours. For instance, if you as a grandparent cash in your immoveable assets in your lifetime, what is left for the grandchildren? And if you do not have enough to see you through your twilight years, your grandchildren may have legitimate concerns about the financial burden (unless they abandon a helpless senior citizen).
 
Incorrectly drafted settlements often lead to more litigation than they were supposed to avoid. Do not rush into a family settlement without considering all the pitfalls. The list above is very minimal and just a starting point.
 
It is my submission that a formal partition suit through a court in India, instead of a family settlement, makes a lot more sense when wills have led to disputes, the number of heirs is large, or the assets to be distributed are huge.  
 
And if any of the beneficiaries or legatees or heirs are foreign citizens, or live abroad, then a settlement, registered or otherwise, is often not worth the paper it is printed on. If they can't trust you in India, then why and how can you trust them in some country beyond the reach of Indian authorities?
Comments
sushilprasadassociates
7 months ago
The biggest challenge is to get people to make a will and / or file nomination for bank accounts. For shares, if held jointly, the company M&AA has to be scrutinised as to what happens if one of the joint share holders dies. Typically, the remaining shareholder(s) becomes the sole (joint) owner.
veereshmalik
Replied to sushilprasadassociates comment 7 months ago
Nominee is not a beneficiary, best to not even visit the bank account till all beneficiaries come on the same page, the risks are too high. Will or no will.

Remaining shareholder, even if the first named, can keep singing and dancing forever. Best to buy everything in single name. And set out the succession.
Harish C Kohli
8 months ago
I have made my will and appointed an executor. Can I add in the will "in the event of a dispute, the executor's decision will be binding on all the beneficiaries. If any beneficiary takes the issue to court, he/she will be excluded from the inheritance". Will this have any standing if one of the beneficiaries does go to court.
jskhattar
Replied to Harish C Kohli comment 7 months ago
Conditional bequests are permissible under Indian Succession Act, 1925. Specifically see Section 134 of Indian Succession Act, 1925.

As far as the power of the executor to decide the disputes between the beneficiaries is concerned, it could be debatable whether such power could be given, because this takes away the beneficiaries right to challenge the Will before a court. It could be seen as a clause against public policy.

Better suggestion would be to put in a clause to say that the beneficiaries won't challenge the grant of a probate and in the event any beneficiary disputes the legacy under the Will, the beneficiary will forfeit his/her right to the legacy and it will vest in the other beneficiary etc.

Trust this helps.

Please do consider taking proper legal advice after discussing all facts with the concerned professional.
jskhattar
Replied to jskhattar comment 7 months ago
Just an additional point that at the end of the day, the executor will have to apply for probate of the Will.
Harish C Kohli
Replied to jskhattar comment 7 months ago
Many thanks Khattarji
veereshmalik
Replied to Harish C Kohli comment 7 months ago
I am not competent enough to opine on your question pertaining to legalities and suggest that you may wish to consult with the correct professionals on the subject . Good luck.
jskhattar
8 months ago
I would like to add, there is also a tricky legal issue on registration of family settlements.

In recent SC decision of Ravinder Grewal, the SC held that if the family settlement is merely a recording of a family settlement and does not otherwise create a right in the property then it doesn't require registration.

I guess as a thumb rule, it would be advisable to register the family arrangement / family feed. Else its a question of trial whether the given document creates a right in the property or is merely a recording of a family settlement.

Ofcourse as we may all know, a Will doesn't necessarily require registration and can be changed prior to the death of the testator.
veereshmalik
Replied to jskhattar comment 8 months ago
Point noted, thanks - larger point I am making is that there are multiple scenarios, settlements work against the unwary, and even if if the heirs/legatees/beneficiaries are or are not not challenging the Will/Wills, then it is better to proceed without introducing yet some more documents like formal general settlements. Especially when immoveable assets have to be sold/disposed off and proceeds distributed across multiple jurisdictions.

And the word "assigns" in a family settlement when it is not present in the Wills is a huge danger signal. None of the beneficiaries should be able to "assign" anything (or alienate any interests) till the assets have been disposed off.
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