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 could be a family agreement, also known as a 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 honor. 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.
When it comes to the 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.
In Govind Kumar Khemka v. CIT, the taxpayer received some assets on account of a family settlement, and the court held that this should not be treated as a commercial transaction given the absence of consideration.
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.
According to Section 17 of the Indian Registration Act, if it is a written agreement, it should be registered to be admissible in court. In case of a written agreement, which is intended to serve as 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.
Suppose a family settlement agreement is not registered, it can still act as estoppel. Estoppel is that which prevents a person from asserting something that is contrary to what he/she had implied previously orally or in writing. However, you will need to register an agreement if it causes a change in the legal rights of the family members.
In the Tek Bahadur versus Debi Singh and Others case, the court had considered the validity of a family settlement deed. It upheld the validity of an oral family settlement and ruled that registration is required only when it is written.
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.
Advantages of Family Arrangement
- The transaction is not treated as a transfer and hence capital gains tax will not arise.
- It is not treated as a gift.
- The clubbing provision will not be applicable.
- Equitable distribution of the wealth instead of concentrating the same in the hands of a few.
- Establishing or ensuring calmness and goodwill amongst the members of the family.
Essentials of Family Settlement
The essentials of a family arrangement were laid down by the Supreme Court of India in Kale&Others v. Deputy Director of Consolidation to include the following:
- Bona fide settlement.—The family arrangement should be bona fide to resolve family disputes and facilitate fair and equitable allotment of properties amongst the various members of the family.
- Voluntary settlement.—The settlement must not be induced by fraud, coercion, or undue influence.
- Oral or written.—The family arrangements may be oral or written. No registration is necessary for an oral agreement.
- Antecedent title.—The members who may be parties to the family arrangement must have some antecedent title, claim, or interest in the property which is acknowledged by the parties to the settlement.
- Even if one of the parties to the settlement has no title but under the arrangement, the other party relinquishes all its claims or titles in favor of such a person and acknowledges him to be the sole owner, then the antecedent title must be assumed and the family arrangement will be upheld.
- Fair and equitable.—Even if bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement that is fair and equitable the family arrangement is final and binding on the parties to the settlement.
- Registration.—Registration of family arrangement could be necessary only if the terms of the family arrangement are reduced into writing. A distinction should be made between a document containing the terms of a family arrangement and a mere memorandum prepared after the family arrangement for the purpose of the record. In such a case the memorandum itself does not create or extinguish any rights in immovable properties and therefore, is not compulsorily registrable.
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.
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