Insurance, HUF and Other Wealth Transfer Tools in Estate Planning

Estate planning is not only about writing a will. A good plan also asks: who gets what, how fast, with how little tax, and with how little family conflict? Insurance, HUF, LLP and family settlements each solve one part of that question.

Life insurance creates liquidity. When the policyholder dies, the insurer pays the sum assured to the nominee or beneficiary. An estate is often rich in property or business but short of cash. Insurance gives heirs money for loans, taxes, expenses and equalising shares among children. Under Section 39 of the Insurance Act, 1938 (as amended in 2015), only the policyholder's spouse, children or parents (or any of them) become beneficiary nominees entitled to the proceeds. Any other nominee is only a collection agent who receives the money. The legal heirs then have a claim to it under succession law.

Section 6 of the Married Women's Property Act, 1874 (MWP Act) lets a married man or woman take a policy for the benefit of spouse and/or children. The policy then forms a trust for those beneficiaries. Its proceeds are protected from the policyholder's creditors and, while the trust stands, do not form part of the estate for succession. The protection does not extend to premiums paid with intent to defraud creditors; those premiums can be recovered. The policy must be expressed on its face to be for the benefit of the spouse and/or children. This is a condition of Section 6, so a policy without such an expression does not become a trust. A beneficiary under it is not a mere nominee.

A Hindu Undivided Family (HUF) consists of persons lineally descended from a common ancestor, together with their wives and daughters. It is a separate assessee under income tax. For income tax, HUF status is recognised for families governed by Hindu law, which includes Hindus, Jains, Sikhs and Buddhists. The head is the karta; coparceners are those who acquire an interest by birth in ancestral property. After the Hindu Succession (Amendment) Act, 2005, daughters are coparceners by birth with the same rights as sons. An HUF arises by operation of Hindu law from a joint family and does not need to be created by agreement. Joint family property comes from ancestral property or from a member's property thrown into the common stock.

The clubbing rule is a separate point. If a member converts his self-acquired property into HUF property (throws it into the common stock), or transfers it to the HUF without adequate consideration, the income from that property is clubbed in the hands of the transferring member, not taxed as the HUF's income. This also covers income from the converted property that reaches his spouse or minor child on partition. Under the Income-tax Act, 1961 this is Section 64(2). The Income-tax Act, 2025 renumbers the sections, so confirm the section number under the Act in force.

On gifts, Section 56(2)(x) of the Income-tax Act, 1961 taxes certain gifts received without consideration above the specified limit. Gifts received by an individual from a "relative" (as defined in the Act) are exempt from tax under that section, subject to its specific conditions. Gifts received by an HUF from its members are covered by a separate exemption, so check the exact wording before applying it. An HUF is not barred from being a donor; what matters is who receives the gift and how that recipient is taxed. An HUF is a separate assessee, taxed under the same slab rules as an individual, with its own basic exemption.

A Limited Liability Partnership (LLP) is a body corporate with partners whose liability is limited to their agreed contribution. For business succession, it lets the family hold business interests in agreed ratios, with an LLP agreement setting out exit, admission of heirs and profit sharing. A family settlement is a written arrangement among family members to settle existing or possible disputes about property fairly. Courts generally favour such settlements, and they work best when the parties act voluntarily and with full knowledge of the facts. A family trust or private trust can be used alongside these tools to hold assets for named beneficiaries.

Use this method for any scenario question on insurance, HUF, LLP or family settlement.