Will vs Gift vs Settlement – Clarity On Estate Planning Instruments

1. INTRODUCTION

1.1. India, with a USD 4 trillion (four trillion US Dollars) economy, recently overtook Japan to become the world's fourth-largest economy in the world.¹ With this exponential growth, India is also witnessing a surge in the number of ultra-high-net-worth individuals (Ultra HNIs) with a net worth of USD30 million (thirty million US Dollars) and more, over the past few years. The Wealth Report of 2024 suggests that the number of wealthy individuals globally will rise by 28.1% (approximately twenty-eight per cent) during the 5 (five) years to 2028. This includes a strong outperformance from Asia, with high growth in India (50% (fifty per cent)). According to the report, Ultra HNIs in India in 2023 are 13,263 (thirteen thousand two hundred sixty-three) in number, and this is expected to grow to 19,908 (nineteen thousand nine hundred eight) in 2028.²

1.2. With multi-fold increase in wealth, preservation of such wealth, ensuring continuity of the hard-earned legacy and tailoring the inheritance suited to family needs, become equally important. The most effective and efficient way to do this is through proper estate planning, at the right time and with the right approach.

1.3. Estate planning can be undertaken through multiple ways including creation of wills ("Wills"), trusts (including testamentary trust), a gift deed, a settlement deed, through family settlement arrangements or through a family charter. The legal and tax implications of each of the estate planning instruments are different, and thus, it becomes important to distinguish the nature and essential characteristics of each of these.

1.4. Recently, the Supreme Court ("SC") has highlighted certain key principles and factors, through interpretation of a number of laws, to distinguish three of the above stated important instruments, namely, a gift versus a settlement deed versus a Will, in the case of N.P. Saseendran v N.P. Ponnamma.³ This ruling will go a long way to ensure key parameters to be addressed while drafting a gift, settlement deed or a Will. This article attempts to summarise and analyse this recent ruling.

2. FACTS OF THE CASE

2.1. A father gifted certain property ("Property") to his daughter, through a registered deed ("Deed") dated June 26, 1985, out of love and affection. The father, while conveying the Property, also reserved certain life interest in his favour, which were:

1. The father would retain possession of the Property till his lifetime and take the yields from the Property.
2. He shall have the right to pledge the Property for a sum not exceeding INR 2,000 (two thousand Indian Rupees) and to avail loan on that basis.
3. After the lifetime of the father, his wife (donee's mother), Janaki Amma, shall have the right to possess the Property, take income from the Property, and utilize the same according to her will and wishes.
4. The daughter would have no right to restrain the rights of her mother for any reason. She can possess and enjoy the usufructuaries from the Property, post the lifetime of her mother.

2.2. The execution of the Deed itself, however, granted the daughter the right to make any necessary constructions in the Property, pay taxes to the government and obtain a purchase certificate for the same. All other rights and liabilities (except for which life interest has been reserved) in relation to the Property were assigned in favour of the daughter.

2.3. After a few years, on October 19, 1993, the father executed a cancellation deed for cancelling the Deed and a sale deed transferring the Property to his son. A suit for declaration of right, title, and interest over the Property was filed by the daughter. During the pendency of the suit, on January 06, 1995, the father passed away.

2.4. The trial court, as well as the First Appellate Court, held that the nature of the Deed is only a Will and not a gift. The Kerala High Court ("HC"), however, upset these findings by construing the Deed to be a gift deed.

2.5. Aggrieved by the order of the HC, the son filed an appeal before the SC.

3. ISSUE BEFORE THE SC

3.1. The main issue which arose before the SC was whether the Deed is a settlement, a gift, or a Will.

4. SC'S DECISION

4.1. The SC's analysis and judgement can be categorized into 2 (two) broad heads:

I. Legal principles distinguishing a Settlement, Gift and Will

(A) Settlement

4.2. The SC referred to the Specific Relief Act, 1963, the Indian Stamp Act, 1899 ("Stamp Act") and the Kerala Stamp Act, 1959, to conclude on certain key factors, as follows, to ascertain whether a deed is in the nature of a settlement:

1. It is a non-testamentary instrument.
2. It is a disposition of one's property (movable or immovable) to another directly or to vest in any such person after successive devolution of rights on other(s).
3. There is an element of consideration involved. The circumstances and reasons that led to the execution of a settlement deed are described as its consideration, which need not necessarily be of any monetary value.
4. More often than not, the consideration consists of love, care, affection, duty, moral obligation, or satisfaction, as such deeds are typically executed in favour of a family member.

(B) Gift

4.3. The SC referred to the legal requirements for a document to qualify as a gift as covered under the Transfer of Property Act, 1882 ("TPA"), the Stamp Act and the Kerala Stamp Act, 1959, to conclude as under:

1. A gift is an instrument by which there is the voluntary disposition of one's existing property either movable or immovable.
2. This disposition is without consideration.
3. The acceptance of the gift, by the donee, should be made during the lifetime of the donor, implying imminent vesting of the right upon acceptance.
4. Delivery of possession is not a condition sine qua non to validate the gift.
5. Registration of a gift deed is mandatory when there is a gift of immovable property.
6. A unilateral revocation of the gift is not permissible.
7. The donor (person making the gift) can, however, impose conditions in the gift deed which need to be accepted by the donee (person receiving the gift) for the gift deed to take effect.

(C) Will

4.4. Will is a testamentary document. Thus, the SC referred to the provisions under the Indian Succession Act, 1925 ("ISA"), which deal with testamentary succession, to conclude:

1. A Will is a legal declaration of the intention of the testator4 with respect to his property.
2. A Will is to be carried into effect after the death of the testator.
3. The testator is at full liberty to revoke or alter his earlier Will any number of times, as long as the requirements under ISA are satisfied.5

(D) Interplay between gift and settlement

4.5. The SC observed that the primary difference between a gift and a settlement is the existence of consideration. A gift does not contain any consideration; however, a settlement is always coupled with a consideration.

4.6. The vesting of right takes place in praesenti in both gift and settlement, and a unilateral revocation is not permissible in both gift and settlement.

(E) Interplay between gift and Will

4.7. In relation to the interplay between a gift and a Will, the SC observed that in the case of a gift, the disposition is in praesenti, while in the case of a Will, the disposition is deferred until the death of the testator. The reservation of a life interest or any condition in the instrument, even if it postpones the physical delivery of possession to the donee, cannot be treated as a Will, as the property has already vested with the donee.

4.8. Unilateral revocation of a gift is not permissible; however, a testator is at complete liberty to revoke or amend his Will any number of times, subject to the conditions of ISA being satisfied.

(F) Interplay between settlement, gift and Will

4.9. The SC observed that the element of voluntary disposition is common to all three deeds. The nomenclature given to a document is irrelevant. The distinguishing factor between a Will, a gift and a settlement is that transfer of interest is in praesenti (at the present time) in a gift or a settlement. On the other hand, the transfer is postponed until the death of the testator in case of a Will.

4.10. In case of a gift, it is a gratuitous grant by the owner to another person; in case of a settlement, the consideration is the mutual love, care, affection and satisfaction, independent and resulting out of the preceding factors; in case of a Will, it is declaration of the intention of the testator in disposition of his property in a particular manner.

II. Factual analysis on the nature of the Deed

4.11. The SC based on clauses in the Deed noted that there is consideration, conveyance, imposition of conditions and reservation of life interest by the executant (father) and thus the Deed is in the nature of a gift by settlement. The condition, creating a life interest, further implies that the father had ceased to be an absolute owner. The postponement of delivery by creation of a life interest is not an anathema to absolute conveyance in praesenti. The father was only holding an ostensible possession by way of a life interest.

4.12. The SC further held that there is an element of gift in every settlement, and therefore, it needs to be examined whether the gift has been accepted and acted upon. Delivery of possession is not a sine qua non to validate a gift or settlement. Therefore, for the Deed to be valid, it is sufficient if the same was acted upon during the lifetime of the executant. In the present case, the receipt of the original Deed by the daughter and registration of the same would amount to an acceptance of the gift. Thus, the father had no right to cancel the gift unilaterally.

4.13. Therefore, the SC held that the cancellation deed is void and consequently the sale deed is also invalid.

5. ANALYSIS / COMMENTS

5.1. This ruling is significant in highlighting the importance of nature and construction of a document. In the present case, if the Deed had been construed as a Will, the cancellation deed and sale deed transferring property to the son would have been valid. However, in case the Deed is a gift or a settlement, no unilateral revocation can be made later.

5.2. Therefore, the nature of an instrument has a fundamental role to decide upon the time when the legatee / beneficiary / donee derives a vested interest and whether the person derives absolute interest or only a limited interest. Undoubtedly, this decision will act as a guide to distinguish three crucial instruments, namely, a settlement, a gift and a Will.

5.3. Based on the SC ruling and rulings relied upon in the case, we have tabulated below the key differences between the three documents, namely, a Will, a gift and a settlement:

5.4. Going forward, it will be imperative to draft instruments of estate planning with greater precision, taking into account the interplay of various laws depending upon the nature of the instrument, principles of interpretation and principles of drafting. This is to avoid ambiguities leading to any potential disputes.

5.5. Estate planning exercise involves several legal and tax considerations that arise depending upon the location of assets, the nature of assets, the location of heirs, etc. This ruling is an adequate example that one must be mindful of the interplay of various laws while structuring and drafting an estate plan.

Footnotes

1. 'India surpasses Japan to become 4th largest economy at $ 4 trillion, to overtake Germany soon: NITI Aayog CEO' ( https://www.livemint.com/economy/india-surpasses-japan-to-become-4th-largest-economy-at-4-trillion-to-overtake-germany-soon-niti-aayog-ceo-11748145853542.html).

2. The Wealth Report, ( https://content.knightfrank.com/resources/knightfrank.com/wealthreport/the-wealth-report-2024.pdf).

3. 2025 SCC OnLine SC 626.

4. A testator is a person making the Will.

5. The requirements include that the testator should be in a sound state of mind and capable to dispose of the property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.