Family settlement better option than approaching a court

Property disputes are a common occurrence in India. Since greed is a great leveller, wars over wealth take place across the strata, from low-income households to ultrarich families. Even an iron-clad will may be challenged by unhappy beneficiaries. The obvious solution for most squabbling relatives is to take the matter to the courts.

However, that is a time-consuming, tedious and expensive process, which in no way guarantees a satisfactory resolution. A far more amicable, and pocket-friendly, solution is to opt for a family settlement. Here is a ready reckoner.

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In a nutshell, a family settlement is an agreement where family members mutually work out how a property should get distributed among themselves. All the parties should be related to each other and have a claim to a share of the disputed property. The latter need not be limited to real estate, but can also cover movable assets like jewellery or money in bank accounts. A family settlement is usually used to settle common property or joint property that the family owns as opposed to individual or self-acquired property.

Those who wish to avoid protracted, public and messy court battles will find that family settlements are a quicker, more harmonious way to resolve disputes. Of course, a family may not be able to reach a consensus, in which case the legal recourse is the only way out.

This is a conciliation process where a third person, usually a lawyer or a senior family member, helps the family arrive at a mutually acceptable solution to the property dispute. A family settlement need not strictly be a single document incorporating the distribution of assets. It may also be a series of documents spelling out the property rights of each family member.

Say, a family of two brothers and a sister are squabbling over a flat, an office and some ancestral jewellery. They could draw up a settlement agreement stating that the oldest brother gets the flat, the sister bags the jewellery and the office goes to the remaining sibling.

The most important thing to remember is that this instrument is neither treated as a gift nor as a transfer as per the Income Tax laws. So one would have to draw up separate transfer of property documents in addition to the family settlement agreement—to bring about an actual transfer. This is where instruments like gift and sales deeds come into play.
Says Sandeep Nerlekar, founder, Mumbai-based Terentia Consulting Group: “The tax factor must be considered when deciding on a transfer of property document. For instance, if you use a gift deed to transfer property to relatives, there is an income tax component.

Similarly, a sales deed may invite capital gains tax. However, so long as no transfer takes place, the parties to a family settlement won’t be subject to capital gains tax in respect of the profits derived from their share of the property.”

Merely reaching a consensus is not enough; there are a few legal formalities that must be completed to ensure that the agreement is valid. Firstly, the settlement document must be signed by all the family members involved. A missing signature can easily become ground for challenging the document in court at a later date. “In addition, as a safety measure, the document should be attested by two witnesses, though it is not mandatory,” says Ravi Goenka, advocate, Goenka Law Associates.

The next step is to register the agreement. According to Section 17 of the Indian Registration Act, a family settlement that purports to assign immovable property must be mandatorily registered or the deed would be invalid. A stamp duty is applicable on such deeds and the amount would depend on the value of the property involved.

While a duly executed family settlement cannot be revoked, except with a court decree, it can be challenged in a court of law. An agreement that is brought about by fraud or coercion is a case in point. Any misrepresentation of facts regarding the title of the disputed property, too, can lead to future altercations. Adds Goenka: “Another common ground on which it is challenged is improper execution.”

Paying heed to these common tripwires while drawing out an agreement will result in a foolproof, amicable and binding family settlement, which benefits everybody.