Estate Planning: Will Or Trust – Which one should you opt for?

Estate planning is the action taken on tasks that serve to manage an individual’s assets in the event of his incapacitation or death. Without estate planning, anybody’s financial planning is incomplete.

WILL and Trust are considered to be the two important tools for estate planning. But the dilemma is ‘Which one to choose?’

As most of us are much aware of the WILL and its importance, our focus area will be demystifying the Trust here.

What is a WILL?

A WILL is a legal document that coordinates the distribution of your assets after death and can appoint guardians for minor children. 

A WILL generally includes:

• Details of the assets and liabilities.
• Details of beneficiaries who will inherit the assets.
• Instructions on how and when the beneficiaries will receive the assets.
• Designation of an executor, who carries out the provisions of the WILL.
• Guardians for minor children, if any.

A probate court is a segment of the judicial system that primarily handles matters such as wills, estates, conservatorships and guardianship. It supervises the executor to ensure that the wishes in the WILL are carried out. 

Get a good WILL format here.

What is a Trust?

A Trust is a legal relationship in which the Trustee, who can be you or someone else you name, holds legal title to assets and manages them on behalf of the beneficiaries of the Trust. Those beneficiaries could include you, your family or your favourite charities.

Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes. 

Deciding who should succeed you as Trustee is a critical decision. Your Trustee should be able to impartially manage your financial assets and be willing to assume all the accompanying legal complexities and administrative duties. The Trustee should also be able to fulfill this responsibility for the full term of the trust, which could be decades into the future.

Because of the responsibilities, time commitment and knowledge the role demands, many people choose a corporate Trustee to succeed them. A corporate Trustee offers the benefits of financial expertise, unbiased decision making, fiscal responsibility, and sworn fiduciary duty to always act in the best interest of the Trust and its beneficiaries.

The assets inside the Trust could include your home, investment accounts and more. And you can set up the Trust to always have access to any of the assets any time, eg, to sell some investments held in the Trust to pay for college tuition for your child.

Trusts offer a number of benefits:

• Maintains the integrity of your estate.
• May minimum transfer/estate taxes.
• Help your beneficiaries avoid the expense, delay and publicity of a probate.
• Allows you to create rules on how your assets will be distributed.
• Allows for charitable giving strategies.
• Enables sound financial decision-making, should you become incapacitated.
• Allows for detailed planning in unique family situations, such as ongoing care for a special-needs child.

But the disadvantages of a Trust? The major disadvantages that are associated with trusts are their perceived irrevocability, the loss of control over assets that are put into trust and their costs. Also, there is no protection from Creditors.

Difference between Will and Trust

There have been periodic rumours that estate duty may be brought back. This has led to many people considering setting up family trusts to avoid the outflow of estate duty.

Our Final Say…

• A detailed Will can serve the same purpose as a Trust, without any complexities involved in forming a Trust.
• There is a misconception that Trust is tax efficient because that is majorly built upon just the fear of expected estate duty in future.
• Devolution of assets among legal heirs through a Will does not result in tax implication on the legal heirs. Since the Will comes into effect only upon death, the person retains control over the assets and may also be able to alter the manner and the extent of devolution during his/her lifetime.
• The relative ease and lack of formalism required for making a Will make it a preferred mode of succession planning as setting up a trust would entail engaging a lawyer to settle and register the trust.
• Trust becomes more advisable only in the case, when there are young or a specially-abled dependent children in the family with no one else to take care of them.
• It is important to take legal and tax advice before succession planning. A careful assessment of the objectives is essential before choosing between a Will and family Trusts.

(Contributed by Devanshu Anand, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)