The two most common ways to plan for the distribution of one’s wealth after one’s death are:
- a) Via a will
- b) Via trust planning
Most people are familiar with the basic principles behind wills and how they work. However, fewer people know about trusts, and even fewer understand them, especially in how they differ from wills.
The testator appoints an executor whose task is to ensure that the testator’s wishes are carried out. The executor may be a beneficiary of the estate.
When a person (the settler) sets up a trust, after careful trust planning, the trust becomes the recipient of the trustor’s estate. However, the trust is in place to distribute the estate to beneficiaries in accordance with the trustor’s wishes, and the trust itself is never a beneficiary of the estate.
So far, you can see that setting up a trust based on trust planning and making a will result in pretty much the same outcome when a person dies. However, a key difference between a trust and a will is that a trust becomes legally binding the moment it is created, so careful trust planning is important. Even the trustor may not be able to change the terms of the trust. A will, in contrast, only comes into effect after the death of the testator. It can be changed at any time prior to that death.
Another key difference is that trust planning may call for the trust becoming the effective owner of any assets that have been placed into the trust. That means the trustor may not be able to dispose of such assets, so, once again, trust planning is vital. With wills, even if an asset has been earmarked for a beneficiary in a will, the testator still has complete control over the asset, and can dispose of it at any time prior to death.
Why create a trust?
People with large estates can use often trust planning to minimize the amount of tax that will be taken from their estate by setting up a trust. This can happen because of the way the trust becomes the owner of the assets during Trustor’s lifetime.
You should always get legal advice as a key part of trust planning. This will ensure your assets will be distributed just as you wish, and will help avoid costly legal hearings in the future through proper trust planning.