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Will or Trust? Here’s how you must choose the best way to transfer assets to your loved ones

A Will works for smaller families with simple inheritance objectives, is cost-effective and easy to draft and modify for the testator. Through a Trust, you can achieve advanced and tailor-made estate-planning objectives

January 05, 2021 / 10:20 AM IST

Should I form a Trust or just write a Will? This is probably the most common question I get as an Estate Planner. Unfortunately, many times, the answer is not simple. Before we get into answering this, let’s first understand the two fundamental differences between a Will and a Trust.

First, the Will captures the desires of individuals on how their assets should be distributed after their demise and it remains just a piece of paper during their lifetime, but a Trust may be created and made operational during one’s lifetime (Living Trust). A Trust may also be created through a Will (a Testamentary Trust), which then comes into force after the demise of the person.

Second, upon the demise of the testator (person who writes the Will), the ownership of the assets has to be transferred to the named beneficiaries as per the Will, within a reasonable period of time. In the case of a Trust, the ownership stays with the Trust and beneficiaries of the Trust derive the benefit out of these assets until these are distributed on termination of the trust. The beneficiaries of the income of the trust may be different from the beneficiaries of the assets.

This unique structure of beneficiaries availing the benefits of the assets without owning them makes Trust an interesting entity and allows a person to plan for his or her estate beyond generations and minimises chances of dispute amongst the legatees.

Every case is unique, requiring a careful evaluation of the pros and cons before deciding which of the two is the most appropriate. Here are some of the key criteria to be kept in mind while choosing between a Will and a Trust.  Choosing a Trust does not exclude writing a Will, as it is the bare minimum for any good estate plan; only that it may not be the primary tool.

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Family Dynamics

While planning for inheritance, you should keep in mind the family composition and its dynamics. For example, those in nuclear families, without any complications and having cordial relationships among members may be able to plan inheritance through a Will. Whilst Testators who anticipate disputes amongst the beneficiaries could consider a Living Trust – assets are gifted to the Trust during their lifetime and the beneficiaries cannot challenge or dispute the transfer. Moreover, you can avoid the time-consuming court process of a probate. Testators having beneficiaries in foreign tax jurisdictions and exposed to international estate or inheritance tax may also consider a Living or Testamentary Trust.

Also read: Follow these 7 steps to transfer assets smoothly to heirs after your time

Special Situations

Planning for situations such as divorce, providing for the financial requirement of a person with special needs, protecting personal assets of business owners and professionals such as doctors, demand advanced estate planning solutions. They may require multiple tools, including a Private Trust, to implement these plans. Planning for these situations should be a done well in advance and, if possible, with a contingency plan as a backup.

Planning for multiple generations

Inheritance received through a Will makes the legatees the owners of the assets and they are free to use them as they desire. Certain advanced inter-generational estate-planning such as skipping a generation and providing for the subsequent generation, preserving ancestral property for multiple generations, protecting wealth from spendthrift legatees or protecting legatees from the ill-effects of excess wealth, etc. can be very well achieved through a Trust structure.

Business Families

Apart from regular assets, business families also own shares/interest in the business, trademarks, brands, etc. While planning for the inheritance of these assets, they need to consider potential consolidation and control of business interest/shares, future business realignments & joint-ventures, induction of new financial/strategic partners, potential IPO, licensing of trademarks and brand, etc. Considering these ever-changing business dynamics, often, private Trusts are the most preferred vehicles for business succession planning.

Size of the Estate

Given the cost factor of establishing, managing and operating the trust, you must keep in mind the size of the estate, besides the objective & family dynamics. Else, there is a grave danger of the management and administration costs eating away a sizeable part of the estate, leaving behind very little to the ultimate beneficiaries of the estate. A classic case where the cure is worse than the disease.

Conclusion

To conclude, choose between a Will and a Trust wisely after evaluating all the pros and cons. A Will works for smaller families with simple inheritance objectives, is cost-effective and easy to draft and modify for the testator, but it has its limitations when someone is looking for advanced estate planning solutions. Also, inheritance through a Will is prone to family disputes, resulting in significant delays and legal costs to the legatees.

Similarly, through a Trust you can achieve advanced and tailor-made estate planning objectives. But if not structured well, it may become a white elephant, locking-up the assets and at times making it inaccessible to the beneficiaries.
Shailendra Dubey is Partner-PlanMyEstate Advisors LLP
first published: Jan 5, 2021 10:20 am
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