In simple terms, will and trusts are documents that define who will receive your assets in the event of your death. Without a will or trust, your assets may not be distributed the way you want them to be. Additionally, your heirs may have to spend significant amounts of money and time to settle your affairs after you are gone. There are different types of wills and trusts, and choosing between them can be perplexing. In this article, we will help you understand everything you need to know about wills and trusts so you can make an informed decision.
Trust Vs Will: An Overview
Do I need a will or do I need a trust? This is a question that people often ask themselves when they begin planning how to distribute their assets after their death. While both of these documents can be used in conjunction, they serve entirely different purposes.
A will is a testamentary document that states how you want your assets to be distributed and affairs to be handled after your death.
A trust, on the other hand, is another form of estate transfer in which you transfer the right to handle your assets for the benefit of your beneficiaries.
One of the primary differences between wills and trusts is that the former comes to effect after your death, whereas a trust is active as soon as you create it. Moreover, a will encompasses the distribution of properties that are under your name and does not include property operating in joint tenancy or a trust. A trust includes property that you have transferred to a trustee.
Another critical difference between a will and a trust is that a will goes through probate. The Court administers the will and makes sure that it is valid and demands within it are adequately adhered to; conversely a trust is passed outside the probate, which can save both money and time. While a will becomes a public record, a trust can be maintained privately.
What are the types of Wills?
Before we get to the importance of getting a will, you should know that different types of wills serve different purposes:
1. Simple Wills
Simple wills are most commonly used to distribute assets to beneficiaries. If the nature of your assets is uncomplicated, writing a simple will should suffice. As with all wills, it should be typed and should include the name of the testator, address, marital status, instructions, etc.
2. Testamentary Trust Wills
A testamentary trust encompasses provisions that put the estate into a trust. Based on the requirements of the will, the assets are distributed to the beneficiaries through the trustee, who holds control of the assets. Testamentary trust wills are ideal in cases where the beneficiary lacks financial responsibility.
3. Reciprocal (Mirror) and Joint Wills
Joint wills are often used by married couples who plan to leave their property to each other. These types also usually include comprehensive instructions with regards to life-saving measures, types of medical treatment, and other things the individual may want in the event they are unable to communicate in the future.
Reciprocal or mirror wills are identical wills created by individuals who are in favour of each other. Typically, this will is created by married couples or individuals in a civil partnership. They both draw similar wills to protect one another and their children in case one of them dies.
4. Living Wills
The objective of living wills is to provide instructions about life-saving measures or medical treatment you may wish to receive in case you are not able to communicate the same. For instance, if you become terminally ill, this document could specify that you do not wish to be put on a ventilator or life support equipment, even if you could die without the use of these measures.
5. Pour Over Wills
A pour-over will is a document that ensures that the remaining assets of an individual will be transferred to the previously set-up trust upon their death. This type of will works together with trust because it allows you to include assets that you have not included in the trust, in the event of death.
6. Holographic Wills
A holographic will is a will that is written, dated, and signed by hand. These types of wills are not considered valid in many regions and should meet specific requirements to be considered authentic. The family would need to prove that the testator wrote the will, and also provide evidence that he or she had stable mental capacity at the time the will was written. Testators can create this type of will; therefore cost less than wills that need to be formed by attorneys.
7. Property Trust Wills
Property trust aims to protect the value of your estate. Although you cannot transfer the property into a trust to avoid paying care fees, you can include a provision within the will that if you die, your share of the property should be left within the trust for the beneficiary. Married couples typically use this type of will.
What are the Types of Trusts?
Outlined below are the different types of trusts:
1. Bare Trusts
Bare trusts are transparent trusts wherein the beneficiary has full rights to the assets and capital mentioned in the trust and the income generated from it. These forms of trusts also provide tax advantages to the people who set them up. Beneficiaries are taxed at the prevailing rates (at the time trust was created), and they may be subjected to exemptions in case of low earning.
2. Interest in Possession Trusts
In an interest in possession trust, the beneficiary has an automatic and immediate right to the income generated from the trust. The trustee needs to pass all the income generated minus his or her fees or other granted expenses to the beneficiary. In this case, the beneficiary is known as a life tenant. If the beneficiary is also entitled to trust capital, then he or she will be deemed as capital beneficiary or remainderman.
3. Discretionary Trusts
A discretionary trust is set up for the benefit of one or more beneficiaries; however, the trustee holds complete discretion as to when and what funds should be provided to the beneficiaries. Beneficiaries have no direct right over the funds, and they are only entitled to the amount of trust income defined in the terms.
4. Accumulation Trusts
Accumulation trusts imply that the trustee does not have to distribute income generated from the trust; instead, the trust collects the income and other profit and secures them until the time and date mentioned in the trust document. Post the predetermined time and date; trustees can distribute the income to the beneficiaries. States have different laws regarding the time of accumulation.
5. Mixed Trusts
Mixed trusts, as the name suggests, are a combination of different types of trusts. Some of the assets may be put aside as an interest in possession trust, whereas other assets may be treated as a discretionary trust. Mixed trusts are typically used for the benefits of siblings who are beneficiaries and will attain legal age at different times.
6. Settlor-Interested Trusts
In a settlor-interested trust, the settlor or the spouse of the settler or civil partner may benefit from the trust. This may be arranged if the settlor is aware that he or she will be incapacitated by illness or other reasons, and thus wishes to set up a trust to protect their partner in the future financially.
7. Non-Resident Trusts
Non-resident trusts are used when the trustee is not a resident of the UK. The tax rules associated with non-resident trusts are quite complicated. In some instances, some of the trustees are residents of the UK, but the settlor is not a resident or domiciled in the UK.
Advantages and Disadvantages of Wills and Trusts
To decide between a will and a trust, you should evaluate the advantages and disadvantages of each.
Advantages of Wills
Below are 5 reasons to have a will –
1. Cheaper and easier to make
A will is not as complicated as people might expect. With the right legal guidance, you can make a will efficiently and with minimal cost. With different types of wills and more relaxed rules, it has become easier for people to create wills and safeguard their loved ones’ future.
2. Allows naming a Guardian for your Children
In case of an unexpected or untimely death, a will helps you ensure that your children will continue to receive the care they need. You can name a guardian for your children to avoid any undue stress following your death.
3. Do not require changing names on financial accounts.
In a will, you don’t have to change the names on financial accounts. To begin with, it will only come into effect after your demise. And the right of your estate will be automatically transferred to the beneficiary without having to go through the arduous process of changing financial accounts.
4. Include Testamentary Trusts
You have the option to set up a testamentary trust. This allows you to protect your beneficiary as well as your assets. By putting a trustee in charge of the distribution of assets, you can be assured that the distribution will be managed properly.
5. The Court will supervise the distribution of the assets.
Another vital benefit of a will is that it goes through probate. The Court supervises the entire process to make sure your wishes are being adhered to efficiently.
Disadvantages of Wills
Following are the disadvantages of making a will –
1. Takes Effect Only at Death
Unlike a trust, a will only come into effect after the death of the creator. So the beneficiary will not have access to the assets until the death of the person who created the will.
2. Changing a will requires following certain formalities.
Once your will is witnessed and signed, you cannot amend it. You can only make changes by establishing an official alteration known as a codicil. You need to sign and get the codicil witnessed as well.
3. Assets that pass by way of a will are subject to probate proceedings.
Considering that the assets have to go through probate, there is less flexibility in the entire process. The process could become cumbersome if distributing assets that go above a particular value.
4. Ancillary Probate Proceedings
The will can be subjected to ancillary probate proceedings. It is another probate process along with the primary one. This is mandatory if you have assets related to real estate situated in a different state.
Benefits of Trusts
Below are the reasons you should make a trust –
1. Avoid Probate Proceeding
In the case of a trust, there are no probate proceedings. The trustee is responsible for handling the assets as mentioned in the trust. So the process may be completed efficiently.
2. Reduce Estate Taxes
When assets are transferred, they are no longer the possession of the settlor. Therefore, the capital gains and income generated from the assets are taxed based on the rules applicable to the trustee.
3. Passes the assets without additional proceedings
Transferring assets within a trust are easier as opposed to in the will. There are typically no proceedings, so that entire process involves less time and money.
4. Protection and Control of Assets
An individual may not wish to pass their assets directly to their heir for many reasons. A trust allows you to allocate your assets as per your wishes, without losing control over the assets.
5. Documents are Effective Immediately
Unlike wills, trusts are active as soon as they are signed. This offers higher flexibility in its application.
Disadvantages of Trusts
Following are the challenges of making a trust:
- Trustee fees are incurred
When you assign a trustee to manage your estate, you have to pay him or her a certain amount for a prolonged period for carrying out the responsibilities. This makes trusts a more expensive option.
- Hard to set-up
Trusts are more complex to register as they need registration of properties in the name of the beneficiary. This process also requires you to put in additional money. And in case, the property is not re-registered, the estate will go through an arduous probate process.
- No-special Estate Tax benefit – No Special Asset Protection
When you set-up a trust, you lose ownership over your estate to the beneficiary from the time you sign the trust. Moreover, there are no estate tax benefits associated with trust, and you have to pay the taxes in standard rates.
- Creditors can still get assets in your trust
Setting up a trust does not protect you from creditors. The debts that you owe may apply to your trust.
What happens if you die without wills or trusts?
If you die without a will or trust, a strenuous probate process will start where the state will elect a representative who will be responsible for the distribution of your assets. Typically, this would be the responsibility of the surviving spouse. But when there are surviving ex-spouses, parents, children, and other family members, the process of electing a representative can become more complicated.
Until the court decides how and to whom the assets will be distributed, they will remain frozen. And the person elected by the Court might not be the one that the family would have chosen.
In the event that no one is willing to handle the estate, the Court will assign a public trustee. This means a total stranger will distribute your assets under the law. You can expect that such a situation would cause stress for your loved ones. If you are asking yourself, why make a will or trust, this should be a serious point for your consideration.
What if You are Single?
If you are single with no children, your parents will likely inherit your assets. If one of the parents has passed away, the assets will be distributed among the surviving siblings and surviving parent.
What Happens to Your Children?
If you have children and you do not have a will, then the Court will decide who their guardian will be after your death. Typically, family members step in and take care of the children, but he or she may not be your ideal choice to care for your children. You can easily avoid such a situation by creating a will.
What if You Are Married?
If you are married, the joint estate will be transferred entirely to your spouse. Moreover, the properties you own separately will be distributed among your spouse, children, parents, and siblings. The situation could become very complicated if you have divorced and remarried, and have children from both unions.
Conclusion
The importance of making a will or trust cannot be overstated. Without a will, you can create a family feud, creating a tense and stressful environment. By setting up a will or trust beforehand, you can choose how and to whom you want to distribute your assets. And if you have under-aged children, you can ensure that they will be cared for by the right people.
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