Who is the owner?
With a will, all assets remain the property of the person who made the will. The will is triggered when that person dies, and a person named in the will as an executor becomes responsible for carrying out the wishes expressed in the will. After any debts of the deceased are paid, assets in the will become the property of the will’s beneficiaries.
With a trust, ownership is split. This may sound strange at first but is actually a well-established process with centuries of precedent and documented case law surrounding it, as well as modern regulation of the industry that does it. Trusts divide ownership between a trustee and a beneficiary.
The trustee takes legal ownership of the assets assigned to the trust and manages the trust on behalf of the beneficiary, who does not hold legal title to the assets in the trust.
Trusts typically have two types of beneficiaries: one type receiving income from the trust during their lifetime, and the other type receiving any remaining capital assets after the death of the original beneficiary. However, no specific trust structure or behavior is mandated by law or regulation and there is great variety in the types of trusts people choose to establish and how they use trusts to manage their assets.
A trust becomes operational as soon as it is created meaning ownership of assets can be transferred during the original owner’s lifetime.
Which property is covered?
A will covers only the property of the person making the will, excluding any trusts of which they may be the beneficiary and any property held in joint tenancy.
A trust covers only property which has been assigned to the trust. In order for property to be in the name of the trust, legal ownership of that property must be assigned to the trust and this can be done at any time.
Does it pass through probate?
For estate planning, it’s important to know that a will passes through a process called probate, where a court ensures that the will is valid and that everyone is getting what they ought to get.
Technically, this is a matter of having a court change the title on assets so that they can pass to the persons named in the will; only a court can do this once the person who previously held title has actually passed on, so beneficiaries of wills must petition courts to
Wills pass through probate when property involved in them is solely in the name of the deceased, to ensure that the dead person’s will is actually carried out. Additionally, wills are public.
Meanwhile, a trust does not pass through probate at any time. A court does not need to oversee the process because there is already a trustee appointed to do this. Trusts can also remain private.
Is a trust or a will better?
The short answer is: no. One isn’t better than the other; they’re better for different things.
A will lets you name a guardian for children, and specify funeral arrangements, as well as allocate assets as you see fit.
However, a trust may be a better choice for planning for a long-term illness, and is often used when passing assets down to a subsequent generation.
Here are five ways a trust can be used to achieve things a will cannot:
- Bypass probate: As we’ve already mentioned, a will covering assets where the deceased held sole title (was the only named owner) goes through the probate process. Even when it goes smoothly it adds time, effort and expense to the process of passing on an estate. A trust doesn’t go through probate at all, so assets can be passed on more quickly and smoothly.
- Creditor protection: A trust can protect the assets you leave your children against those children’s creditors. For instance, assets held in trust can’t be lost to business debts, divorcing spouses, unpaid credit card debt or bankruptcy. Assets handed down via a will can, so a trust can be a good way to provide some protection against creditors.
- Benefits protection: A trust can protect your children if they have needs-based benefits based on disabilities or long-term conditions. As these tend to be means-tested a trust can ensure that they don’t lose out or have their assets eroded by caps on entitlements.
- Estate taxes: For many high-value estates, this is a major concern. Depending on the jurisdiction, estate taxes can take a large chunk out of an estate. There’s no kind of will that can prevent this, but trusts can defer, or in some cases prevent, estate taxes from being levied on your estate, especially when passing on assets to future generations.
- Minor children: Leaving assets to minors is a problem, because the law says minors don’t have the capacity to hold title on assets. A will that leaves assets to minors can be the start of a long period of legal wrangling. But a trust can leave beneficial ownership to minors because legal ownership is held by the trustee, avoiding the issue.
Trusts and wills aren’t interchangeable, but they can be complementary; it may be that they can be combined to arrange your estate best. Talking to a company with experience in estate planning and knowledge of trusts is the best place to start creating the right structure for your legacy.