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Wills or Trusts: What is More Effective in Estate Planning?

People are increasingly seeking to secure their wealth & futures of their legal heirs before any unforeseen circumstances strike. Wills & Trusts are two common methods of estate planning.

An estate means the ‘net worth’ of an individual and includes all land, real estate, possessions, financial securities, cash, and all other assets the person owns or has controlling interests in.

Consequently, estate planning refers to the management of the estate, i.e., the assets and their transfer to the beneficiaries when a person passes away and other financial obligations. This planning, therefore, includes the bequest of assets to legal heirs and settlement of taxation.
The two popular methods of estate planning involve making a Will or a Trust. Both methods have their benefits that may be suited to a certain type of estate. 

Wills: Definition & key features


A Will is a legally enforceable document that entails the wishes of the testator (writer) for the distribution of the assets post death. Dying intestate, i.e., without a Will increases time, cost, dispute, and energy of your legal heirs to understand the rightful transfer of the assets. A Will is important because of the following features:
  • Clarity on who gets assets – what and how much?
  • Exclude estranged people.
  • Helps in taxation.
  • It becomes a public record, thus removing any future ambiguities.
  • Authenticating a Will by the court, known as probate, makes the Will bullet-proof.
  • A Will cannot be challenged in court if all necessary elements are fulfilled. 
  • To ward off any legal challenges to your Will, it is best to have it in a written form and witnessed by at least two persons.
  • A Will may be written by the person themselves, but under the guidance of an ‘Estate and Trust’ lawyer to ensure no gaps.


Trusts: Definition & key features


A Trust is a type of fiduciary relationship in which a party, known as the trustor, gives the other party, the trustee, a right to hold title in property or assets for the benefit of another third party, who is the ultimate ‘beneficiary’. Trusts ensure that assets are managed according to the wishes of the trustor and help save time, paperwork and legalities. The key features of a Trust are as follows:
  • Trusts can be used to achieve a variety of specific goals.
  • It has six broad categories – living, testamentary, funded, unfunded, revocable and irrevocable – thus, making it a flexible option.
  • A Trust maintains confidentiality about the assets and their value.
  • Effective in reducing taxation on capital and income, particularly for the beneficiary.
  • Allows for distribution over time, in case you do not trust the beneficiary to handle all assets at once.
  • Trusts are frequently used in estate planning to benefit and provide for the distribution of assets to the heirs of the grantor.


Wills vs. Trusts: A comparison of features


 The following is an illustration of a comparison between the features of a Will and Trust:


GROUND WILL TRUST
 Name of Guardian for Minors  Yes  No
 Probate Requirement   Yes  No
 Revision/Alteration   Yes  Yes, if it is a ‘revocable’ Trust
 Type of Record   Public  Private
 Assets All assets of the testator  Specific assets, as stated in the deed 
 Effective  On death  On transfer, even while trustor is alive 
 Revocation    Any time before the death of the testator   Depends on type of Trust
 

What is more effective, Wills or Trusts?


As mentioned before, estates can be planned either on the foundation of a Will or a Trust:

Estate planned on the basis of Wills

  • While the writing of a Will may initiate the uncomfortable topic of death, it provides a sense of the responsibilities and an idea of the financial position in the family to the legatees. In making a Will, the heirs get a sense of guidance for handling the estate and avoid dispute in its management.
  • The use of a Will for family estates is often used due to its ease and lack of formalism. The only essentials, practically, are that the testator should be of sound mind, and that witnesses are present at the time of writing the Will.
  • However, with a plethora of personal laws governing different religions, the execution of a Will and the transfer of assets often leaves the common man confused. Any asset left off the Will is distributed through succession laws, further adding to the complexity of the process.
  • Therefore, while Wills are simpler to make, its slightly informal nature makes it difficult to execute and one can expect challenges from those not mentioned in a Will.


Estate planned on the basis of Trusts

  • ‘Living Trusts’, created during the trustor’s lifetime, ensure that assets are transferred to the beneficiary/trustee without the cost and publicity of a Will and its probate.
  • Transfer by Trusts are generally quicker and maintain confidentiality; this is often a key element for choosing Trusts as families and businesses want to ensure privacy of their estates.
  • However, Trusts may not circumvent the cost of obtaining a probate if the value of your estate is meager and assets are limited and uncomplicated. This means that creating a Trust may be more costly than the worth of the assets and their management.
  • Certain costs such as transfer of titles, legal compliances and hiring an estate lawyer for legal formalities are indispensable expenses when forming a Trust. Therefore, one must evaluate their estate before choosing to form a Trust.
  • Trusts are more popular in estate planning. However, Trusts are a more formal procedure that need registering and, thus, require the hiring of an expert lawyer; hence, they are more costly.


Can one choose both Wills & Trusts in Estate Planning?



Wills and Trusts are not to be seen as competing against one another; this is not an either/or case. Rather, it depends on what works best for your estate.

  • For small estates with uncomplicated assets, a Will may be the simplest and most cost-effective choice.
  • However, the two may sometimes work together. For instance, trouble may arise in a Trust without a Will when the assets outside the Trust become subject to succession. Therefore, a Will is always beneficial.
  • A combination of a Will and Trust can ease financial and administrative burden, whilst ensuring confidentiality and ease of transfer of assets as the Will can help in transfer of assets not covered in the Trust, and the Trust set-up provides other benefits.


Conclusion


Wills and Trusts have long been used for planning estates. Both have their own pros and cons, and the final decision rests on the estate owner. An owner must carefully consider the estate, the heirs and the financial soundness and potential before deciding upon a method. As aforementioned, a combination of the two is also beneficial.

Making an estate plan early can save money, time and hardship upon the passing of the original owner. Nobody can say for certain that one method is better than the other; it must be decided on a case-to-case basis. In India, estate planning is till at a nascent stage. However, with rising wealth and a booming population, estates are likely to increase. COVID-19 made people realize that they must secure their wealth from any eventuality and secure the futures of their legal heirs. People are also realizing that wealth preservation is as much an art as wealth creation and as crucial. 

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