Comparing the effectiveness of wills and trusts in estate planning
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As a High-Net-Worth Individual (HNI), your estate likely covers complex elements such as multiple properties, investment accounts, sizable assets, and perhaps cross-border interests. Thus, estate planning is a non-negotiable component of your financial strategy.
Estate planning involves making decisions about the management, preservation, and distribution of your assets posthumously. This helps you secure the future of those you care about and honour your legacy exactly as you want.
The decision between choosing a will versus a trust is the most common aspect of estate planning. Both serve crucial roles in estate planning but work differently. Read on to learn how each operates and their effectiveness in managing your estate.
What is a will?
An important aspect of estate planning is the creation of a will. It is a legal document that provides instructions on how a person’s assets should be distributed to the beneficiaries after their death. In India, wills are governed by the provisions of the Indian Succession Act, 1925.
Key features of a will:
- Anyone above the age of 18 and of sound mind can draft a will.
- It becomes effective only after the death of the person making the will.
- Wills become public once they enter probate. It removes ambiguities and clarifies asset distribution.
- Wills can be revised or updated any time before the testator’s death.
- You can appoint guardians for minors in the will.
- Wills can be created with or without a lawyer. However, guidance of an estate and trustlawyer is recommended to avoid gaps.
- They require two witnesses to be legally valid.
What is a trust?
A trust is a fiduciary arrangement where assets are transferred from the settlor to a trustee, who manages them for the benefit of the beneficiaries. Trusts established in India are governed by the Indian Trusts Act, 1882.
Key features of a trust:
- They become effective immediately once signed and funded.
- Allows for the wealth management and distribution of your assets according to your specified terms.
- Trusts can be operational during the trustor’s lifetime or after death.
- It has six broad categories, i.e., living or testamentary, funded or unfunded, revocable, or irrevocable.
- Trusts are private. Thus, confidentiality about the assets and their value is maintained.
- Your assets are protected even if you become incapacitated while still alive.
What is more effective, wills or trusts? Analysing the risks involved
Here is a comparison of the risks involved in using wills versus trusts in estate planning:
| Aspect | Wills | Trusts |
| Effectiveness | Ensure clear asset distribution after death. Can be easily updated or revised. Simple and cost-effective to create | Provide immediate and posthumous asset management. Offer more control over asset distribution terms |
| Privacy | Become public record after probate, risking privacy | Enhance confidentiality of estate matters |
| Cost and complexity | Lower initial costs. Potentially high probate and legal fees | Higher initial setup costs. May incur ongoing management fees |
| Tax implications | Subject to probate and legal fees, but no specific tax advantages | Irrevocable trusts offer tax benefits in terms of capital gains and income tax |
| Protection from creditors | Offers no direct protection against creditors or legal judgments | Can protect assets from creditors, depending on the trust structure |
| Timing of asset distribution | Distribution occurs after probate, which can be time-consuming | Allows for immediate or specified future distribution, bypassing probate |
Key takeaways
The final decision between a will and a trust depends on your circumstances, including the size and complexity of the estate, privacy concerns, tax implicatio-ns, level of control needed, and family structure.
Put simply, the decision depends on what works best for your estate. In fact, many estate plans incorporate both wills and trusts to leverage their combined strengths and leave no loopholes or gaps. Consulting with a qualified estate planner can help you determine the most appropriate strategy and create a lasting legacy.
