Should you create a will or a trust? Learn about their differences to know which is the best option for your estate planning.
Do you need to create a trust or a will? Deciding which one will work best for you is a decision that should not be taken lightly when doing your estate planning.
The right choice depends on your individual circumstances. For some, a will is the most practical tool. For others, a trust might be a more appropriate choice. Each has its own set of benefits and drawbacks that you will need to consider. But first, it’s important to understand what they each are and how they function.
What is a will?
A will is a legal document indicating what you want to happen to your estate upon your death. Your estate includes all your assets such as your properties, cars, collectibles, bank accounts, insurance etc. It covers things such as:
- How your assets will be managed and distributed
- Who will take care of your minor children
- Your health and financial directives
It is revocable and can be reviewed and updated at any time during your lifetime. Amending your will as your situation changes is vital.
If you decide to create a will, remember that it may need to go through the probate process. It is a legal process that is sometimes required to validate a deceased person’s will in order for their stated wishes to be carried out by an executor (who is usually named in the will). The executor is a person that was assigned to manage the deceased person’s estate, ensure that all debts are repaid and that the remaining assets are distributed properly.
A probate may be required when a person dies and leaves behind certain types of assets. For example, if you leave a certain amount of money in a bank account and you were the only account holder, the lender may require a grant of probate before the funds can be released to the executor. It can also be triggered if someone contests the validity of the will. To officially recognise the validity of the will and its executor, the probate court will release a ‘grant of probate’. To learn more about how the probate process works, read here.
What is a trust?
Contrary to what most people think, trusts are not just for the wealthy. Trusts are an efficient way to deal with a number of issues that may emerge from estate planning.
A trust is defined as a fiduciary relationship in which a trustee is given the right to hold the title to property or assets for beneficiaries. There are two main types of trusts: a testamentary trust and a living trust. A testamentary trust is included in your last will and testament. This type of trust takes effect when you die and it is overseen by a trustee that you appointed in your will. A testamentary trust is also known as a “will trust” or a “trust under will”.
Meanwhile, a living trust is a document that places most of your assets into a trust during your lifetime. This means that the trust takes effect as soon as you create it. The assets are now legally owned and managed by the trust, but you can continue to use your assets as you normally would. It provides lifetime and after-death property management. For a revocable living trust, the trustee is usually the person that created the trust. If the trustee becomes incapacitated or died, a successor trustee takes control of the trust property.
For a complete guide on trusts and how they work, read here.
Which one should I use for my estate planning?
There are several factors to consider before deciding if a will or a trust is the right tool for your estate planning. This includes:
- Probate court. While wills may require a probate process, court intervention is not needed with a trust. Avoiding probate on assets is one of the main reasons why some people choose to create a trust. Probate can be costly and it can delay the distribution of the estate. This can also prevent your beneficiaries from accessing their inheritance immediately.
- Publicity. When wills are submitted to the court for probate, they become public record. On one hand, the terms of a trust remains private. If you want to avoid your financial affairs being open to public scrutiny, a trust may be the best option for you. But in some cases, the public record status of a will can be advantageous because it allows checks and balances.
- Contestability. Because the details of a will are public, they are more likely to be challenged than a trust. Additionally, the rules for contesting wills are well established, while there are less grounds for challenging trusts.
- Simplicity and control of assets. Generally, a will can be viewed as a “simple” document. As mentioned, it covers the main points of estate planning. It’s also easier to set up. However, its simplicity also comes with some drawbacks. It provides a limited control over the distribution of assets and most likely needs to go through probate after your death. Meanwhile, a trust is more complicated. Remember that after you create a trust, you also need to transfer assets to it to make the trust officially the owner, making it more difficult to manage. But the complex nature of trusts allows it to offer greater control over when and how and your assets will be distributed.
- Time and money. The traditional cost of making a will averages between $500-$3,000, depending on the number of people involved and what services are needed from the law firm. You can even draw up your own will with no costs involved. Compared with wills, trusts tend to be more expensive to create and maintain. Aside from paying a fee to set up the trust (which can range from $500-$2,000), you need to pay accounting fees that vary within the same price range each year.
Another thing to consider is time. After you draw up your will, you can be done and over with it, although it is recommended to update it every three to five years or if life events make it necessary to do so. Meanwhile, trusts can be tedious to set up and must be actively managed. If you are not capable of actively managing your estate plan, a trust may not be the best option.
Conclusion
When choosing between a trust and a will, keep in mind that they offer different benefits. It’s not particularly helpful to assume that one is “better” than the other option. First, you should assess your situation and your goals at the start of your estate planning. Only then can you find the right tool that will suit your needs and protect your loved ones in the best way possible after your death.
Whatever you decide to do, we can work with you to make sure your strategy suits your lifestyle, circumstances and financial goals. Contact us at 08 8231 4709 or info@centrawealth.com.au
