What is the difference between a Will and a Trust?
In many ways, Wills and Trusts are fairly similar. They can both be used to protect your assets after your death, ensuring that they go where you wish them to, although Trusts can also be used during a person’s lifetime. However, Wills and Trusts are different documents with different functions, and it’s important to understand why this is the case – particularly if you are thinking of putting plans in place for after your death. It might not be pleasant to think about, but it’s best to get your affairs in order ahead of time.
What is better – a Will or a Trust? And what is a beneficiary in a Will? If you’re not sure, don’t worry. Here, we’ve outlined the differences between Wills and Trusts to help you better understand.
What is a Will?
In simple terms, a Will is a document that outlines how you want your assets to be distributed and your affairs to be handled after your death. It’s a legally enforceable document that needs to be written, signed and witnessed. It should name your beneficiaries and give details of how all of your possessions should be distributed. Furthermore, it should outline an executor (the person who will be in charge of distributing your assets).
Should you have any dependent children, your Will can also outline who would care for them if you should pass away while they are in your care. You can set out explicitly who gets what and allow your loved one's access to your assets without too much difficulty. You can make plans to save money on inheritance tax too, through gifts and charitable donations. In addition, you can use your Will to specify your funeral arrangements.
What happens when someone dies without a Will?
If someone dies without a Will, they are said to have died ‘intestate’. As a result, their assets must be distributed in line with the intestacy rules, whether or not this is what they would have wanted. Remember, what the intestacy rules dictate might not be what you’d choose. Meanwhile, if you have any dependent children, the court will name a guardian. Again, this person might not be who you’d choose to care for your children after your death, which is why it’s so important to create a Will.
Plus, when someone dies without a Will, they might not be taking full advantage of the inheritance tax spousal exemption. The exemption is in place when you pass your estate over to a spouse or civil partner – without making a Will, other relatives might be entitled to some of your assets, meaning that those legacies would not be exempt and should they exceed your nil rate band there could be inheritance tax payable.
What is a beneficiary in a Will?
A Beneficiary is somebody who is chosen by the deceased person – as set out in their Will – to receive an inheritance from their estate. In their Will, the deceased person will state their beneficiaries, and give details such as their home address for ease of contact. It’s the executor’s job to contact the Beneficiaries and notify them of what they are entitled to do, as per the deceased person’s wishes.
What is a Trust?
A Trust is the formal transfer of assets to a small group of people known as Trustees to hold and safeguard for the benefit of others.
With a Trust, you will have to appoint one or more Trustees who will manage and look after your assets on behalf of the Beneficiaries, in accordance with the terms set out in the Trust Deed.
Essentially, your assets will be transferred to some type of Trust either on your death or during your lifetime. The Trust assets can remain in the Trust after your death where they’ll continue to be overseen by your chosen Trustees. The Trustees are the legal owners of the assets held in a Trust. If the assets are being gifted for inheritance tax purposes, the settlor wouldn’t normally retain any interest or be included as a potential Beneficiary as this would be a gift with reservation and ineffective for inheritance tax purposes.
On your death, your Trustees will divide your remaining assets between your Beneficiaries, according to your wishes, or continue to look after them until such time as they wish to make a distribution. The latter could occur, for example, where there are minor or disabled Beneficiaries perhaps, or Beneficiaries who may fritter the funds away.
Does a Will override a Trust?
It’s possible to create both a Will and a Trust, and in many cases, they’ll complement each other. However, if there are any issues or conflicts between the two, the Trust will normally override the Will – not the other way around. This is true where the Trust is created during the lifetime of the settlor, also known as a living Trust. Since this type of Trust becomes operative before the Will takes effect at death, the Trust takes precedence over the Will, when there are discrepancies between the two. Where Trusts are set up on death of a settlor as part of the Will, depending on the situation and the ages of the Beneficiaries etc, a Trust set up by a Will could potentially be unravelled or a deed of variation used. But generally:
- A Will and a Trust are both part of a comprehensive estate plan, that sometimes are inconsistent with one another.
- When there are conflicts, a living Trust takes precedence over a Will.
That said, it is worth considering both options. Often, Trusts will only be concerned with specific assets, rather than your entire estate, so it can make sense to outline everything in a Will as well.
What are the main differences?
So, what’s the difference between a Will and a Trust? There’s no single answer, but there are a few factors that make them different.
A Trust can be set up during a person’s lifetime or on their death, whereas, a Will won’t be activated until the person dies. A Will is a document that outlines who will receive your assets on your death, appointing an executor to carry out your wishes, and one of the Beneficiaries of your Will might be a Trust rather than passing assets to individual Beneficiaries directly. A Trust is a legal arrangement wherein Trustees hold property for Beneficiaries, and can distribute assets before and after death.
If you gift assets into Trust during your lifetime this is a gift for inheritance tax purposes and after seven years those funds are out of your estate. For this to be effective it’s important that you aren’t included as a Beneficiary of the Trust. You can however be one of the Trustees in order to keep control over the Trust assets.
Your Will must go through probate after your death, while a Trust won’t. Of course, this will save time and money, and it also means that the details inside a Will remain private (with the exception of being registered to the Trust Registration Service where details do need to be provided). Wills on the other hand become part of the public record and as a result can be challenged in court. Furthermore, a Trust can take into account disability and incapacity before your death and can provide tax savings.
One benefit of a will, is that you can name a guardian for any dependent children, while also detailing your wishes for your funeral.
What is a living Will and Trust?
You may have heard the terms living Will and living Trust, but what do they mean, and how do they differ from standard Wills and Trusts? There are a couple of key things you need to know. So, what is a living Will and Trust?
Basically, a living Trust is similar to a Will, but it becomes effective before your death, i.e., while the property owner is still alive. Hence, with a living Trust (also known as a Revocable Trust), the probate process can be skipped, and your Trustees can take control of your assets immediately. This can be extremely useful in certain situations, i.e., if you’re unable to look after your own affairs due to illness or incapacity.
A living Will (also referred to as an Advance Decision) is a slightly different type of document – essentially, it enables you to express your wishes around refusing medical treatment in the future. But it will only be used if you lose the capacity to make or communicate decisions about your treatment.
So, what is better – a Will or a Trust?
There are advantages to both Wills and Trusts, and it can be difficult to decide which is most appropriate for you. It’s accepted that pretty much everyone should have a Will and depending on individual circumstances and objectives, using Trusts either during lifetime or on death may be appropriate. It’s not something that’s always easy to talk about, but we're here to help.
If you would like to speak to one of our financial advisers, you can contact The Private Office and arrange a free inital consultation today.
Please note: The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.