One of the most integral part of financial planning is Estate Planning. It ensures that in the event of estate owner’s death, the survivors get access to his/her assets without any disputes and legal issues, in the proportion decided by the estate owner. Wills and Trusts are important vehicles for effective estate planning.
A will is a written document of the desired way of distribution of wealth among loved ones after one’s death. A few pointers about a will:
- It can be made only by individuals and has no legal validity until one’s demise.
- Will does not help manage individual’s assets when he/she is incapacitated, owing to old age, illness or injury.
- Will can be modified or revoked during the life time of an individual any number of times.
A trust is a three-party financial arrangement where one party (the author) gives a second party (the trustee) the ability to hold assets or property for a third party (the beneficiary). A few pointers about trust:
- It has rights and obligations assigned to each of the parties.
- Trusts can be created anytime and provides different structures.
- It lives alongside an individual.
- A trust can be formed for various purposes.
Difference between a Will and a Trust?
Need for setting up trust in Estate Planning:
- a) Aids to avoid any disputes within or outside the family
- b) Helps to Avoid any transmission loss
- c) Provides protection to personal assets against avoid claims / litigation’s in the future
- d) Ensure smooth distribution of wealth as per the estate owner’s desires rather than any statutory disposition
- e) Helps to Safeguard interests of dependents
- f) Gives an opportunity to assign guardians for minors and incapacitated beneficiaries
- g) Aids Inheritance tax planning
- h) Aids Philanthropy.
- i) Helps to minimise the expenses of transferring property to the beneficiaries and enable them to get more benefit.
- j) Helps to plan for medical and physical incapacity and decides in advance who should take care of the estate owner and his/her minor children in such a situation.
- k) Helps protect estate from the heirs’ creditors or from beneficiaries who may not be adept at money management
- l) May allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.
Who can form a Trust ? / Parties to a Trust
Any competent individual person over 18 years of age and mentally sound can create a trust for any legal purpose(s). A trust can be created by or on behalf of a minor with the permission of a principal civil court of original jurisdiction. Apart from an individual, a company, firm, society or association of persons is also capable of creating a trust.
What are the different types of trust?
Generally, there are two types of trusts in India, private trusts and public trusts. While private trusts are governed by the Indian Trusts Act, 1882, public trusts are divided into charitable and religious trusts.
A private trust is one in which beneficiaries may be definite and ascertained individuals and a public trust is one in which beneficiaries are unascertained individuals.
A Private Trust can be divided into two, i.e.:
(i) Revocable Trust: When the settlor establishes a trust and retains the right to amend, modify or revoke the trust at any time, however if the author is deceased before the expiry of tenure of the trust – the status of the trust automatically changes to irrevocable.
(ii) Irrevocable Trust: When the settlor establishes a trust and the settlor effectively gives up his control over the assets – the trust is irrevocable in nature.
Without a will who gets all the assets?
In absence of estate planning, if one dies intestate (in absence of will), assets are than distributed amongst the family members (legal heirs) as per succession laws of the religion that the person belongs to (the intestacy laws of the state where the person reside). Assets include any bank accounts, securities, real estate and other assets owned at the time of death. A few examples of succession laws applicable as per religion are Hindu Succession Act, Parsi Succession Act, Muslim Shariat Laws etc.
How living trusts avoid Probate?
When setting up a living trust, a person transfer assets from his/her name to the name of the trust, which is under his/her control — such as from “Mr Rajesh and Bina Sinha, husband and wife” to “Rajesh and Bina Sinha, trustees for Rajesh and Bina Sinha trust dated (month/day/year).”
Legally the estate owner no longer owns anything; everything now belongs to the trust. So, there is nothing for the courts to control when the owner dies or become incapacitated. The concept is simple, but this is what keeps the estate owner and the family out of the courts.
“Living Trusts,” are an effective estate-planning tool for avoiding the costs and hassles of probate, preserving privacy and preparing the estate for ease of transition after one dies.
Debalina Roy Chowdhury