In Short
- A family trust is a private arrangement for managing assets, while a will details asset distribution after death.
- Family trusts offer flexibility and tax benefits, whereas a will requires probate and is subject to public scrutiny.
- Both tools serve different purposes and can complement each other in estate planning.
Tips for Businesses
When considering estate planning, think about how a family trust can help manage business assets and potentially reduce tax liabilities. A will is essential for outlining the distribution of assets after death, but it requires probate. Using both tools together can provide a comprehensive approach to safeguarding your business.
Table of Contents
- What is a Family Trust?
- What is a Will?
- What Are the Similarities Between Family Trusts and Wills?
- The Benefits of a Family Trust
- The Benefits of a Will
- What Are the Differences Between a Family Trust and a Will?
- What is the Difference Between Family Trusts and Wills When the Appointor Dies?
- Key Takeaways
- Frequently Asked Questions
If you are looking to make arrangements for your assets, you may be looking at wills and family trusts. However, when discussing a will and a family trust, people often mistakenly confuse them as being the same thing. However, although you can use both for estate-planning purposes, they have very different uses and purposes. This article will explore the key differences between a family trust and a will. It will also highlight the purposes of each and explain when each is appropriate to use.
What is a Family Trust?
A family trust is a type of discretionary trust set up to hold a family’s assets. In accordance with the trust deed, the controller of the family trust (the trustee) distributes the income and assets of the trust to the other family members (the beneficiaries).
A trust deed is a document used to set up and manage a trust. It sets out the:
- settler (the person who set up the family trust);
- trustee;
- appointor (the person with the power to remove or appoint the trustee);
- details on what the trust contains; and
- management process for the trust.
The assets remain in the trust until the trustee distributes them to the trust’s beneficiaries.
What is a Will?
A will is a document that specifies how your property is to be dealt with and distributed upon your death. A will provides details and management instructions on your assets. The preparation of a will occurs during your life but only becomes operational after your death.
An executor is a person in charge of ensuring the enforcement of the instructions contained in the will.
In the will, you will name and direct all of your assets. However, ‘residue’ clauses are also common. Here, assets other than those you specifically name in the will are pooled and distributed.
What Are the Similarities Between Family Trusts and Wills?
Both a family trust and a will provide you with a way to hold and distribute assets to family members. As these family members are the ones who receive the benefit of the assets, they are called the beneficiaries.
Both a family trust and a will require someone to be responsible for managing the property and the distributions. In a family trust, this person is the trustee. In a will, this person is the executor. Both a trustee and an executor must act in the interests of the beneficiaries.
However, there are also differences between family trusts and wills. Specifically, a family trust is a way of controlling (but not legally owning) assets during your lifetime. In comparison, a will is a mechanism that controls the distribution of your assets after your death. A will only applies to the assets of an estate. The assets of a family trust do not form part of your estate and, therefore, you cannot pass trust assets under a will.
The Benefits of a Family Trust
There are two main benefits to managing assets through a family trust.
1. Tax Benefits
Placing assets into a family trust minimises your family’s overall tax liability. By spreading the family’s income across multiple beneficiaries from year to year, you minimise the tax you pay.
Generally, within a family group, there will be several different individuals who fall within different tax brackets. When assets are put into a family trust, the trustee can make distributions to family members. This is very beneficial from a tax perspective. This process usually involves making greater distributions to beneficiaries who are in lower tax brackets.
2. Asset Protection
By placing assets in the trust, it is no longer the property of its original owner and becomes the trust’s property. Therefore, if your personal assets are ever at risk of being seized (for instance, if you were being sued or becoming bankrupt), the property will be considered trust property and will not be in jeopardy.
The Benefits of a Will
The benefits of a family trust differ from those that exist when a will is prepared. The key benefit in having a will is that you can choose who you want to benefit from your assets after your death. If you pass without leaving a will, it will make distributing your assets a much more complex process. This is done according to the intestacy rules that provide a guide to determine who receives your estate’s assets. Under these rules, only spouses or immediate family can inherit your assets after you die. To avoid having to use these intestate procedures, you need to ensure you create a valid will.
Though choosing who benefits from assets is also a benefit under a family trust, this is generally done with tax minimisation as the main objective. In comparison, your wishes for what happens to your estate after your death is generally the driving force behind creating a will.
What Are the Differences Between a Family Trust and a Will?
Although there are similarities between a family trust and a will, they are not the same thing. There are two main distinctions between a family trust and a will.
1. When You Use Them
One clear difference between a family trust and a will is the time during which you use each. A family trust usually makes annual distributions during your lifetime. In comparison, you hold onto the property in a will until you die. Only once you die does your property pass to the beneficiaries.
Furthermore, in a family trust, the title of the assets are in the name of the trustee on behalf of the trust. Whether or not the trustee is living or not, the assets still belong to the trust. In a will, the title to the assets remains with you during your lifetime. The title only passes upon your death and after the distributions are made and finalised.
2. Distributions
Distributions under a family trust are different to those made under a will. In a family trust, distributions are made on an ongoing basis and are typically made annually.
On the other hand, distributions under a will are only made upon your death. After that, the will’s executor will need to obtain a grant of probate. The grant of probate allows the executor to begin making the distributions that you requested.
Understanding the Practical Implications of Family Trusts and Wills
When considering the practical applications of family trusts and wills, examining how they align with your financial planning and protection strategies is essential. A well-structured family trust offers not only tax benefits and asset protection but also flexible control over managing your assets during your lifetime. This flexibility includes the capability to specify conditions under which beneficiaries can access the assets, making it a valuable tool for addressing the long-term financial needs and potential circumstances of different family members.
The main advantage of having a will is the peace of mind that comes with knowing your assets will be distributed according to your wishes upon your death. This straightforward and legally binding document is critical for preventing disputes among surviving relatives and ensuring your legacy is honoured as you envisioned. Additionally, the presence of a will simplifies the legal process required to settle your estate, reducing the burden on your loved ones during a time of grief. An effectively drafted will seamlessly coordinate with your estate plan, including trusts, to facilitate a comprehensive asset management and distribution approach.
Engaging in thorough estate planning, possibly with the assistance of legal and financial advisers, will ensure that both these tools are utilised most effectively to secure your financial legacy and provide for your family’s future. Thus, by understanding the distinctive benefits and functions of each, individuals can make informed decisions that best suit their estate planning objectives.
What is the Difference Between Family Trusts and Wills When the Appointor Dies?
Family Trusts
Upon the appointor’s death, any assets in a family trust are treated separately to a will. This is because the assets that the appointor has put in the trust are now held for the benefit of the beneficiaries, not for themselves.
However, who will now control the trust is an important issue after the appointor’s death.
If the trustee is different to the appointor, the family trust will continue in the same way as it did before the appointor’s death.
If, however, the trustee is the same person as the appointor and they pass away, you will need to pass control of the trust to someone else. It may be beneficial to determine who the successor trustee will be while creating the trust deed.
Wills
A trust under a will is a testamentary trust. It involves an asset held by an individual that creates a new trust following their death.
Once the asset passes out of the estate and into the testamentary trust, it essentially has the same function as a family trust. However, it is subject to a much lower tax rate.
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Key Takeaways
A family trust and a will are both legal tools used to manage and distribute assets, but they serve different purposes. A family trust allows assets to be held and managed by a trustee for the benefit of beneficiaries, offering flexibility and potential tax advantages. A will, on the other hand, outlines how a person’s assets should be distributed after death, but it requires probate and may be subject to public scrutiny. Understanding their differences is key to making informed decisions about estate planning.
If you need any help understanding the difference between a trust and a will, contact our experienced business lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1800 534 315 or visit our membership page.
Frequently Asked Questions
Yes, a family trust can offer potential tax advantages, such as income splitting among beneficiaries, which may reduce the overall tax burden.
Yes, a will usually requires probate, which is a court process to validate the will and ensure assets are distributed accordingly.
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