When discussing a will and a family trust, they are often mistakenly confused as being the same thing. 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);
- 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. The trustee is considered the owner of assets in the trust. However, this is only on the behalf of the trust; the trustee does not have legal ownership of any of the assets.
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 a Family Trust and a Will?
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 in 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, 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 a will, then distributing your assets is a much more complex process and is done according to the intestacy rules. Under these rules, only spouses or immediate family can inherit your assets after you die.
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.
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 for the executor to begin making the distributions that you had requested.
What Happens to the Assets in a Family Trust When the Appointor Dies?
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.
What About a Trust Under a Will?
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.
There are many similarities between a family trust and a will. The key similarity is that you use both as a way to pass assets to family members. However, they do differ in how and why those distributions to family members are made.
Generally, the motivating factors behind setting up a family trust is for tax-planning and asset protection. In comparison, a will’s primary purpose is succession planning.
Whether you should prepare a will or set up a family trust depends on your specific circumstances. If you have any questions about family trusts or wills, contact LegalVision’s business structuring lawyers on 1300 544 755 or fill out the form on this page.
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