Few of us like to contemplate what will happen after we die. Deciding what will happen to our much-loved possessions and assets we have worked long and hard for can be daunting.
That’s why so many people find the idea of discussing inheritance uncomfortable and subsequently put off estate planning until, in some instances, it may be too late.
It is important to understand your options completely before making a decision on what will happen to your belongings. Below, we explain what the difference between Wills and Trusts are, so you can make a well-informed decision.
The terms ‘Will’ and ‘Trust’ are often confused. People tend to know they both have something to do with giving your assets to others. However, despite the two documents sometimes being connected, they are very different and serve different purposes.
When it comes to estate planning, the most appropriate options for you will often come down to your individual situation and your personal wishes and concerns.
What is a Will?
A Will is a legally enforceable document stating how you want your affairs handled and assets distributed after you die. It:
- Is a statement that must be written, signed and witnessed.
- Names your beneficiaries – the people you want to benefit from your assets – as well as details of your possessions.
- Allows you to choose an Executor – a person to manage the distribution of your assets.
- Can be used to appoint a Guardian to care for your children if you die while they are still minors.
Dying Without A Will
A Will is an important component of estate planning and everyone should have one. If you die without having made a Will, you have died ‘intestate’. This means the court will distribute your property and determine the beneficiaries and may not rule according to your wishes. In addition, without the guidance of a Will, the court will name a Guardian for your children, perhaps a sibling when you would have preferred a close friend.
Dying intestate also means that you may not be making the most of the Inheritance Tax exemption, which exists if you wish your estate to pass to your spouse or registered civil partner. You may even choose to leave money to a charity in your Will. If you don’t make a Will, then relatives other than your spouse or registered civil partner may be entitled to a share of your estate, and this might trigger an Inheritance Tax liability.
What Is A Trust?
A Trust is a legal arrangement in which you need to appoint a Trustee, or Trustees, who will be responsible for holding and managing your assets.
Trustees have a responsibility to manage the Trust on behalf of and in the best interests of the beneficiaries in accordance with the Trust terms.
These terms are set out in a legal document called the Trust Deed.
Unlike a Will, which comes into effect when you die, your assets are transferred to certain types of Trusts while you are still alive, and the Trusts continue to hold everything after your death.
Although you no longer own the assets (because your Trust does), you still have access to them during your lifetime. You instruct your Trust to pay income to you and, on your death, your Trustee – or Successor Trustee, if you were the original Trustee – is instructed to divide whatever is left to your beneficiaries, according to your instructions.
There are many different types of Trusts, such as bare Trusts, discretionary Trusts, and accumulation Trusts, and the rules around them, including potential tax implications, are complicated. As a result, you should seek professional advice if this is something you are considering.
Deciding between a Will and a Trust depends on your circumstances; there are pros and cons of each. For example, a Trust can be used to avoid probate and reduce Estate Taxes, whereas a Will cannot. On the flipside, a Will can help you to provide financial security for your loved ones and enable you to pay less Inheritance Tax.
By looking at your future needs and reviewing all your assets, including investments, property, businesses, pensions and life assurance – and by gifting and utilising investment reliefs – we can advise you on estate planning and the most effective way to pass on your wealth, leaving you with the freedom to get on enjoying life.
WILLS, TRUSTS AND TAX ADVICE ARE REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.