Personal Finance

‘Will’ you ‘trust’?

Neha Pathak | Updated on September 11, 2021

The right answer to this important estate planning question depends on your desired outcome

Estate Planning is a process where one decides how the assets should devolve upon one’s loved ones. The process starts during the life of the person and continues after one’s lifetime.

While doing the Estate planning for the family assets, it becomes pertinent that one analyses what suits the family requirements.

This planning can be achieved by creating a will or a family trust.

A Will is a document, which ensures that one’s wishes with respect to his assets and property are followed after his lifetime. A Trust is defined as "an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another and/or the owner". It is a transfer of property by the owner to another for the benefit of a third person along with or without himself or a declaration by the owner, to hold the property not for himself and another. So the question is, should one make a will or a trust. There are certain differences between Will and a Trust and one should be aware of these distinctions while taking a decision to form a will or a trust or both. They are as follows:

Creation and effect

A will is formed during the life of the person creating the will. However, it actually takes effect after the life of the person creating the will whereas, a trust can be created and can take effect during the life the creator of the trust. One can create a family trust during his/her lifetime in such a way where it benefit the creator of the trust for his/ her life and can also continue to pass through after the creator’s lifetime.

Probate or letter of administration

Probate is a certificate which is granted by the Court of competent jurisdiction to a person certifying that the will is genuine and is the last will left behind by the creator of the will.

A will requires Probate or Letter of Administration to certify its authenticity and therefore passing the assets to the designated beneficiaries. Whereas, the biggest benefit of forming a Trust is that one does not require probate on the assets belonging to the trust in order to pass the assets or the benefits from the assets to the designated beneficiaries.

It is at the time of probate, a will can be challenged and the process may get even lengthier for the inheritors to actually enjoy the benefits of the assets bequeathed to them.

Control on fund usage, stamp duty

If a person wants an option to control on the usage of the funds after his lifetime such as providing the funds for marriage or for education or at specific age intervals to an individual, then a Family Trust will be more useful.

In a will, level of control is to the point where one can choose the beneficiaries and the quantum of assets distributed to them. However, the end use of those assets cannot be controlled. One of the limitations that one finds while one is creating a trust is that there is a stamp duty impact on the transfer of immovable property which tantamounts to the payment of significant stamp duty. However, there is no stamp duty on the transfer of moveabe assets into the trust.

In a will, one can mention the name of the person who will inherit the property. Since there is no duty on the legacy, the inheritor of the assets is not required to pay any stamp duty. However, the legal costs for the probate or Letter of Administration will remain, which may be significant.

Tax implication

One should be aware that in a trust, any transfer of the assets are tax free since the trust is considered as a relative under Income Tax Act, subject to the creator and the beneficiaries of the trust are also defined as relatives under the Act. In case there is a beneficiary who is not a relative under the Act then there may be an incidence of double taxation. In a Will, the beneficiary can be a relative or a non-relative and presently there is no tax impact on the inheritance by a non-relative.

It is said that the creation of a will or a Trust is the most selfless act but again one needs to analyse the family requirements and objectives before settling on any or both the options.

The author is the head of Trust & Estate Planning, Motilal Oswal Private Wealth

Published on September 11, 2021

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