The terms "will" and "trust" are common, but sometimes poorly understood. The distinctions between them are significant, as they are both important in estate and succession planning but generally serve different purposes. In a well thought out financial plan they are complementary to each other. Here we look at what they are and how they’re created.
A will comes into effect only after death and directs who will receive property upon death. It appoints a legal representative(s) to undertake the wishes of the deceased. A will covers any property that is in someone’s name when they die. It does not cover property held in joint tenancy or in a trust, which operate independently. A will allows the deceased to name a guardian for minors, and to specify funeral arrangements
If an individual dies without a valid will, they die ‘intestate’, and their wealth may not be distributed in the way they would have wished. Statute dictates who receives the money in this situation. Our article ‘UK intestacy rules’ explains this further
In either instance (where there is a will or the individual dies intestate) probate is required, which is the formal legal process and is necessary before the estate can be distributed.
A trust takes effect as soon as it is created. It can be used to begin distributing property before death, at death or after death. A trust is a legal arrangement through which a person, the “settlor”, passes legal ownership to a "trustee", who holds title to property for another person, called a "beneficiary." A trust covers only property that has been transferred to the trust.
A trust passes outside of probate, so a court does not need to oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust is confidential, and in some situations can offer creditor protection.
A trust can also be used in some instances to plan for taxes, including inheritance tax.
Creation of each
Each jurisdiction will have its own rules on what is a valid will. In England and Wales these are:
- it must be in writing, signed by you, and witnessed by two people
- you must be 18 years old or over, have the mental capacity to make the will and understand the effect it will have
- you must have made the will voluntarily and without pressure from anyone else.
The beginning of the will should say that this will revokes all others. If there is an earlier will, it should be destroyed.
For a trust there need to be three certainties that must be there for the trust to be valid:
1. Intention (must be clear the settlor/creator wanted to create a trust)
2. Subject matter (clear what property is part of the trust)
3. Object (must be clear who the beneficiaries are)
To read our next article looking at both wills and trusts in a little more detail.