Wills And Trusts: How Does Subsidiary Law Apply?

A will is a legal document that provides instructions on how to distribute property to beneficiaries after death, while a trust is a legal structure that protects assets and directs their use and disposition according to the owner's intentions, with a trustee managing the assets. Trusts can be used during the lifetime of the grantor or after their death, while a will only takes effect upon death. A will must be signed and witnessed and is filed with a probate court, while a trust can help maintain privacy concerning the nature and value of assets. The subsidiary law of wills applies to trusts in that both are legal mechanisms for transferring assets, but they differ in terms of their structure, timing, and level of privacy.

Trusts and wills: Differences and similarities

Trusts and wills are both legal mechanisms for the transfer of assets from a grantor to a beneficiary. However, there are several differences and similarities between the two.

Similarities

Wills and trusts both enable the transfer of an estate to heirs or beneficiaries. They can be used together or separately for effective estate planning. Both can be used to designate a guardian for minor children, and they can also be used to disinherit a child, although this must comply with state laws.

Differences

A will is a legal document that provides instructions on how assets are distributed after death. It takes effect upon death and must be signed and witnessed as required by state law. It is filed with a probate court and is publicly available. Individuals can revise a will multiple times. If a person dies without a will, they are subject to their state's intestacy laws, and their assets will be distributed according to those laws.

On the other hand, a trust is a legal structure that protects assets and directs their use and disposition according to the intentions of the grantor, or creator. Trusts can be used during the lifetime of the grantor and after their death. Trusts are managed by a trustee, who holds the assets for the benefit of the beneficiaries. Trusts can be revocable or irrevocable. Revocable trusts can be altered or terminated during the grantor's lifetime, while irrevocable trusts cannot be changed once assets are transferred. Assets in a revocable trust are included in the grantor's taxable estate, while those in an irrevocable trust are not. Trusts also provide privacy for the nature and value of assets.

In conclusion, while both wills and trusts serve the purpose of asset transfer, they differ in their structure, timing, privacy, and flexibility.

The role of trustees

A trustee is a person or firm that holds and manages property or assets for the benefit of a third party. Trustees have a fiduciary responsibility to the trust's beneficiary or beneficiaries, meaning they must act in the best interests of the beneficiaries and manage their assets. Trustees are usually designated by the original owner of the assets, called the trustor, but they can also be assigned by a court. They can be individuals, independent business entities, or large financial institutions.

The role of a trustee is to make decisions about how to manage, invest, and distribute trust property in the best interests of all beneficiaries. Trustees must always act with honesty, care, and in good faith, putting the interests of the beneficiaries ahead of their own. They are responsible for:

• Understanding the terms of the trust and ensuring the safety of the assets
• Investing assets when necessary
• Administering the trust, including distributing assets to beneficiaries
• Making ongoing decisions about how and when beneficiaries receive payments
• Keeping track of records and preparing tax-related forms/filings
• Communicating with beneficiaries, answering their questions, and providing information such as statements, account information, and tax reports
• Acting as a fiduciary by ensuring the trust is administered according to the grantor's wishes and in the best interest of the beneficiaries
• Filing reports to state and federal regulators and keeping beneficiaries updated
• Making decisions about the assets as circumstances change, always in alignment with the grantor's wishes
• Investing, allocating, or adjusting assets as needed according to the wishes of the grantor

The specific duties of a trustee will depend on the type of trust and the assets it holds. For example, if a trust holds rental properties, the trustee is responsible for ensuring those properties are managed, maintained, occupied, and generating income. If the trust holds investments, the trustee must manage those investments according to the terms of the trust document.

It is important to choose the right trustee, someone who will be able to put personal goals aside and follow the instructions of the trust. This can be a challenging task as the trustee will be responsible for administering the assets in the trust and ensuring they are used in the way the grantor intended.

Types of trusts

Trusts are legal structures that protect assets and direct their use and disposition according to the intentions of their creators (grantors). They are managed by a trustee, who is a fiduciary obligated to handle the assets in the best interests of the beneficiaries. Trusts can be created during the lifetime of the grantor or after their death.

There are two basic trust structures: revocable and irrevocable. Revocable trusts can be altered, amended, or terminated during the grantor's lifetime, whereas irrevocable trusts typically cannot be changed or amended after creation.

Revocable Trusts

Also known as living trusts, these trusts can be changed after they are created. By transferring assets to a revocable trust, grantors can avoid the probate process that is required for a will. Revocable trusts can be set up in various ways, such as ending upon the grantor's death and distributing assets to beneficiaries, or automatically creating irrevocable trusts for different people or institutions.

Irrevocable Trusts

These trusts typically cannot be changed or amended after creation. The assets are no longer part of the grantor's estate, and the trust pays its own income tax and files separate returns, offering greater protection from creditors and estate taxes. Irrevocable trusts can be set up during the grantor's lifetime or after their death using a will (called a testamentary trust).

Irrevocable Life Insurance Trusts (ILIT)

This type of irrevocable trust is often used to set aside funds for estate taxes, especially if the grantor owns a family business. The trustee owns the life insurance policy, and when the grantor passes away, the trustee collects the policy proceeds, which can be used to pay estate taxes or fund a buy/sell agreement.

Grantor Retained Annuity Trusts (GRATs) and Qualified Personal Residence Trusts (QPRTs)

These are irrevocable trusts intended to last for a specific term of years. GRATs are commonly used to minimize taxes on financial gifts to beneficiaries, while QPRTs are used to transfer real estate assets to beneficiaries.

Charitable Remainder Annuity Trusts

These irrevocable trusts allow grantors to leave a lasting legacy to a charity of their choice. The trust can be set up so that the primary beneficiaries (e.g., children) receive income first, and then any remaining assets go to the chosen charity, or vice versa.

Special Needs Trusts

Special needs trusts are typically created for individuals eligible for government benefits due to a disability. These trusts allow grantors to provide financial support while ensuring that the beneficiary remains qualified for government assistance.

Domestic Asset Protection Trusts (DAPT) or Self-Settled Trusts

These trusts are set up to protect assets from future creditors and are not available in all states. They can be used to keep assets in the family in the event of a divorce, as the spouse would not have a claim on the assets.

Generation-Skipping Trusts (GST)

A GST is a trust used for tax reasons, where assets are designated to grandchildren, bypassing the children to avoid estate taxes. Each individual has a generation-skipping tax exemption, and these trusts can be funded with an amount equal to this exemption.

These are just a few examples of the many types of trusts available. The type of trust chosen depends on the grantor's unique wishes and goals for their assets.

Trusts and wills: Tax implications

Trusts and wills are both legal constructs that can be used to transfer assets to heirs and beneficiaries. However, they differ in several ways, including the tax implications involved. Here are some key points regarding the tax implications of trusts and wills:

Wills and Inheritance Tax (IHT)

A will is a legal document that provides instructions on distributing assets to beneficiaries after the owner's death. In the UK, Inheritance Tax (IHT) is a crucial consideration when drafting a will. IHT is a tax payable on the owner's assets after their death, including their share of jointly held assets. Lifetime gifts made within seven years before death are also considered. The current IHT threshold is £325,000, known as the nil-rate band, and a 40% tax rate applies to the remaining balance above this amount.

Trusts and IHT

Trusts, on the other hand, are legal structures that hold and manage assets on behalf of beneficiaries. Trusts can be created during the owner's lifetime (living trusts) or after their death (testamentary trusts). Trusts have their own tax implications, particularly regarding IHT:

• IHT may be due on assets transferred into or out of a trust, known as exit charges, and on certain trusts every ten years, known as ten-year anniversary charges.
• The threshold for IHT on trusts is also £325,000, and the tax rate is 20% if paid by the trustees. If the settlor pays the IHT, their estate incurs an increased loss.
• If the owner dies within seven years of transferring assets into a trust, their estate will pay IHT at the full rate of 40%.
• Gifts into a trust with a reservation of benefit, such as continuing to live in a house gifted to the trust, will be subject to IHT at 20% and will still be considered part of the owner's estate.
• There are different types of trusts with varying IHT treatments, including bare trusts, discretionary trusts, and trusts for disabled individuals or bereaved minors.
• The ten-year anniversary charge applies to trusts containing relevant property with a value above the IHT threshold, and the calculation for this charge is complex.
• When a trust is set up by a will, known as a will trust, the personal representative must ensure compliance with IHT regulations, especially if a home is included in the trust.

In conclusion, both wills and trusts have important tax implications, particularly regarding IHT. It is essential to carefully consider these implications when creating or amending wills and trusts to ensure compliance with tax laws and optimise tax efficiency.

Trusts and wills: Legal requirements

Trusts and wills are both legal structures that can be used to direct the distribution of assets after death. However, there are some key differences and legal requirements to be aware of when considering these options.

A will is a legal document that provides instructions on how an individual's property and assets are to be distributed among beneficiaries after their death. It is important to note that a will must be signed and witnessed as required by state law. The will is then filed with a probate court, which oversees its execution and has jurisdiction over any disputes. A will can also be revised multiple times to reflect any changes in personal or financial circumstances. In the absence of a will, an individual's property will be distributed according to their state's intestacy laws, which typically favour the surviving spouse, children, or other family members.

On the other hand, a trust is a legal structure that allows for the protection and management of assets by a trustee for the benefit of specific purposes or persons. Trusts can be established during the lifetime of the grantor (living trust) or after their death through directives in the will (testamentary trust). Living trusts facilitate the transfer of assets to heirs without the need for probate court involvement, thus maintaining privacy. However, creating a living trust may be more expensive and may not offer protection from estate taxation.

When creating a trust within a will (will trust), it is important to understand the legal requirements, such as the "Three Certainties Principle". This principle states that there must be certainty in intention, subject matter, and objects. The testator must clearly intend to create a trust, the assets included in the trust must be identifiable, and the beneficiaries must be clearly identified or ascertainable.

It is worth noting that both wills and trusts can be used together as part of comprehensive estate planning. A will can direct an executor to create a trust, and a trust can be designated as a beneficiary of a will. Seeking legal advice when considering these options is always recommended to ensure compliance with applicable laws and to avoid potential disputes.

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