Will VS Family Trust Explained
To begin, a will is a written document signed in the presence of witnesses that specifies how your possessions will be dispersed after your death. A will becomes valid only after your death, and all of the deceased's intentions must be carried out in accordance with it.
A trust, on the other hand, is associated with asset and property management and can be active before and after death. While this may appear to be convenient and attractive, it is not without its drawbacks. Because the trust must be funded and actively managed during your lifetime, it might be more of a hassle.
Advantages of a Will
Streamline Processes for Family and Loved Ones Following Death
Protect Inheritance for Heirs of Your Estate
Allocate Money or Assets for Trusts
Plan Living Will in the Case of Incapacitation or Physical Deterioration
Prepare for Coverage of Burial Costs and Necessary Taxes
Advantages of a Family Trust
Creditor protection – Assets are not owned by the trustees or beneficiaries and the creditor, therefore, has no claim against them.
Protection against relationship property claims – If your assets are owned by a trust, or are given to your trust on death, your children can continue to receive the benefit of those assets but the assets do not form part of their personal property, and therefore cannot be subject to claims by your children’s partners.
Protecting property from or for beneficiaries – You may be reluctant to simply give your assets to your children during your life or on death if you have concerns about their ability to manage their financial affairs. If you give your assets to a family trust, then the trust can provide a vulnerable child with income and/or capital to meet their cash requirements as they arise.
Protecting assets for future generations from potential tax law changes – Family trusts may provide protection against various forms of tax. For example, R100 000 earned by a trust can be split between five beneficiaries so that they earn R20 000 each. Assuming that they earn no other income, they would pay no tax as this amount is below the threshold. This is the so-called split income principle i.e. income tax is levied against the trust, but income distributed is taxed in the hands of the beneficiary.
Disadvantages of a Will
Possible challenges - Although it's possible that someone could challenge your will, if you have followed all of the proper procedures in its creation, your will and its provisions will likely stand.
May need to go through probate - If you have assets that pass under your will worth more than a certain amount, your will must be filed for probate, the procedure through which a decedent's assets are distributed; this can be a long process, which can, in turn, be costly for the estate. In contrast, a living trust does not require probate.
It is public record - A will becomes public record once it is filed for probate, which means anyone can search for it and see its contents.
May not fully address tax concerns - A will that is not carefully planned out could leave your estate open to paying estate taxes or your beneficiaries to paying hefty inheritance taxes.
Disadvantages of Family Trusts
Loss of ownership of assets – If you transfer your personal assets to a trust, then the trustees of that trust will control the assets. Although you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, it is important to remember that assets you transfer to the trust are no longer your own. If you continue to treat the assets as your own, any trust could be open to challenge as a sham.
Additional administration – If you establish a trust, you need to allow for the time and cost involved with meeting the trust’s annual accounting and administrative requirements.
Cost of formation of the trust and the transfer of assets – There are costs involved with establishing a trust. These will depend on the complexity of your trust and the nature of the assets to be transferred.
Future law changes – Possible changes to legislation of trust law may remove or effect some of the original objectives for the trust formation.
If you have any further questions or would like to talk to someone about drafting a will or establishing a family trust, contact Mahumani Inc. today.