Is a Family Trust Safer than a Will?
The question of whether a trust is better/safer than a will is not one that can be answered so easily. There are many different factors to be considered when it comes to estate planning. In the end, whatever decision a family takes will be a personal decision and should be best suited to the family. What is right for one person may not be right for another.
As an overview, a will is a legal document for distributing your assets before death, pay off debt, or handle any other administrative tasks. You can also list a guardian to take care of your children in case they are under the age of 18. You can also choose a property guardian who will oversea anyone to look over any assets left for your children The will on its own isn’t expensive to put together but the legal process, called a probate, can be quite long, and this will happen before any assets are actually distributed. It is also during this time that any debts are paid off before your family receives the bequests. A will becomes a part of a public record. A trust is a kind of obligation that is attached to the ownership o the property, and accepted by the owner and author for the benefit of another person or the owner.
The table below shows a simple and quick comparison between a will and a trust:
In the case of families with a high net worth, a trust is probably a better option. This may actually come as a surprise. Last year, a CFA survey found that in India, whenever money is involved, over 60% of people prefer to work with a professional advisor, compared to 53% globally (economictimes.com). The same survey also concluded that younger investors (ages 25-34) are more trusting than older investors. Indians in general were found to be more risk averse and often fear a sudden financial crisis happening sometime in the future. The reason for this is that Indians don’ trust their political leadership too much and prefer to put their faith in their independent financial advisors. They prefer to take as less chances as possible when it comes to maintaining their wealth, even during any political-economic crisis. Indians also generally have poor succession planning which is also another reason for their apprehensive and fearful mentality.
Within the Indian economy, family businesses are the traditional means of earnings with nearly 67% of India’s GDP within the organized sector coming from family businesses. However, only 10% of those family businesses are able to grow into the third generation due to an obvious reason; family feuds. One example of this is the Raymond Ltd. Family, one of India’s most popular textile brands pioneered by Vijyapat Singhania. Upon handing over the reins to son Gautam Singhania, the wealth dwindled at once.
One can contend that most family disputes occur because of assets. This can be seen amongst the Ambanis, Singhanias, Baroda Royal family, Thackeerays, and Birlas. It even seems unavoidable!
However, that’s not the case. These feuds can be avoided with the use of a Family Trust Vehicle, and this is especially helpful for high net worth families.
In India, only 15% of famly businesses have a proper, strong, well documented and communicated succession plan, according to the PwC India Family Business Survey 2017. Wills are not that effective in protecting against high wealth because it only comes into effect after the death of the creator, however a trust functions even when the person who created it is alive. Also, unlike for wills, you cannot challenge a trust in the court; a big plus.
A good case study of this is the will of Priyamvada Birla, who was the widow of Madhav Prasad, promoter of Birla Corporation. Her will is still under trial in the Calcutta High Court. Priyamvada entrusted her estate (which supposedly is worth nearly 5,000 crores), to her chartered account named Rajendra Singh Loda back in July of 2004.
The will was written in 1999 and was not officially granted probate. The court battle began in 2004, and Rajendra Singh Lodha passed away in 2008. Now his son Harsh is the legal heir and claiming the bequest.
This post examined the benefits for a high net worth family, but trusts in general are a better option for anyone, especially if you have more than one piece of real property. Also, a trust can be used to avoid probate, but a will cannot.
In the end, make a decision based on what is best for you. Take a look below at some important questions to ask yourself before deciding:
- What assets do I want to protect?
- How complex are my estate planning needs?
- Am I concerned my children won’t manage my assets responsibly after I pass?
- Do I anticipate family conflict after I pass?
- Do I own real estate?