Comparison of a Will to a Discretionary Trust

By Nigel Rotheroe

When it comes to estate planning it is not uncommon to be asked what is the difference between a Will and Discretionary Trust?

There are two fundamental differences I always think of when seeking to answer this question  and they are:

  • A Will hopefully addresses your wishes on your demise, whereas a trust can address your wishes during your lifetime and after death; and
  • That the terms and wishes within a Will are fixed at the time it is created and remain in force (assuming the Will is valid) unless superseded by a subsequent Will or amended by way of codicil; whereas a trust, especially a discretionary one, is flexible and can if drafted appropriately, act very much as you can personally and in many ways address the “unknown unknowns”.

But these are not the only differences between a Will and a Discretionary Trust, and it is worthwhile comparing and contrasting the differences between the two; especially as it is not uncommon for a Will and a Trust to be executed and co-exist.

BASIS FOR COMPARISONWILLTRUST
WHAT IS IT?A Will (otherwise known as a Testament) contains a declaration of a person’s (the “Testator”) wishes, regarding the management and distribution of his / her personal estate after death and the person(s) (the “Executor(s)”) who are to manage the property until its final distribution.A trust is a legal arrangement in which the person creating the trust, known as the Settlor, authorises one or more persons (a “Trustee(s)”) to manage any transferred asset(s) (the “Trust Fund”) placed under their control for the benefit of those persons who are named or who may become the recipients (“Beneficiaries”) of appointments or benefits from the trust.
LEGAL DOCUMENTWill – executed by Testator before two independent witnesses in the presence of each other.Trust Deed – Usually executed by Settlor of the trust and the original trustee(s) or solely by the Settlor or Trustee(s) by way of a Declaration of Trust.
SCOPE AND APPLICATIONApplies to all the assets within the Testator’s estate.Specific asset(s), as stated in the deed any additional assets subsequently gifted to the trust or any accretion to the trust by way of income or gains.
WHEN EFFECTIVE?On the demise of the Testator.On the transfer of an asset(s) to the Trustee(s) with the intention that the Trustee(s) will hold the asset(s) on trust.
PROBATEProbate is the word normally used to describe the legal and financial processes involved in dealing with the property, money, and possessions (called the “Estate”) of the Testator. Probate involves a judicial process whereby a Will is “proved” in a court of law and accepted, as a valid public document, as the true Last Testament of the deceased, or whereby the estate is settled according to the Laws of Intestacy in the jurisdiction the deceased was resident at the time of death in the absence of a legal Will. The grant of probate is a court order which empowers the Executor(s) to carry out the instructions in the Testator’s Will.A trust normally comes into existence via a lifetime (inter vivos) gift. Probate does not apply to a trust, save to the extent that a trust created under the provisions of a Will can only be funded from an estate’s assets after all taxes, claims, creditors debts, testamentary dispositions and expenses have been paid.
REVOCATION A Will may be revoked and replaced with an updated Will at any time before the death of the Testator providing the Testator has the requisite intention, capacity (including being compos mentis, i.e. of “sound mind”) and the formalities for a valid Will are observed
A Will may be revoked or amended by operation of law on the occurrence of certain events such as marriage/civil partnership, divorce, etc.
Depends on the type and wording of the trust deed of a trust. A revocable trust is usually one where the Settlor can revoke the trust deed at any time. Family trusts in the Isle of Man and the UK are, however, usually irrevocable which prohibits the Settlor from revoking the trust; changes may be made to the terms of the trust deed normally being within the discretion of the Trustee(s) or the Trustee(s) with the approval or the Settlor or any Protector.
CHANGE OF PROVISIONSChange of Provisions A Testator seeking to change the terms and provisions of an existing Will may do so by way of the execution of a new Will or by way of a Codicil; being a document attached to an existing Will, that makes reference to it and describes a change to a particular clause or provision within the Will.Depends on the type of trust which has been established. Most family trusts are discretionary in nature such that the trustees have “discretion” as to how to use the trust’s income and to utilise or distribute (appoint) the trust’s capital to beneficiaries and the conditions, if any, they may impose on the recipient beneficiary(s). The Settlor of a trust normally expresses his / her wishes in relation to the rationale behind the creation of the trust and what and how they would like the Trustee(s) to exercise their discretion in favour of one or more of the trust’s beneficiaries. The Settlor’s wishes are normally reflected in writing or verbally. However, unlike a Will, the Settlor’s wishes are not legally binding on the Trustee(s), although a professional or regulated Trustee(s) would tend to consider such wishes before exercising their discretion.
PUBLICATIONA Will becomes a public document and available for inspection when Probate is sought and granted.A trust deed is a private document unless it is created pursuant to the provisions within a Will.
CHALLENGE AS TO PROVISIONSThose contesting a Will in the Isle of Man may do so by lodging a caveat at the Probate Registry and thereafter proceed to take legal action through the Court.A transfer by a Settlor into a trust can be set aside within 2 years of its creation if the transfer by the settlor was to defraud creditors. After 2 years, but no more than 12 years from the inception of a trust, any person seeking to take action against the transfer of funds into a trust must prove the Settlor was insolvent at the time the trust was established and/or funded by the Settlor.

Disclaimer

The information and/or opinions contained in this article is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.  Any reliance on such information and/or opinions is therefore solely at the user’s own risk and Odin Fiduciaries Limited (and its associates and subsidiaries) is not responsible for and does not accept any responsibility or liability in connection with any action taken or reliance placed upon such content.

To find out more contact Nigel Rotheroe

[email protected]