Why is Trust Crucial in Estate Planning?

Individuals work hard to establish and accumulate assets for the next generation. However, they forget to chalk out a plan regarding how these assets should be passed on. With the pandemic changing the way people think about the future, estate planning has become crucial in managing finances. It must be viewed as not just a post-retirement or post-demise practice but must be employed as a contingency plan. Thus, with estate planning, dispersal is well managed. 

WHAT IS AN ESTATE AND ESTATE PLANNING?

An estate can be understood as all of the property owned and controlled by an individual. This property in an estate includes financial assets like stocks, bonds, or bank accounts, immovable property such as residential real estate, tangible personal assets including vehicles, artwork, or collectibles, and intellectual property in the form of royalties. 

Here, it is vital to understand the concept of estate planning. It can be explained as an agreement wherein a person decides who will own and manage the assets in case of their demise or incapacitation. It is imperative to exercise state planning to eliminate any burden of bearing taxes while transferring the assets that the legal heirs may face if the estate is not planned. 

IMPORTANCE OF ESTATE PLANNING

As mentioned above, estate planning aids a person in deciding how their assets can be managed and owned after they die or are incapacitated. It is not only tax-proficient but also an easy way to transfer the assets to the family. The reasons explaining the importance of estate planning are as follows:

1. Allows you to plan how your assets are to be divided: One must note that in the absence of an estate trust, the government may decide on the distribution of assets. This could give rise to unnecessary challenges and roadblocks for the family. Thus, it is essential to execute estate planning and segregate the assets beforehand.
2. Efficient and swift transfer of assets: Without estate planning, several estates take a long time to settle, as disputes may arise among the family members on the distribution of the assets. Thus, it is necessary to have a plan in advance to transfer the estate efficiently to the beneficiaries.
3. Lower fees and taxes: As mentioned above, without effective estate planning, the cost of transferring and allocating the assets can be a lot higher. However, with an estate plan in hand, one can avoid taking out more money from the estate to pay fees and taxes.

WHAT IS A TRUST?

The most popular instrument to exercise estate planning is to write a will. However, a Will is a unilateral legal declaration in which the creator of the will, i.e., the testator, attests to their intention regarding their assets. However, it becomes difficult to change a Will if the testator becomes physically or mentally challenged. Also, a will often leads to rivalry among the beneficiaries. One can steer clear of all this hassle by setting up a trust. 

The parties included in Trust formation are:

1. The Settlor, who creates a trust and is also known as trustor or grantor
2. The Trustee, who manages and dispenses the assets on behalf of the individual who creates the Trust
3. The Beneficiary, who benefits from the Trust’s asset

A trust can thus be explained as the transfer of property by one individual (Settlor) to someone (Trustee) who manages that property for the benefit of another individual (Beneficiary). To establish a trust, the Settlor must sign a legal document that specifies the terms under which the Trust will operate. The Trustee is under a legal obligation to administer the Trust and dispense the property as per the terms set in the trust document and according to applicable laws. 

In India, Trust is defined under Section 3 of the Indian Trust Act, 1882 and the types of estate planning trusts in India are typically divided into 

1. Private Trust, divided into revocable and irrevocable trusts, and
2. Public Trust, divided into charitable and religious trusts. 

BENEFITS OF TRUST FORMATION IN ESTATE PLANNING

Exercising an estate plan by including a trust in it provides various benefits. They can be explained as follows:

1. Grantor controls allocation and distribution: The most important advantage of including a trust in an estate plan is that it allows the grantor to control how property and assets are distributed to beneficiaries after the grantor’s death. This benefit of control is not available in property distribution by a will because the property immediately and entirely goes to named beneficiaries.
2. Protects family wealth: Trusts can also be used to own certain assets like land or an interest in a family company which may not be dividable between individuals by the Settlor. Here, a trust allows such individuals to enjoy the assets without owning them. A trust also aids in maintaining the capital value of these assets for future generations.
3. Avoids probate: When the legal title of the assets passes from the Settlor to the Trustee, there is no change of ownership in case of the Settlor’s death, hence avoiding the need for probation of will with regards to the trust assets. A trust is a private arrangement that does not require registration, whereas grants of probate need to be registered as they are a matter of public record. A trust avoids the complex and time-consuming process faced by the relatives of the deceased and allows the smooth transfer of assets.
4. Maintains privacy and is flexible: A trust provides flexibility during the distribution of a deceased settlor’s estate as it enables the Trustee whom the Settlor has guided in his lifetime to manage and subsequently dispense the assets. Such guidance is provided to the Trustee in private by way of effectively drafted Letter of Wishes which the Trustee must execute after the Settlor’s death.
5. Tax mitigation: One of the most crucial benefits of trust formation is reduced taxes on capital and income. Trust formation can effectively protect the Settlor, the beneficiaries, and the trust assets from punitive taxation and thus enables the assets to remain within the family.
6. Protects assets: If one seeks to protect their assets from creditors, marriage breakdown, or those who might wrongfully influence the beneficiaries, trust formation is the most effective means.

As mentioned above, trust formation proves beneficial for individuals across all financial backgrounds. Various reasons make trust formation an effective tool for exercising estate planning but managing money for minors, benefits on taxes, and efficient transfer of assets in case of the untimely death of the Settlor, top the list of reasons why a trust is crucial in estate planning.  

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