The previous post was about making a will, which is the most basic form of estate planning. But in certain cases, a will has its own limitations and it not sufficient to efficiently distribute one’s estate. This is where a trust comes into the picture.
What is a trust?
A trust is created by the client who sets aside money for his heirs and invests the same in the trust, and appoints a person(s) called the trustee(s) who manages this trust according to the client’s instructions for the beneficiary. A trust can be formed by the client when he is alive, or he can instruct that one be creation as part of his will, which would come into effect after his demise. Any person who is of 18 years of age can form a trust.
Types of trusts
Trusts are of two types
Revocable Trusts- These trusts can be revoked or changed anytime after formation.
Irrevocable Trusts- Once formed these are permanent and cannot be changed.
Where a trust scores over a will
The main advantage of a trust over a will is that it not only provides for the distribution of a person’s assets after his death, but also manages the estate during the person’s lifetime. The following are some cases which require the formation of a trust and a will alone would not be enough –
- If the beneficiaries include old parents, minors or disabled dependants who are not capable enough to protect their own interests, creation of a trust is necessary.
- High net worth Individuals whose net worth, including movable and immovable assets run in to crores of rupees prefer creating a private trust for effective succession planning.
- Owners of certain businesses create trusts for safekeeping a portion of their wealth for their families and protect it from the losses and ups and downs the business may face in the future.
- Trusts are especially very beneficial in case of joint families which are prone to litigations and court battles over family wealth and assets.
- Some people have special interests like philanthropy or social service which require the formation of charitable trusts. Such trusts are also entitled to tax rebates and concessions.
Limitations of Trusts
Drafting a trust deed is not easy, and it also incurs a legal cost of formation, stamp duty etc. which depends on the complexity of the trust. Also, the proper selection of the trustees is essential for the efficient functioning of a trust.