Trust Fund Vs Will – which one will you trust to suit your needs?

Would you trust a Trust fund or a Will? The question is which is the right one for you?

At a certain age, the need to have a will drawn up become something that you'd want to scratch off your to do list quite quickly. Especially when you have specific members of your family or loved ones in your life that you'd want to inherit your assets (especially your children).

You may also have heard to trust fund or "trusts", though. While trusts are also set up to manage inheritance , it differs from a will in certain ways.

The question is which is the right one for you? 

Trusts vs Wills

There are a few differences between a trust and a will.

A trust is an arrangement set up through wealth managers or professional trust firms and you can decide how your assets are to be distributed and under whatever terms and conditions you want.

For example, you can choose to specify that your children must be of a certain age before they start receiving funds.  You can also specify that certain pre-requisites must be met, for example, that your children must already be holding a stable job; that your children must still be in regular contact with you; that the beneficiaries can only use the funds for specific purposes, and so on.

As you may have deduced from the above, you do not have to have passed on for the trust to come into effect. A trust goes into effect as soon as you create it, and can be used to manage or distribute assets at any time before or after death. A will on the other hand, can only take effect after your death.

There are other technicalities that make a trust different from a will. If you choose to create a trust, the assets concerned with it will be managed and invested accordingly by a trustee.  Yes, you can be your own trustee. But people who decide to create trusts usually do so and elect a third party trustee to ensure protection of the assets against lawsuits, creditors, bankruptcy, or divorce. As you can imagine, this would be necessary for assets amounting to a large sum- which is why the term "trust fund kids" tend to refer to children of wealthy parents.

With a trust, you relinquish your legal ownership of any assets to a trustee.  But the benefit of doing so is that you will no longer need to pay income or estate tax on those assets since they are no longer yours! This would be a huge reprieve for those in the higher tax brackets!

Another "benefit" to creating a trust is that it operates outside of probate and does not require a legal court to oversee the execution process. So no lawyers need to be involved for your son to inherit your share of the family's private island in the Bahamas and for your daughter to get the majority stake of the digital app you co-founded.

But a will can only take care of assets that are solely in your name and requires a court to validate it and oversee its execution.

Also, many people use their last will and testament for other instructions related to the care and upbringing of their children (such as who will be their guardian). A trust on the other hand, is only for distribution of the trustee's held assets.

So trusts and wills fulfill quite distinct requirements that a person might have in mind for his beneficiaries. 

Do parents need to set up trust funds for their children?

There are cost involved in setting up and managing a trust fund – typically around $1,000 to $4,500 for the set-up fee in addition to an annual management fee. You will need a qualified wealth manager from a financial advisory firm such as Singlife Financial Advisers, or a professional trust firm, in order to set up a trust.

If you have accumulated a considerable amount of assets and are concerned that your beneficiaries may squander away their inheritance if they're given a lump sum, then a trust can help to disburse the funds over a period of time. So for the purposes of wealth management, a trust fund is an ideal way to ensure that your legacy can last for generations. You can also specify how you would like your assets to be invested, for example, in low-risk stock options and investment-linked plans. This is not something that can be done with just a will. 

Who should be your trustee if you decide to set up a trust fund?

Whether you choose to go with a trust fund or a will or both, having a healthy financial plan would include regular checks and updates to your will, beneficiaries (as your family grows) for your life insurance policies, and balancing your investment portfolio.  Only then will your finances for the future be in order for you to make a difference for your family's and loved ones' future.

The advantage of selecting a neutral party to become your trustee (instead of yourself or a trusted family member or friend) is that third parties can be more objective and efficient in carrying out your directives without any biases related to family dynamics or politics as the case may be. Also, wealth professionals  can carry out the asset investment portion more readily as compared to a trustee who may not have the time, inclination or expertise to do so and is only taking up the position as a favour to you.

There are also different types of trusts available – you should speak to your trusted wealth manager or a professional trust firm to weigh your options and decide which route best suits your objective. 

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