6 min read

What's the Key Difference Between a Trust & Estate Plan?

Whilst a trust can distribute assets to beneficiaries when you’re still alive, an estate plan only guides distribution after your death. In this article, we clear up the confusion on what trusts and estate plans do. Diving deeper into when they’re required, why they differ and how their legal distinctions impact you, your estate and your beneficiaries.

Piggy bank

Read on to cover:

  • Simple definition of a trust

  • Common types of trusts, inc. living, family, public trust and more…

  • An express version of everything you need to know about estate planning

  • 3 main differences between trusts and estate planning

  • Why you might need both

What is a Trust?

A trust imposes a legal obligation on a trustee to hold your assets or property for the benefit of a third party, the beneficiaries. They will receive income or possessions from your assets at the specified milestone, age or need set by you. This allows you to control your assets during life, even when you no longer legally own them.

There are several different types of trusts to achieve your different goals. These include:

  • Revocable trusts: allow for amendments during the trustor’s life. Commonly used to create living trusts, which avoid the need for probate after the trustor’s death.

  • Irrevocable trusts: represents an irreversible transfer of assets out of the trustor’s possession. Often used to avoid or minimise estate taxes, protect assets or create charitable trusts.

  • Testamentary trusts: established within a will and take effect after the trustor’s death. Commonly used to provide for minor children or dependents.

  • Discretionary trusts: grants discretion to the trustee on identifying the beneficiaries and how much they will receive. Commonly used for family trusts, where one family member sets out the distribution of assets.

  • Public trust: created for a larger group of undetermined beneficiaries in the community. Often covers charitable or religious purposes.

These cover the basics. Highlighting the range of options to preserve your assets for specific purposes while still alive. Whether it's a revocable living trust conditioned on funding your grandkids education, or a discretionary family trust which distributes the assets of your business amongst the family- there's likely a trust option which will work for you. Below we cover how establishing a trust can serve your specific goals, both in life and death.

How can a trust fund benefit you?

Trusts can generate a number of benefits for both yourself and your family, including:

  1. Asset protection against bankruptcy or business failure

  2. Asset protection against marriage breakdowns

  3. Safeguarded wishes against poor health or lost capacity

  4. Avoided need for probate lawyers

  5. Tax protection for assets held in trusts

Crucially, trusts reduce the financial and emotional stress of lengthy probate processes after your death. This creates the advantage of control, without the risk of still legally owning assets you have specified intended use for. So whether it's discretionary or charitable, a trust fund can make up an influential part of your estate planning. Granting you financial stability and peace of mind for both the present and the future.

A trust is however limited in its ability to replace the need for a will and comprehensive estate plan. That’s because there’s important components of an estate plan not covered by a discretionary or testamentary trust. Still struggling to wrap your head around the legal jargon? Let’s take a deeper look and demystify this difference by first understanding exactly how an estate plan works for you.

What is an estate plan?

An estate plan is a comprehensive outline of how your assets will be managed and distributed after your death or incapacitation. Estate plans may include a trust, as well as a variety of other legal documents; including a will, a power of attorney, and advance healthcare directives. Other end of life or funeral guidance can also be included in your estate plan.

Do you need an estate plan if you’ve established a trust?

Even if you’ve established a trust fund, an estate plan is still required to guide the distribution of your assets after your death. This is because whilst a trust allows you to control assets during your life which you no longer legally own, the assets you still own at death are distributed according to your will.

In this sense, the main benefit of estate planning is providing clarity and direction for the distribution of your leftover assets after your death. As your assigned POA will have authority to make these decisions and manage your affairs, an estate plan goes that step further than a trust fund in protecting your legally owned assets. This clarity can minimise probate expenses, as well as safeguard other wishes in relation to funeral arrangements.

What's more, an estate plan also reduces the burden on family to make these difficult decisions at the time of your death. Providing guidance, clarity and support when it is needed the most.

How do trusts and estate plans differ?

So if a trust is just part of your estate plan, then do you even need a trust? Or can you reap the trust fund benefits without the admin of a whole estate plan?

Fundamentally, trusts and estate plans are different legal arrangements which compliment but don’t replace each other. We outline the 3 key differences below:

  1. How assets are distributed

An estate plan guides the direct distribution of your assets after death, whereas a trust indirectly distributes your assets via a middle-man trustee. This distribution of assets via a trust might be conditioned on a specific time or age, and until this time will be held by said trustee. In contrast, any remaining assets at the time of your death will be directly transferred according to the directives in your will. This leads into the second key difference.

2. Timing of distribution

A trust takes effect immediately during the trustor’s lifetime, whereas an estate plan represents a future plan for distribution after death or incapacitation. The beneficiaries of a trust may be granted assets before death, and in doing so avoid the probate process required to validate the transfer of assets after death.

In contrast, an estate plan is more about providing future guidance for when death occurs. It reduces uncertainty, and also involves appointing an executor to take the reins in your asset distribution.

3. Timescale

In this sense, an estate plan represents a one-off transfer of assets to your designated legal heirs after your death. A trust can in contrast exist for generations; setting out a sustained legal roadmap to distribute wealth according to a set of rules and conditions.

To Wrap Up:

Trusts and estate plans offer the chance to influence the distribution of your assets, in both life and death. And whilst they share this fundamental function, differences across management, timing and length of distribution render the two legal documents non-interchangeable. To determine the best course of action for you and your specific goals, it's important to consult with an experienced estate lawyer.

Safewill offers this legal guidance and estate planning support at a lower cost, greater ease and with more compassion than ever before. So kickstart getting your affairs in order now, and chat through your options today; via 1800 103 310 , or live chat.

Last updated 06th January 2023
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Hannah Comiskey
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