Estate Planning 101: The Differences Between a Will and a Trust
Eric Brown - Mar 25, 2021
Some people mistakenly believe that their spouse or children will automatically inherit these assets. This is not the case, and the provincial government has the authority to distribute your assets.
Far too many Canadians are not planning for death. In fact, more than 50% of Canadians do not have a will or living trust. This is proving problematic as thousands are dying due to the coronavirus pandemic. Many young people are dying tragically and unexpectedly.
What happens to their assets after death? Some people mistakenly believe that their spouse or children will automatically inherit these assets. This is not the case, and the provincial government has the authority to distribute your assets.
Read on for a comprehensive guide to estate planning. Explore the differences between a will and a trust so that your family is comfortable after a passing.
What Is a Will?
A living will is a document that details a person’s wishes in the event of their passing. The will is only active after a person dies.
It instructs on what to do with a person’s most cherished possessions. For example, a will is going to name a legal guardian for minor children. This is very important in the aftermath of an unexpected death. The last thing anyone wants is an expensive and prolonged fight over child custody.
A will also instructs the court on how to distribute assets. Items like cars and homes go to friends or family. Other items of value are also bequeathed, like jewelry or valuable collector’s items.
Also, a will names an executor of the estate. The executor’s role is to make sure that the deceased person’s final wishes occur. They represent the deceased individual as the will goes through the legal process.
What Is the Legal Process for a Will?
A will has to be validated by the court system before assets transfer. Probate is the legal term for this process.
The first step in the legal process is filing a petition for the court to probate the will. The petition names an executor to represent the deceased in court. Just because a will names someone as executor does not mean it happens. The court makes a determination as to whether the named executor is capable of fulfilling duties.
In some cases, the executor is not capable or simply does not want to do it. Many wills name an alternate executor, or the court is responsible for the assignment. The court ultimately provides a Grant of Administration which officially appoints the will’s executor.
All heirs and beneficiaries receive notification of the probate petition. This gives them an opportunity to challenge the will.
The probate process can get ugly and personal if the will has challenges. There may be multiple wills, and the court is responsible for deciding which one to use.
Assets and liabilities are identified and reported to the court. The probate court takes a back seat while the executor works to settle the deceased’s debt. Once all debt is resolved, the court once again plays a prominent role
The court receives a final accounting of the estate. This report informs the court on the use and distribution of assets.
What Does an Executor Do?
The executor has legal control over assets during the probate process. He or she is responsible for disclosing all assets and providing valuations for them. Of course, this includes any cash, real estate, or vehicles. Other examples of assets include boats, investments, and even pets.
The executor is also responsible for notifying creditors about the estate proceeding. This notification allows creditors to make claims against the estate for any debts.
Another responsibility of the executor is to settle the deceased person’s debts. They are to use available cash to close any lines of credit. If they do not have enough cash, the court grants the executor authority to sell assets. The sales proceeds are used to settle these debts.
With debt eliminated, it is time to distribute any remaining assets. The executor distributes assets in accordance with the will. This may include transferring titles or deeds for homes, vehicles, and boats.
What Is a Trust?
A trust is a very different form of estate planning than a will. Unlike a will, your trust is active while you are still alive. This means that you can transfer assets to your loved ones prior to death.
A trust is a legal entity created to host all of your assets. Within a trust you may find bank accounts, stocks, and bonds. Also, real estate and other physical assets are placed in a trust. Some put their private business in a trust.
The primary benefit of a trust is avoiding the probate process. This leads to a less contentious effort. Heirs and beneficiaries no longer have a mechanism to challenge your last wishes in court.
There are both revocable and irrevocable trusts. A revocable trust can be amended at any time. It gives the trust’s creator the flexibility to update terms.
Some trusts are irrevocable – meaning they cannot be amended. A joint trust may become irrevocable when one spouse dies before the other.
A testamentary trust is another type. This trust is established after death as instructed by a will. This is to avoid probate, and income is ultimately taxed at a lower rate.
What Do Canadians Prefer?
Clearly, there are some benefits to creating a trust. It is a benefit to transfer assets prior to death. Also, avoiding probate court is a perk to all stakeholders. Lastly, the details of the trust remain private throughout the process.
However, trusts are not nearly as popular in Canada as they are in the rest of the world. This is because trusts have a special tax rate in Canada. All income is taxed at the highest marginal rate in the province you reside in.
Assets transferred in a trust are not spared from taxation. Asset transfers are treated as a sale and capital gains tax applies. Due to the tax structure on trusts, many Canadians prefer a living will instead.
Will vs. Trust: A Recap
For some, estate planning is an uncomfortable topic. Few people enjoy talking about death. However, this is an important discussion to take care of your loved ones after death. The last thing you want is the provincial government deciding what is best for your family. Writing a will or creating a trust solves this problem.
These estate planning tools allow for the orderly distribution of assets after death. If you are deciding between a will and a trust, contact us today to speak with a member of our team.