Wills and trusts are both estate planning tools and involve giving your assets to others, but the difference between them is often a bit murky for clients. This blog highlights some of the key differences between wills and trusts within the context of estate planning in Ontario.
When is it Effective
A will gives legally binding instructions for dividing up an estate after the will maker (the testator) has died, whereas trusts can be effective to distribute assets of the gift-giver (settlor or grantor) while living (inter vivos) or after death (testamentary).
Manner of Creation
A will is always a physical document in Ontario, whereas the main ways a trust can be created are by written instrument (often in a will), by oral statement, by unilateral declaration, and by operation of law.
Legal Document vs Legal Entity
A will is just instructions on a page; it can’t own anything, and it doesn’t pay taxes. A trust is a legal structure and is also considered a legal entity, a bit like the way a person or a corporation is a legal entity. Trusts own property and they pay taxes, but the taxation of trusts is distinct from the taxation of people or corporations.
A will appoints an executor, who ensures that the terms of the will are carried out, without much discretion. The trustees of a trust are a bit like legal guardians of children; they manage the trust’s property and ensure that the trust pays its taxes and more. Trustees of trusts have fiduciary obligations and must act in the best interests of the beneficiaries of the trust, so a greater degree of discretion is required of trustees.
At this point, an astute reader might point out that a will creates a bunch of fiduciary obligations on the executor of the estate. And they would be right, because a will creates a trust and transfers all the assets of the deceased to the trust and names the estate trustee, who then has the responsibility of distributing the assets of the trust. In this sense, a will with testamentary trusts can be considered a trust instrument.
Legal Requirements
While there are additional legal requirements for a typed will (formal) and a handwritten will (holograph) that are outside the scope of this article, a will in Ontario must, at the very least:
- Be in physical written form (not a digital file, a verbal instruction, or a video recording);
- Be signed by the testator (the person who is disposing of their assets upon death); and,
- Actually dispose of assets (if it doesn’t actually gift anything, its not a will).
Whether in physical form or created orally, all trusts must satisfy “the Three Certainties of Trusts” in order to be a legally valid trust entity:
- Certainty of Intent (Is there sufficient evidence that the settlor intended to create a trust?);
- Certainty of Subject Matter (Is it clear what tangible or non-tangible things are, or are not to be governed by the terms of the trust?)
- Certainty of Objects (Is it clear who is and who is not a beneficiary?)
Uses
While the uses of wills and trusts overlap in estate planning, there are some uses of trusts that are not available in a will (or at least in a will without a trust). Some of these uses are:
- To protect an inheritance from the spendthrift ways of a beneficiary;
- To protect beneficiaries receiving ODSP from being disentitled to these government benefits due to an inheritance;
- To protect the interests of young beneficiaries;
- Tax savings strategies, although multiple wills can save probate tax;
- Capacity planning for management of assets of the trust without a capacity assessment (although a settlor/trustee may not agree that capacity is in issue and an assessment may be unavoidable);
- Control the disposition of assets of an estate for an extended period of time after death;
- Planning for blended families;
- To avoid probate thus avoiding probate tax and providing privacy since probated wills always become public record;
Similarly, there are things a will can do or allow that a trust generally cannot, including:
- Designate guardianship of minor children;
- Articulate cultural or family ceremonies and traditions you wish to be observed when you pass;
- Provide court oversight over the disposition of your estate;
- Access personal tax credits;
- Allow for transparency for those who did not benefit from the will or trust;
This article touches just briefly on a few of the major distinctions between wills and trusts. There are different kinds of wills and different kinds of trusts, all with their own distinct estate planning uses and implications under different scenarios. If you’d like to consult a lawyer to determine whether a trust is suitable for your specific personal and financial situation, please reach out to Robin Hammond at [email protected].
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