Will vs Trust in estate planning: How conflicting documents can derail your wealth transfer and how to avoid it

Wills and trusts are two of the most commonly used tools in estate and succession planning. The will is, of course, the more traditional instrument and has long been the starting point for individuals looking to determine how their assets should devolve after their lifetime. Over the last decade, however, private family trusts have progressively become an important part of succession planning in the country, particularly for promoter and business families looking not only for inter-generational wealth transfer, but also continuity, governance, and ring fencing of family assets.

Increasingly, therefore, succession plans involve both a will and a trust. While the two can work perfectly well together, complications arise when they are not aligned. What happens, for instance, if a will leaves shares in a company to one child, but those very shares have already been settled into a family trust under which all the children are beneficiaries?

To understand the conflict, you first need to understand the fundamental difference between the two instruments.

A will speaks after death; a trust can operate during life

A will records a person’s, i.e. a testator’s wishes regarding the distribution of assets after death. It is testamentary in nature and takes effect only upon the testator’s death. Until then, the testator generally remains free to deal with the assets covered by the will and can amend or revoke the will during their lifetime, subject to applicable law.

A private trust operates differently. An individual, typically a settlor, settles an identified set of assets into a trust, which are then held by the trustee or trustees for the benefit of the beneficiaries in accordance with the terms of the trust deed. Depending on how the trust is structured, the settlor may have effectively parted with ownership of those assets during his or her lifetime. Trusts can also be created under a will (a testamentary trust) and come into existence upon the death of the testator. But in succession planning, particularly for business families, lifetime family trusts are increasingly used alongside wills.

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Why do conflicts arise?

In most cases, the problem is not using two succession instruments but failing to update them regularly to avoid conflicting provisions.

A common situation is one where an individual executes a will and subsequently establishes a family trust, transferring some of the assets mentioned in the will to that trust, but never revisits the will.

Contradictions can also arise because the two documents identify different beneficiaries or direct the same asset differently. A will may, for example, state that a particular property should pass to a daughter, while the same property may already have been settled into a trust for the benefit of the settlor’s spouse and all children.

Changes in family circumstances can create another layer of complexity. Marriages, divorces, births, deaths, changes in residency, acquisition or disposal of assets, and restructuring of family businesses can all render an otherwise carefully drafted succession plan outdated.

So which document wins?

There is no universal rule that one document always overrides or trumps the other. The answer is more closely linked to the question of who owned the asset at the time of death.

A will can ordinarily operate only in respect of assets or interests that form part of the testator’s estate at the time of death. Therefore, if an asset has already been legally and validly transferred to a trust during the testator’s lifetime, the asset would ordinarily be governed by the terms of the trust deed rather than by a subsequent direction of the testator in his or her will.

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For example, a father owns 100 shares in a company and executes a will leaving those shares equally to his two children. Several years later, as part of a succession exercise, he settles all 100 shares into a family trust after completing all legal and procedural formalities. The trust deed provides that the shares are to be held for his spouse and children in specified proportions. If his will is never updated and continues to refer to those shares, the will does not—merely by saying so—bring those shares back into his personal estate.

The position becomes more complicated where the transfer to the trust was incomplete, the asset was never actually settled into it, or if the father, as settlor (the person who created the trust and transferred his assets into it), kept certain rights or interests that themselves form part of the estate. The precise terms of the trust deed, the nature of the asset, the manner in which it was transferred, and other laws then become critical.

The solution: making the two documents speak to each other

A sophisticated succession plan should not treat the will and trust deed as standalone documents. They are different pieces of the same architecture.

The asset schedule under a will should be periodically reviewed against assets already settled into a trust. Beneficiary provisions should be checked for inconsistencies. Where family members or assets span jurisdictions, foreign succession laws, tax consequences and exchange-control considerations may also need to be factored in.

Importantly, a succession plan should be revisited whenever there is any material change—whether in the family, the ownership of the business, the nature of the assets or the residency of relevant family members.

The objective of estate planning is not merely to execute documents. It is to ensure that those documents work together harmoniously when they are eventually required to operate.

After all, when a will and a trust appear to “go to war”, the conflict often arises because the two instruments were not reviewed and aligned as the estate plan evolved. In other words, the real issue may be that the estate plan was never updated to prevent a battle in the first place.

The Author is partner, Shardul Amarchand Mangaldas & CO