Can Establishing a Trust or a Will Truly Solve Inheritance Issues?

The passing of actress Hsu Hsi Yuan has left behind a vast estate. Despite her legal heirs being her children and spouse, there is a possibility that her ex-husband might end up receiving the majority of her inheritance. This has sparked widespread media discussion on the topic of estate planning, with trusts and wills being the most commonly mentioned methods. However, both trusts and wills have their own limitations and must be tailored to the specific needs of each case.

Utilizing Trusts for Proper Asset Distribution

Through a trust structure, assets can be distributed to designated beneficiaries according to the provisions of the trust agreement. The type of trust should be chosen based on the most critical elements of the specific case.

For instance, Ms. A has multiple heirs and her primary concern is leaving most of her assets to one or a few specific heirs, she must consider the issue of "reserved portions" (the legally protected share of inheritance for certain heirs). This means that her trust must be structured in a way that can legally counter against the reserved portion regulations.

On the other hand, Mr. B’s main concern is preventing the next generation from recklessly spending or mismanaging a large inheritance received all at once, his trust must focus on asset protection. This means structuring the trust so that assets are transferred to beneficiaries in installments rather than as a lump sum.

Testamentary Trust—Unable to Override Reserved Portions

For Ms. A’s situation, a testamentary trust would not fulfill her objective. A testamentary trust involves drafting a will in advance, which then transfers the deceased’s estate into a trust upon their passing. Since the assets first become part of the estate before entering the trust, if the will’s distribution plan violates the reserved portion rules, the other heirs have the right to demand the return of their legally protected share.

In simple terms, if someone’s reserved portion is infringed upon, they can request the recipient of the majority of the inheritance to return the portion they are legally entitled to. Therefore, if the purpose of a trust is to bypass reserved portion regulations, a testamentary trust is not a suitable approach. Conversely, for Mr. B, who wants to prevent the next generation from receiving a large inheritance all at once, a testamentary trust is a viable solution to achieve this goal.

Consideration of Estate Tax

Both testamentary trust and wills are subject to estate tax. Since the deceased’s assets are classified as an estate at the moment of death and are then distributed through a trust or will, all assets are subject to estate tax calculations.

If estate tax is a concern, such as when an individual has substantial assets and worries that his/her heirs may struggle to pay high inheritance taxes, the trust structure should be designed to minimize estate tax liability—primarily by preventing assets from being classified as part of the estate. How can assets be kept out of an estate? The simplest way is through gifting. Once an asset is gifted, it no longer belongs to the original owner and will not be considered part of the estate.

Careful Planning Is Essential

Although trusts and wills are highly practical tools for estate planning, they each have limitations. It is crucial to evaluate individual circumstances carefully to determine the most suitable approach. Life is unpredictable, only by planning ahead can one ensure effective asset inheritance when it matters most.