There are four documents essential in creating a successful estate plan: a Last Will and Testament, a Living Will, a Living Trust and a Power of Attorney. Each one operates independently of the other, yet they are interrelated. The four documents combined provide the fundamental benefits of organization, uniformity, and coherence to the administration and execution of your estate and desires.
The Last Will and Testament
Many are familiar with the form and function of a will. A will provides the mechanism for distribution of any property you own at death, based upon your intent. The most important functions of a will are to declare and transfer everything you own to the people that you want to receive the items. The best thing to do when writing your Last Will and Testament is to make a list of all items that are important to you and identify the people you want to receive them. Then, be sure to include a clause to cover items that you may forget to give someone or items you may receive after you write the will.
The Living Will
Some people may think if you have a Living Will then you have a will. WRONG! A Living Will is known as a “Healthcare Directive.” A Living Will states your wishes on medical treatment if you cannot make decisions for yourself. Not only does it protect you if you want to DENY all available medical treatment, but it also protects you if you want to make sure you RECEIVE all possible medical treatment. In the absence of a Living Will, the doctors who treat you will try to determine what your best options are, with possible consent required from a family member. The Living Will removes this responsibility from the doctors and any surviving family members and states what you want and who you want to make decisions on your behalf.
Most Living Wills provide for a “proxy,” which is basically the same thing as a power of attorney except it is limited only to the Living Will. A “proxy” is a person who will make sure that your intentions are carried out.
The Living Trust
The Living Trust can be the most complicated of any of your estate documents. Basically, a Living Trust is a document that is created and takes effect while you are alive, compared to a Testamentary Trust created while you are alive but effective upon your death. The benefits to the Living Trust are that you can avoid Probate Court and all related costs. However, you can change your mind after you write a Living Trust and you can void out the trust before your death. A Living Trust allows you to transfer ownership of your property to your intended beneficiaries while retaining benefits for yourself until your death. Therefore, you DO NOT lose control of your property while you are alive, and upon your death, a successor Trustee will take over to distribute the property to the beneficiaries in accordance with your wishes. While the Living Trust may avoid probate, it doesn’t avoid creditors or taxes, but it does provide for a quick and efficient method of distributing your property, which may discourage creditors. Remember, you do not save any estate taxes with a living trust over a Last Will and Testament, since you maintain “control” of all aspects of the trust until you die. The two key benefits involve avoiding probate court and its related expenses and keeping your estate private since the public does not have access to the trust documents.
Power of Attorney
The fourth and final document that is needed in an estate plan is a Power of Attorney. It is important that you plan for the unfortunate situation when you are not able to make sound financial decisions. A Power of Attorney is necessary in the event you are unable to make sound financial decisions regarding your assets during your lifetime. The Power of Attorney does not become effective until it is executed by the individual you state in the written document. Remember, you can always change the named individual or the terms, as long as you are of sound mind.
The four documents we have presented in this explanation are important elements of any successful estate planning. While this is just a short introduction to the topics, it is imperative to realize the importance of each document. The Last Will and Testament acts like a road map with the Living Will and Living Trust helping to direct the heirs where to look for the needed information. The Living Will is crucial in conveying your intent regarding any medical wishes you may have, while the Living Trust is the document that will transfer your property to your intended beneficiaries with the benefit of saving time and money at your death. Finally, the Power of Attorney protects you in the event of an unsound mind while you are alive.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors