Often when clients come to us for their estate planning needs, they are confused about what they want or need. Many times they ask for one thing, perhaps a will, but it turns out what they are really asking for is a Trust or some other estate planning document. Estate planning is an essential part of financial planning and it is important for clients to understand the most basic estate planning documents. At its core, estate planning is the process of arranging for the management and distribution of your assets after your death or incapacity. Below is a simple, and by no means exhaustive, breakdown of the most common estate planning documents and what they do and do not do.
Wills
A will is probably the estate planning document most people are familiar with. We have all heard at one time or another about someone being added to or cut out of someone’s will. A will is a legal document that outlines your wishes regarding the distribution of your assets after your death. It appoints a personal representative to manage your estate, pays your debts and taxes, and distributes your assets according to your instructions in the will.
One advantage of a will is that it allows you to specify who will inherit your assets, including your real estate, personal property, and investments. You can also name a guardian for your minor children, specify funeral arrangements, and make charitable donations. However, a will does not avoid probate, which is the legal process of transferring assets from a deceased person’s estate to their beneficiaries. Probate is public, can be time-consuming, costly, and may expose your assets to creditors and potential litigation.
Revocable Trusts
A revocable trust is a legal document that creates a separate entity to hold your assets for your benefit during your lifetime and transfer them to your beneficiaries after your death. Unlike a will, a revocable trust can avoid probate by transferring your assets directly to your beneficiaries. You can also make changes or revoke the trust at any time during your lifetime, which makes it a flexible estate planning tool.
A revocable trust allows you to specify who will inherit your assets and when they will receive them. Additionally, a revocable trust can provide for the care of your pets, charitable donations, and other special requests.
Irrevocable Trusts
An irrevocable trust is a legal document that creates a separate entity to hold your assets for the benefit of your beneficiaries. Once you create an irrevocable trust, you cannot change or revoke it, which makes it a more permanent estate planning tool. One advantage of an irrevocable trust is that it provides greater creditor protection than a revocable trust. Once you transfer assets to an irrevocable trust, they are no longer considered part of your estate for tax purposes and are protected from creditors. An irrevocable trust can also be used to minimize estate taxes by removing assets.
Living Wills/Advance Directives
A living will, also known as an advance directive, is a legal document that allows you to specify your wishes regarding medical treatment in the event that you become incapacitated and unable to communicate your wishes. In a living will, you can provide instructions about the types of medical treatments you would like to receive or not receive, such as life-sustaining treatments like artificial respiration or feeding tubes. A living will is important because it allows you to have control over your medical treatment even if you are not able to communicate your wishes due to illness, injury, or incapacity.
It’s important to note that a living will only takes effect if you are unable to communicate your wishes. If you are able to make decisions for yourself, your medical team will consult with you directly to determine the best course of treatment. A living will can be revoked or amended at any time, as long as you are of sound mind and able to communicate your wishes.
In addition to a living will, it is also important to have a durable power of attorney for healthcare. This document allows you to appoint someone you trust, known as your healthcare agent or proxy, to make medical decisions on your behalf if you are unable to make them for yourself. The person you appoint should be someone who knows your wishes and is willing to act on your behalf. Together, a living will and durable power of attorney for healthcare can help ensure that your wishes regarding medical treatment are respected if you are unable to make decisions for yourself.
Powers of Attorney
A power of attorney (POA) is a legal document that grants someone else the authority to step into your shoes and act on your behalf in financial, legal, or medical matters. However, there are two types of POAs: a regular power of attorney and a durable power of attorney. While they may seem similar, they have important differences that can significantly affect your legal and financial affairs.
A regular power of attorney is a legal document that gives another person the authority to act on your behalf, but only while you are mentally and physically capable of making decisions for yourself. If you become incapacitated, the regular power of attorney becomes invalid, and your agent will no longer have the legal authority to act on your behalf. For example, if you are in a coma, your agent will not be able to access your bank account or sign legal documents on your behalf.
A durable power of attorney, on the other hand, is a legal document that gives another person the authority to act on your behalf, but it remains valid even if you become incapacitated. This means that if you become unable to make decisions for yourself, your agent can still act on your behalf. One of the most significant benefits of a durable power of attorney is that it can help prevent the need for guardianship or conservatorship proceedings. If you become incapacitated and do not have a durable power of attorney in place, your loved ones may need to go through the court system to be appointed as your guardian or conservator. This process can be time-consuming, expensive, and emotionally draining.
In conclusion, while both types of powers of attorney can be useful, a durable power of attorney offers more comprehensive protection in the event of incapacity. It is important to consult with an experienced estate planning attorney to determine which type of power of attorney is best suited for your needs and to ensure that your legal and financial affairs are properly protected.
If you require assistance with your estate planning needs, we at Tilchin & Hall, P.C. are here to help. Please reach out to us at (248) 349-6203 or email us using the form below.
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