When it comes to estate planning, there are so many beneficial options, depending on what you need to accomplish. A durable power of attorney is a common tool. So is a living trust. So, what is the difference and how do you know which one you need for your estate planning.
What is the definition of a Durable Power of Attorney?
A power of attorney is a flexible estate planning tool that allows you to choose someone who will handle all or part of your personal affairs, including making health care decisions. The person who signs and executes the power of attorney is known as the “principal.” The person authorized to act on behalf of the principal is the “agent” or “attorney-in-fact.”
A durable power of attorney is a special kind of power of attorney that will remain in effect even if the principal becomes incapacitated. A durable power of attorney can also be created where it only becomes effective when the principal becomes incapacitated.
What is the definition of a Living Trust?
A “living trust” is a particular type of trust that goes into effect while you are still alive, as opposed to being created through your will upon your death. As with any type of trust, the trust property will be managed by the trustee, and later distributed to your beneficiaries after your death. With living trusts many people name themselves as trustee so they can maintain control of the property while they are alive. Then upon their death, the successor trustee takes over.
How are these two estate planning tools different?
A living trust is will often be one of your main estate planning documents. It will handle both the management of your assets while you are incapacitated and the distribution of your assets upon your death. An important aspect of estate planning with a living trust is that you will be required to transfer your assets to the trust in order for the trust to be effective. The trustee will have the authority to manage all of the trust assets only. On the other hand, your living trust does not give your trustee any power over assets that are not transferred to your living trust.
Instead, it is your durable power of attorney that gives your agent the authority to manage your non-trust assets, i.e., assets that are still in your individual name. Under the authority of the power of attorney, your agent will also be able to manage those assets you neglected to transfer to your living trust as well as your retirement accounts, annuities, life insurance policies, and social security. Furthermore, your durable power of attorney will give your agent more wide-ranging authority over such issues as the ability to gain access to your mail, deal with the IRS, enter into contracts on your behalf, as well as many other actions where legal authority is required.
An often misunderstood limitation of a power of attorney is that, unlike the power of a trustee under a living trust, an agent’s authority under a power of attorney terminates at the death of the principal. Many who have used powers of attorney to manage another person’s affairs during their lifetimes are caught unprepared when they are told by banks and other companies that the power of attorney is no longer effective after the death of the principal. This can often result in the need to endure a costly and burdensome probate to settle the decedent’s affairs.
Another potential problem with financial powers of attorney are that certain companies may refuse to recognize them despite their apparent legitimacy. The reason is that in California financial institutions are are mandated reporters of financial elder abuse. A consequence of this law is that banks and other financial companies often closely scrutinize powers of attorney and will sometimes not honor them when they are viewed as “stale”, i.e., created even just a few years ago or when they conclude that the circumstances under which the power of attorney is presented is questionable.
Comprehensive estate planning typically includes both
Most comprehensive estate plans will include both a living trust and a durable power of attorney. In those cases, you should be sure that your agent is aware of the relationship between these two legal documents so he or she will know which document to present when attempting to manage certain aspects of your affairs.
Some benefits of living trusts help to avoid probate
One key benefit of creating a living trust is that your family may be able to avoid the lengthy and costly probate process. With a last will and testament, your estate must go through probate so that your assets can be distributed according to the terms of that will. However, with a living trust, your estate will not go through probate and your heirs can receive their inheritance much sooner.
One benefit of a durable power of attorney is that you can decide now who you want to make decisions for you and act on your behalf if you become incapacitated, rather than have a judge make that decision for you. The agent you select will be able to step right into your shoes and make the necessary healthcare decisions without going through a lengthy and costly court proceeding. If you do not have a durable power of attorney, the court will most likely appoint a conservator.
Download our FREE estate planning checklist here. If you have questions regarding a durable power of attorney or any other estate planning needs, contact the Northern California Center for Estate Planning and Elder Law for a consultation, either online or by calling us as (916) 437-3500.