Deciding how to divide your assets can be difficult. Understanding all the different paperwork can be even more so. You may wonder how estate planning tools differ and which is right for you. Here is what you need to know about common estate planning tools.
Trust vs. Will
A will is a legal document that stipulates how your property will be divided after you pass. A trust does essentially the same thing, but these two documents function differently and provide different benefits.
A will takes effect after someone passes on. A trust goes into effect when you fund it. As soon as your assets are moved into the trust, these are earmarked for the named beneficiary. With a revocable trust or living trust, you can make changes to beneficiaries or move assets in and out of the trust. After an irrevocable trust is funded, you can no longer move assets or change beneficiaries. Both types of these trusts provide certain tax benefits, particularly for those with large estates.
A trust protects assets in the trust, and you can still collect income earned on these assets while you are around. A will does not protect any assets you plan to give to your beneficiaries.
With a trust, you can be very specific about how assets are distributed, since you appoint a trustee to manage the trust. Wills pass through probate, so the court oversees the administration of your will. This also means a will is a public document. Trusts do not pass through probate, so all the information included in a trust remains private.
You can only include property that you own solely in your will. Jointly owned property cannot be included. With a trust, any property you move into a trust can be passed on.
Health care directives
Health care directives allow you to express your wishes about medical treatment, if you are unable to do so. You can also appoint someone to make these decisions for you, if you become incapacitated.
A living will is one type of health care directive, and it specifically addresses your wishes regarding medical care. You can lay out what live saving measures you want used, palliative care options and even if you want your organs donated.
Power of attorney
A person with your power of attorney can be placed in charge of several things. A general power of attorney arrangement is someone who makes financial decisions on your behalf, in case you are unable to do so. That included managing your personal finances, paying your bills, etc. You should appoint someone who will make responsible financial decisions.
You can also appoint someone as your healthcare power of attorney. This person makes decisions about your medical care, if you are not able to do so. You want to pick someone you trust make decisions based on your wishes, not their own. The same person can make both types of decisions, or you can designate two people for these decisions.
A will is often the right estate planning document for simple estates. If you have a more complex estate, you may want to consider a trust, particularly if you are concerned about estate taxes or privacy. There are several different ways to create health care directives, so if you are unsure which is right for you, you may want to reach out to an experienced estate planning professional.