What happens to our affairs when we’re no longer able to speak for ourselves? When you’re younger you don’t think about this often, but as we age, estate planning moves up a few spots on our financial checklist. Unlike insurance which we buy and hope to never need, estate planning is a bit more crucial, especially if you’ve compiled assets.
Two important estate planning documents are living wills and living trusts. While they may sound similar, a living will and a living trust provide very different sets of instructions for those who care for us should we become incapacitated, temporarily or otherwise. Using these documents can provide peace of mind and a smooth transition, but you’ll need to understand the differences between them.
A living will isn’t the same as a last will and testament. A last will is executed when we die and lays out instructions for things like distributing assets to heirs or naming guardians to minors. On the other hand, a living will has no validity after we die and only has standing while we’re alive. That’s because living wills dictate medical instructions, not financial ones.
Let’s say you’re in an accident and remain incapacitated for several months. During this time, you may need decisions made on your behalf regarding medical care. Since you can’t communicate these wishes yourself, you’d leave them in your living will. A living will makes the treatment process clear and removes tough decisions from the hands of your loved ones. Unlike advanced medical directives or power of attorney, no one is assigned to make decisions on our behalf – the choices are laid out in the document itself. But note that living wills are only enforceable while the owner is alive. Once you die, the living will becomes invalid.
A trust is a different type of estate planning document. As mentioned above, living wills are about medical instructions, but a living trust is for financial instructions. A trust can be used to pass assets like stocks or real estate onto heirs without the involvement of probate court.
A trust is a legal agreement that maintains the guidelines of the estate during the life and death of its owner. That’s because a trust works as its own entity, and property like stocks, bonds, or real estate can be passed over to the trust. In this scenario, the trust owns the property. Trusts can be irrevocable or revocable, but an irrevocable trust cannot be administered by the person who is putting their assets into it.
One of the biggest advantages of using a trust is your affairs will not be a matter of public record. Other means of bequeathing assets to heirs, such as a last will, must be administered through probate court and can be challenged by unhappy beneficiaries. A trust cannot be challenged and probate court is not involved in the distribution of its assets.
Both documents can be useful estate planning documents – you don’t need to choose one or the other. A living will makes sure you receive the type of medical care you prefer (and ONLY the type of medical care you prefer). Your instructions for care on various medical conditions and scenarios will be laid out on paper for doctors and family to read. Misinterpretation can still occur though, which is one weakness of living wills.
A living trust won’t provide any information about preferred medical treatment, but it will offer a safe haven for assets that won’t change in the event of your incapacitation or death. A living trust can go in effect while you’re alive as well, but only revocable trusts can be altered once they’re written.
Wills are generally easier documents to draw up and make legal. You can even go online and type up your will, it just needs to be signed in front of witnesses. Some states may require a copy of your will as well, but these regulations vary from state to state.
Trusts are more difficult and expensive to set up since they likely require the services of an advisor or attorney. Trusts require a number of steps before completion, such as the naming of a trustee, transferring of assets into the trust’s ownership, and selecting beneficiaries for your assets. Setting up a trust isn’t a do-it-yourself exercise like a will, so be sure to enlist your advisor for help in establishing one.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situations. Good Life Financial Advisors and LPL Financial do not provide legal advice or services.