Disclaimer. So that I am not embroiled in a law suit by some sue happy litigator, what follows is merely what some attorneys have stated to be the case. It should not be interpreted as legal advice or an attempt to practice law.
People often use the terms "living will" and "living trust," interchangeably, thinking they are one and the same, when in fact, they are very different documents. The confusion often arises because both are important pieces of a solid estate plan and both documents help you plan for an unfortunate event in the future, such as your death or incapacitation. Additionally, a living trust provides other significant benefits such as avoiding probate and providing tax savings.
THE DIFFERENCE BETWEEN A LIVING WILL AND A LIVING TRUST
A living will is a legal document that instructs health care providers how to handle the scenario in which you become incapacitated. Many living wills, for example, instruct doctors to remove you from life support after, say, 14 days of coma or non-responsive brain activity. The living will can be a great blessing to family or loved ones who otherwise would have to make a difficult decision on your behalf.
A living trust is a legal relationship that you can create to hold some of your property. A trust is a three-party relationship involving a trustor (you, the person creating the trust), a trustee (the person or entity who manages the trust property, usually an attorney or bank), and one or more beneficiaries (the people you designate to benefit from the trust property). It is called a "living" trust because you create it while you are still alive, and it holds your property while you are alive. But, importantly, the trust continues to exist when you die.
ADVANTAGES OF A LIVING TRUST
A living trust helps you avoid probate. Probate is the legal process where your will is submitted to a judge, the judge interprets the will and makes sure it is valid (meaning, makes sure it is actually your legal will), and then orders your personal representative to disburse your property according to the terms of your will. Probate is often a time- consuming and expensive process, especially if somebody challenges the will (like a family member, who under the terms of your will, thinks he/she didn't get enough from your estate). Any property held in your trust is technically not owned by you, which means it does not have to go through probate as part of your will. This can be a huge benefit to your surviving family members and loved ones.
A trust can provide significant tax benefits, too. For example, let's say you have a high income which places you in the 40 percent income tax bracket.
You own some investment property that produces about $100,000 per year in rental income. At 40 percent, you would pay $40,000 in taxes. If, however, you instead place the property into an irrevocable living trust, the trust will probably fall into a lower income tax bracket, say 25 percent, so the trust would only pay $25,000 in taxes. You have saved $15,000 in taxes by placing the property in trust. It is important to name yourself as the beneficiary (or at least one of the beneficiaries) so as to benefit from the trust income.
Another significant benefit of the living trust is that it allows you to benefit from professional property management. When you appoint a trustee, you can appoint somebody who is experienced in handling whatever kind of property you place in the trust. If you put real estate in the trust, you can appoint a real estate attorney as trustee, and the attorney may be able to produce more income and provide more tax savings than you could have done on your own. Additionally, if you ever get into an accident and are left incapable of managing your property, then a trust comes in handy because the trustee handles the property, which means the property will be taken care of even though you couldn't do it yourself.
JOINT TENANCY MYTHS EXPLODED
Some people think there are certain "end runs" that may be employed to avoid the expense of having a Living Trust drafted such as using a joint tenancy estate. As with most myths there exist partial truths, but there are almost always exceptions or details that can catch one out.
MYTH: Joint tenancy will avoid Probate
REALITY: Joint tenancy does not avoid Probate. At best, it can delay it.
* Probate is not avoided is one tenant is incapacitated.
* Probate is not avoided if there is a simultaneous death.
* Probate is not avoided on the death of the last survivor.
MYTH: Joint tenancy won't our impact taxes.
REALITY: Joint tenancy can cost up to hundreds of thousand of dollars in capital gains.
* When you are in a joint tenancy, with the first death, the survivor receives only half of the step up basis, and only half of the cost basis on the property.
MYTH: Making someone other than your spouse a joint tenant will protect your property.
REALITY: To the contrary, doing so can cost you your property, along with your equity.
* The entire property can be seized to satisfy a debt or judgment against the other tenant.
* You could lose all your equity.
POWERS OF ATTORNEY
When one might need a power of attorney? Generally people find powers of attorney to be helpful in decisions regarding the following financial and personal concerns:
Living Trusts. As part of the process of creating a living trust, spouses commonly grant each other a special power of attorney for the express purpose of transferring their assets to the trust. In this way, the process of funding the trust can continue if one spouse becomes incapacitated. Even if both spouses maintain their capacity, a special power of attorney can effectively delegate the task of signing the transfer documents to just one spouse.
Medical Care. Perhaps the powers most commonly granted by individuals concerns their health care. Assume that a person (or couple, both the spouse or the partner) are in an accident and unable to make and communicate a decision about their medical treatment. Who would select, direct and, if need be, discharge their health care providers and institutions; approve or reject diagnostic tests, surgical procedures and medication programs; and, if needed, determine whether to provide, withhold or withdraw life support and all other care, including cardiopulmonary resuscitation?
By creating a durable power of attorney for health care, one can specify the person to make these decisions on his or her behalf, together with one or more successors in case his or her first choice is unavailable. This can relieve family members' anxiety because it provides answers to many difficult questions. Many clients grant a health care power of attorney as part of an Advance Health Care Directive, in which they also describe their wishes regarding heroic measures, life-sustaining treatment, organ donation and similar tissues.
Residential and Personal Care. A power of attorney can provide an agent with the authority to manage the principal's personal care, including the authority to decide where the principal will live, arrange for meals, hire household employees, provide transportation, handle mail and arrange recreation and entertainment. These matters are very personal. A person may be understandably hesitant to give someone else this authority. Nevertheless, many clients prefer to select the person who would have this power if they become unable to make the decisions for themselves rather than leave the decision to state law.
Gifting and Medi-Cal. Many individuals reduce their taxable estates by making gifts to their heirs annually, or more frequently. A springing durable power (a power of attorney that takes effect only upon the occurrence of a specified event) can allow a gifting program to continue or to commence on the principal's incapacity, without granting anyone authority to make gifts until that time. A similar power may be crafted with respect to charitable contributions. An agent also may be empowered to take certain steps to enhance an incapacitated principal*s financial qualification for Medi-Cal and other benefit programs and to manage the subsequent exposure of the principal's estate to recoup for benefits received.
Other Estate Planning. To maximize the available estate-planning opportunities in the future, a principal may provide a spouse, heir or trusted friend with the power to modify or revoke trusts created by the principal so long as this is also expressly allowed in the trust agreement. An agent may even create a living or other trust on the principal's behalf. There is a natural aversion to planning for incapacity even though it can occur through accident or other mishap at any time. Perhaps it is human nature that many, particularly those who actively exercise control over the myriad details of daily life, have not yet taken the extra step to exert their influence over the way others would make decisions for them if the need were to arise.
This summary is based on the requirements of California law and is provided for your general information. The laws governing powers of attorney vary from state to state.
Although California law is fairly liberal in the powers that can be granted under a power of attorney, specific requirements must be satisfied in order for many of the powers to be valid. A power of attorney should be individually crafted and implemented to address the individual's particular situation and specific preferences.
Copyright © 2021 Rod Haase. All rights reserved.