As you create an estate plan, you have many documents to choose from, and the differences between documents can sometimes be confusing. Three documents that people are often confused about include wills, living wills and living trusts. Although all three documents are common estate planning documents, they serve very different purposes and it can be advantageous to know the differences.
Last will and testament
A last will and testament, often just called a will, is a document that allows you to determine what you would like to happen after you die. You can use a will to specify who you want to be named guardian of your minor children, who you want to inherit from your estate, what you would like your beneficiaries to inherit and who you would like to manage your final affairs.
If you use a will, your estate must still pass through probate. However, having a will can significantly reduce the time it takes for your estate to go through probate.
A living will, sometimes called an instruction directive, serves a completely different purpose than a will or a living trust. A living will and a living trust can both address what you would like to happen after you die. However, a living will is an advance directive that allows you to address what you want to happen if you are alive, but you are unable to express your wishes for medical care.
A living will allows you to put into writing what your wishes are for or against certain medical treatments. Typically, people use living wills to specify to family and medical professionals the circumstances in which they want or do not want to receive life-sustaining treatments.
Although you are not required to have any advance directive, a living will can be a valuable document in almost any estate plan because it can clearly express what you would like to happen if you become incapacitated. A living will and a durable power of attorney for health care are two advance directives that often work well together.
Like a last will and testament, a living trust allows you to specify how you want your assets distributed after your death. However, a living trust works in a slightly different way than a will does. You, the settlor, create a living trust and fund it with your assets. Those assets become owned by the trust instead of being owned by you, and while they are in the trust they are managed by the person you appoint as the trustee. Sometimes you can even name yourself as the trustee. Also, many trusts that people create are revocable, which allows the trust to be modified or eliminated at any point during the settlor’s lifetime.
Trusts have several benefits over wills, though one of the key benefits is that the items in the trust avoid probate. However, one drawback to living trusts is that the items that you forget or run out of time to add to the trust must go through probate, and if you do not have a will as well as your trust, those items may be distributed according to state law instead of according to your wishes.
Ultimately, the estate planning documents you use are up to you. However, understanding the benefits and drawbacks of each estate planning document can help you select the most appropriate documents for your situation.