What Differentiates Powers of Attorney, Trusts, Wills and Living Wills?


By Daniel Bucherer, Contributor, Fea Money Financial Literacy school

There are a number of different terms thrown around when discussing wills. In fact, the word “will” is often used to describe a number of different things. When you’re considering a document that controls where your possessions go after your death, you’ll want to ensure you understand the ins and outs.

For example, do you know the difference between a “will” and a “living will”? Do the terms “power of attorney” or “trust” ring a bell? If not, don’t fret. In this article, we’ll detail these four key terms and the differences between them.

Will or Final Will and Testament

At the base level, a will simply states what the executor, or person in charge of carrying out what the will says, is to do with all of your things. This includes your home, your car, any possessions you own and any insurance policies you have. 

From a financial perspective, wills are critical because they keep your possessions where you want them. Laws differ around the world, however, in many places, your possessions can be given to anyone who claims them or can be simply sold to pay debts if you don’t have a will in place. From a personal perspective, it ensures that the people who you designate as beneficiaries receive your possessions and no one else.

What a Will Does

  • Defines an executor for your estate (the person who carries out the will)
  • Distributes your assets according to your wishes
  • Establishes legal guardianship for your children and care for pets

What a Will Doesn’t Do

  • Change who receives jointly owned property
  • Change who receives jointly owned financial accounts
  • Change who receives your life insurance or other relevant policies
  • Change assets placed in a living trust

How Is It Different from the Other Items on This List?

A will deals solely with your possessions and only comes into force after your death. A living will deals with your wishes for your care and is enforceable before your death. Power of attorney is established before your death and is not used in the case of your will. Finally, trusts are established either from your will or separately. 

Living Will or Advance Directive

Living wills or advance directives are documents that outline how you would like your care and ultimately, your death and burial to proceed. They can be as simple as, “I want my spouse to decide everything,” to as complicated as a multi-page document that outlines your wishes for specific medical cases. You can outline specifics including whether you would like to be resuscitated, whether you would like machines to be used to keep you alive, and if you want to be given experimental drugs in order to save your life. 

It is difficult to outline how best to develop a living will, as it comes close to your values and religious beliefs. Ensure that you take the time to think out your wishes. Your living will also spells out specifics such as how you would like to be buried, whether you’ll be cremated, and how you would like your burial services to proceed. 

When preparing one, the requirements are very similar to a will. You are more likely, however, to be able to complete a living will yourself and witnesses will be required. If you are scheduled for surgery or are able to consent in an emergency situation, a hospital will often require you to fill out an advance directive. This helps doctors to care for you in a way that corresponds with your wishes. In the absence of such a document, doctors will default to their Hippocratic Oath, which may result in your being treated in a way that you do not want.

How Is It Different from the Other Items on This List?

Your living will is similar in its requirements to your last will. However, it is distinctly different in that it is in force before your death and controls how your medical experience and last days proceed. Living wills are closely related to a power of attorney. In many U.S. states, for example, the power of attorney is actually encapsulated within the living will—the individual you designate is the same. In other U.S. states, however, you may need to select a different power of attorney for medical and other decisions. Trusts are unrelated other than the fact that they stem from you broadly.

Power of Attorney

A power of attorney allows an individual to make decisions on your behalf, including legal and medical decisions. Some U.S. states require that these roles be separate, but for the sake of this conversation, we can assume they are the same. Selecting someone to have power of attorney is a serious matter. Generally, their role will only begin if you are incapacitated or unable to make decisions for yourself. However, they can sue for the right to take control of your medical care if they have reason to believe that you are not making decisions in your best interest. This is why it is massively important to appoint someone who will have your best interests at heart. If no power attorney is named, generally states will default to your spouse or children. 

How Is It Different from the Other Items on This List?

Power of attorney is an element in all of the areas of this list. Your designated individual will have certain responsibilities in your living will and trust. Additionally, you can designate your power of attorney to have a certain role in your last will.

Trust

A trust is a separate legal entity one would set up to manage his/her assets. There are two basic types of trusts: revocable and irrevocable. Both are financial tools that you establish while you are still alive and both are managed by a trustee. However, they have important differences.

A revocable trust, often called a living trust, is more flexible. Funds and beneficiaries can be removed from it and changes can be made at any time. That extra flexibility comes with a price, however as they are not shielded from some forms of taxation and court decisions. If you are sued, you could be asked to pay out of your trust.

An irrevocable trust, on the other hand, is inflexible. Once money goes in, it can only come out to the benefit of those named. The rules and beneficiaries are set at the time the trust paperwork is signed. This means that the funds placed into the trust are better protected from creditors.

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