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Difference Between the Basic Estate Planning Documents

I’m sure you’ve heard the terms “will,” “trust,” “power of attorney” and “health care directive” in the past. What do these terms mean, though, and when are they actually needed?

If you don’t know the exact meaning of these terms, you aren’t alone. Even the most basic estate planning documents are commonly misunderstood.

One of the most important documents of this type is a will. By executing a will, you are legally stating your wishes, including who will inherit your estate upon your death and who shall be in charge of making sure that your wishes are met. It is especially important to express whom you DO NOT wish to receive a share of your estate. What happens, though, if you die without a will? If an individual passes without executing a will in Pennsylvania, that person’s estate will be distributed according to the intestacy laws of Pennsylvania. If you die without a will, just because you may not have had a relationship with your next of kin during your lifetime or you verbally expressed your wishes that only a certain loved one would inherit your assets, without extenuating circumstances, Pennsylvania follows the prescribed intestacy law.

What does that mean? Just because you die married does not mean that your spouse will be your sole beneficiary. If you have an asset in your individual name and die with a spouse and children, then your estate will be divided between all of them. If you die married but without children, and your parents are alive, then they will inherit along with your spouse. When it becomes more complicated is if you have a blended family. If your children are not the product of your relationship with your spouse, then a different formula applies. What if you are in the middle of a divorce? Or, what if you die with a child who is still a minor? There are so many situations that make the drafting of a will so very important.

In your will, you may choose a guardian to care for your minor children. You may select a guardian of the person who will make decisions regarding your child’s health, education and living situation. You may also name a guardian of the estate who will manage any property your child may receive. A will allows you to select a trustee to manage the property in any trust contained in your will. If you have minor children, children with special needs, or a child who simply isn’t responsible enough to manage their new wealth, a will allows you to set up a trust on their behalf. A trust is a vehicle used to hold and manage property, which is ultimately distributed for the benefit of someone else.

It is common to create a minor’s trust for a beneficiary. Most folks do not want an 18-year-old to inherit any amount of money for fear that it will be mismanaged or wasted. I have a trust created under my will for my kids to inherit, but I appoint who shall manage the fund and direct the length of time that their share will remain in the trust. The length of time that the funds are held in trust is flexible. You can designate an age or ages, an event, or even leave it to the discretion of your trustee.

You may also create a special needs trust when you have a loved one who is eligible for public benefits, such as medical assistance and supplemental security income. These benefits may be a disabled person’s only source of income and health insurance. If a person is eligible for such benefits, inheriting monies over $2,000 may disqualify them completely. A will can set up a special needs trust that will allow the disabled person to continue to receive public benefits while also allowing the inherited monies to be used to increase their quality of life. The rules are so specific that, without proper planning, a loved one may lose their benefits and be worse off than you ever anticipated.

Another essential estate planning document is a durable power of attorney. By executing a power of attorney, you are giving another person – such as a spouse, child or friend – the authority to make decisions on your behalf if you are unable to do so for yourself. A durable power of attorney continues to work even after you’ve become incapacitated. This is especially important because, if an individual becomes incapacitated without executing a power of attorney, it is likely that guardianship proceedings will need to be instituted in order to appoint a guardian to make financial or medical decisions on behalf of the incapacitated person. The guardianship process, which requires petitioning the court, is a much more complex and expensive process. A guardianship hearing could result in a decision contrary to what you would have wanted or in having someone you would not have chosen to act on your behalf.

It is also important to prepare a living will, also known as an advanced directive. There are two separate documents – a financial power of attorney and a medical power of attorney – that are combined with your living will. Conti Law combines the medical power of attorney and living will so that your agent is ensured to know your wishes upon acting on your behalf. This document allows you to state what your goals are for your end of life, including hospice care; the continuation or withholding or withdrawal of life-sustaining treatment; and funeral preparations.

Just like your will only becomes effective once you have died and your named executor – or administrator if you die without a valid will – is appointed as such by the court, your powers of attorney STOP working the day you die. If this is the case, then who pays your bills, especially your funeral?

The truth of the matter is that most people don’t know this rule and, when an agent attempts to act after a person has died, the account may be frozen by the bank. It is important that a fiduciary know the rules when acting on behalf of another. Consultations with experienced counsel are very helpful in differentiating everyone’s roles. Furthermore, it is important that the executor understand that the monies owed by the person who has died are not assumed by the executor upon appointment. Though there is a priority of creditor list in Pennsylvania, an experienced attorney can assist you with when to pay each and in which specific order.

Sometimes, the basics of estate planning are not all that basic. Contact Conti Law to assist you with your drafting and settlement needs.