Another way to put this question might be, “Why do I need all these different documents for my estate plan? Can’t I sign one and be done with it?”
The short answer, unfortunately, is no. The long answer is that each of these legal instruments—will, trust, and power of attorney—serves a different purpose. The law has not yet produced a single, all-purpose document to cover every facet of an estate plan. (That would be convenient, though!)
One way to understand how these documents work together is to think of your estate plan as covering two periods of time: your lifetime and after your lifetime. A power of attorney applies during your life. A will applies after your life. A trust typically applies to both periods. Here’s a look at each of them and how they interact.
Power of attorney: This is a legal instrument that enables you to grant formal authority to another person to act on your behalf. California has two types: a power of attorney for health care and a power of attorney for property and personal care. These are key documents in your estate plan, because they serve as your backup in case you need help managing your affairs later in life. They allow another person to step in and act for you.
In a power of attorney for health care, you appoint another person to make health care decisions for you. (In addition, you can include specific health care instructions, known as an “advance health care directive,” in this document.) This type of power of attorney complements your trust by covering your person. A trust, in contrast, concerns only property. Most estate plans should have both.
A power of attorney for property and personal care—sometimes referred to as a power of attorney for finances—might appear to overlap with your trust. After all, this power of attorney addresses property, like a trust does. (It also can address your “personal care,” by specifying that your appointed agent has the power to decide where you should live in the event that you become incapacitated.)
The difference between a power of attorney for property and a trust lies in which property each covers. Your trust instrument applies only to assets that you’ve actually put into your trust. Any property you’ve left outsideyour trust—meaning anything you still own in your individual name, rather than in your name as trustee—is the proper subject of a power of attorney.
Here’s an example: If you put a house into your trust (by changing title from your individual name to your name as trustee), and then later in life you lose the capacity to manage your affairs, the house would be managed by your successor trustee. If you leave the house outside your trust—by purposely or inadvertently not changing title—the house would need to be managed by the agent you appointed in your power of attorney for property. (One asset commonly left outside trusts is an IRA, because putting an IRA into a trust can trigger serious income tax consequences. That’s a whole other topic.)
It’s important to note that your powers of attorney may never come into effect at all. In fact, that’s the ideal: You live a long and happy life, in full possession of your faculties, and your agent is never empowered to act for you. Your power of attorney then expires when you do. At that point, only your trust, and possibly your will, would be needed.
Will: If you have a trust, the only function of your will is to direct your non-trust assets into your trust, so that your successor trustee can manage or distribute them according to the provisions of your trust instrument. This is why the will of a person with a trust is often called a “pour-over” will: It simply “pours over” non-trust property into the person’s trust.
The key is to make sure that no more than $150,000 worth of property is subject to your will. If the total value exceeds $150,000, your estate will be subject to the probate process, which would thwart one of the main purposes of having a trust. (Note that assets that pass to beneficiaries by “nonprobate transfer,” such as IRAs and life insurance proceeds, don’t count toward the $150,000 limit.)
Trust: This is the centerpiece of your estate plan. While you’re living, it enables you to use and manage your property as you’ve always done. After you’re gone, it directs the disposition of your property in the way that you specify. Trusts are wonderfully flexible devices that can be tailored to a person’s wishes and amended as needed (or even revoked).
So, to recap: A trust differs from a power of attorney for health care in that it concerns your property, not your person. It differs from a power of attorney for property in the property that it covers. (And it differs from both powers of attorney by remaining in force after your lifetime.) A trust differs from a will by disposing of your assets without probate, which is why trusts are often called “will substitutes.”
When you complete an estate plan with all of these documents, you’ll know you’ve planned ahead for yourself and your loved ones. It does take some paperwork, but it’s worth it!