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Living Trusts vs Lasting Power of Attorney: Which is Right for Me?

By: J.A.J Aaronson - Updated: 1 Oct 2012 | comments*Discuss
 
Living Trust Inter Vivos Lasting Power

There remains some confusion regarding the nature of living trusts, and the way in which they relate to Lasting Power of Attorney.

Both living trusts and Lasting Power of Attorney are useful legal tools. But it is important that you are aware of the differences between them, and that you understand which might be the right choice for you.

What is a Living Trust?

A living trust is a trust that is established during the lifetime of the settlor – that is, the individual who transfers assets into the trust. It is distinct from a ‘testamentary trust’, which is established upon the death of the settlor.

Just like any other trust, a living trust also has trustees and beneficiaries. The trustees are in charge of the management of the trust, and they do this on behalf of the beneficiaries. You could theoretically establish a living trust and act as the settlor, trustee, and sole beneficiary – although there are very limited circumstances in which this might be a good idea.

There are two types of living trust – revocable and irrevocable. In a revocable trust arrangement, the settlor retains control over the trust and can change or close it at any time. In an irrevocable trust, the settlor no longer has these rights.

What is Lasting Power of Attorney?

Lasting Power of Attorney (LPA) is a tool that allows individuals to pass on the responsibility for making decisions to someone else. Your appointed ‘attorney’ could make decisions on your behalf regarding things like healthcare, your home, or you money.

There are two types of Lasting Power of Attorney – ‘health and welfare’, and ‘property and financial affairs’. Both types can only legally be made when you have the mental capacity to do so. The attorney then assumes these responsibilities when you are either unable or unwilling to make the decisions yourself.

What are the Key Differences?

Lasting Power of Attorney and living trusts are often confused, but they are distinct legal tools that have different characteristics and uses.

Living trusts are commonly used for asset management or protection reasons. You might choose to settle assets in a living trust in order, for example, to protect them from creditors – although there would be legal questions to answer here.

You might also use a living trust for reasons of guardianship. You might, for example, write a trust document that stipulates that certain assets will be settled into the trust in the event that you become incapacitated. Provided that you appoint trustees in whom you have complete trust, you can therefore ensure that your financial affairs are managed in a suitable way if you become unable to make decisions for yourself.

Lasting Power of Attorney, meanwhile, could allow you to pass on ever more responsibility to someone else. Living trusts are limited, in that the trustees only have control over the assets that are settled in trust. A property and financial affairs LPA, meanwhile, could enable you to pass responsibility for virtually every financial decision to another person. This might include whether to sell property, how to pay bills, and so on. Furthermore, a health and welfare LPA can give your attorney the power to make decisions about things like medical care, and where you are treated. It is important to note, however, that health and welfare LPAs will only come into force if you are no longer capable of making your own decisions; you cannot hand over this responsibility simply because you don’t want to make the decisions yourself.

Which Should I Use?

This depends on your aims. If you are concerned about the management of a specific asset, or group of assets, then a living trust may well be sufficient. But you should be aware that a living trust may not be able to fulfil all of your wishes.

Many people want to be sure that they will be looked after, and that their affairs will be handled in a reasonable, sympathetic way, if become incapacitated. In these cases, you should seriously consider using a Lasting Power of Attorney. These enable you to pass on a significantly wider range of responsibilities to the individual of your choice.

At all times you should remember that both a living trust and Lasting Power of Attorney are powerful legal tools with major potential implications. You should seek independent legal advice before taking any action.

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