Estate planning involves a lot of paperwork, and it can be hard to tell the difference between the documents involved. In this post, I'm explaining the difference between two of the most common estate planning documents: wills and powers of attorney.
Here’s the short answer to this common question: both wills and powers of attorney appoint someone to deal with your property, but a power of attorney does so while you are alive, and a will only has effect after your death.
The chart below outlines the main differences. Keep reading for the longer explanation.
A power of attorney appoints someone to manage your assets for you if you’re incapacitated. The goal is to avoid having to go to court to get this authority- you’re granting it yourself, to the person you’ve chosen (your agent). Having a power of attorney is both less expensive than the alternative (going to court) and more powerful (since you choose exactly the powers you wished to grant to your agent).
A properly drafted power of attorney will allow your agent to do the things that you do yourself every day: pay your mortgage, manage your bank accounts, and have access to your financial information. The goal is to allow the agent you’ve chosen to manage your finances when you are incapacitated without the oversight of the probate court. The authority granted by a power of attorney is generally very broad, because we cannot anticipate what your agent might need to do, and should give the agent as much authority as you are comfortable with.
Powers of attorney are long and quite specific. Financial institutions like to see that you have specifically authorized the action your agent wants to take (opening an account, accessing your tax information, etc.), so a good power of attorney will be at least a few pages long, and probably longer.
(You can also grant a limited power of attorney; for example, you could authorize an agent only to deal with a specific piece of property you own out-of-state. In most estate plans, however, we’re talking about a broader durable power of attorney that applies to all of your assets.)
Wills, on the other hand, exist mainly to guide the distribution of your property after you die. They have no effect during your lifetime, with the exception of guardianship of your children if you’re incapacitated. (I use a different document to handle this, so that you don’t have to file your will - probate court filings are public - during your lifetime.)
Wills also do not, unlike powers of attorney, prevent your family (or whomever you appoint) from having to go to court. Your will acts as a guideline to direct the distribution of your assets after your death during the probate process.
So: which do you need?
A good, complete estate plan will have both. Estate planning should protect you during your lifetime and carry out your wishes after your death, and multiple documents are required to do that.
You should have a power of attorney in case you’re temporarily unable to manage your own finances during your lifetime. Particularly if you’re older or in poor health, it’s vital to have your power of attorney drafted while you’re still healthy and able to do so. If you are unhealthy and unable to get to the attorney or if you’re mentally incapacitated (for example, suffering from dementia), or, of course, if you’re unconscious, you do not have the required state of mind to make a power of attorney. It has to be done in advance.
You should have a will in which you state who you want to give your assets to when you die. This is especially important if you want to give money to friends or to charity, or anyone who’s not your immediate next-of-kin. If you do not have a will, the state intestacy codes- basically a will the state has written for people who have not written their own wills- will determine who gets your property.