Our estate planning always includes planning for a client’s potential disability and particularly mental incapacity and the inability to manage their financial affairs. Statistics say people over 65 are 50% more likely to be disabled for some period of time before their death than younger clients. While physical disabilities may not be as impactful on the client’s ability to manage a client’s financial affairs – mental illnesses, dementia and diseases causing cognitive impairment can often lead to incapacity. Clients are typically informed about the privacy, administrative and cost and efficiency of avoiding probate when creating revocable living trusts (RLTs), but not as many know or consider the power of an RLT to plan for a client’s incapacity. But RLTs are highly effective tools to protect a client’s assets against incapacity. We tell our clients that RLTs can be even more powerful and effective than a Statutory Durable Power of Attorney (for financial decisions), although a client should have both. We often refer to our RLTs as a “Super Power of Attorney”. RLTs offer the client (the Trustmaker) the freedom and flexibility to manage their own assets while they can, but provides a financial safety net when and if the client loses capacity by naming a successor or Co- Trustee who can immediately and easily step in and take over the assets.
It is important to understand that incapacity can be difficult to diagnose. That makes the language defining incapacity and detailing when the successor Trustee or Co-Trustee can take over is critical. Sometimes, for example, it is common to include a requirement that a medical professional’s determination of incapacity is required. However, older clients often become resistant to seeing medical professionals, especially if they suspect their autonomy is at risk. We often include provisions allowing the successor Trustee or Co-Trustee to make the determination under certain circumstances. RLTs offer several other advantages over a POA:
- The trust terms can clearly express a client’s intentions regarding the management and use of the trust assets. By contrast, a POA typically only authorizes the agent to act, but does not provide any specific direction and guidance.
- A POA authorizes the agent to assist with financial transactions (ex. selling a home), by representing the client and signing documents on behalf of the client. But often title companies and banks will not honor the state specific POA. Although for assets outside a RLT a POA may be the only choice and so are clients always have both.
- Also, if the client is a victim of fraud or identity theft, RLTs may provide protection against identity theft and fraud if the trust has a taxpayer ID independent of the client’s taxpayer ID and Social Security number.
Clients often believe that simply adding a trusted family member as a joint owner to their financial accounts and creating Ladybird and TOD deeds for their property provides the same level of protection without the expense of creating a POA or an RLT. However, a joint owner does not have any fiduciary obligation to use the assets on behalf of the client. Only a POA or a Trustee are bound by this requirement. In addition, the joint owner has no authority to act on behalf of the client.
By planning ahead and creating a POA and a RLT while a client has capacity, you will help ensure your client’s assets will be better protected. Our law firm is available to assist you and your family members with your planning. Call our firm and make an appointment today.