Which is the best way to protect your assets, smooth the estate planning transition, and make life easier for you and your heir – a Power of Attorney or a Living Trust
Power of attorney or revocable living trust?
Truth is, most estate planning need both a power of attorney and a revocable living trust.
So the better question is: Which one should cover the bulk of your assets?
Over the years, I’ve heard from many people with practical experience, and I’ve recently had some personal, hands-on experience with this issue.
Today we’ll review the pros and cons of the power of attorney and revocable living trust — so you can determine the best strategy for you.
Bills have to be paid and assets managed when you aren’t able. Without an effective tool to manage the transition, your family has to undergo the cost, delay and publicity of asking a court to appoint a guardian or custodian.
The power of attorney (POA) authorizes one or more people to be your agent and take actions on your behalf.
The main goal of a revocable living trust is to avoid probate. But it also should have a provision that provides for a successor trustee or co-trustee to manage things when you can’t.
There’s a tension in both of these tools.
You want to be sure someone can control the finances when needed, but you also want to avoid fraud, theft and abuse.
In the past we’ve discussed the importance of carefully considering to whom you give these powers, and ways to create checks and balances, as well as other safeguards.
Today, we’re going to assume you identified the right person (or persons), and we’ll focus on which of the two tools is most effective in achieving your goals.
The power of attorney is a time-tested legal document.
Since 2006, over half the states updated their laws by enacting versions of the Power of Attorney Uniform Law.
Estate planning professional are very comfortable with the document and recommend one for every Estate Planning Strategy. It is widely recognized by financial firms and other businesses.
Once you sign the power of attorney, you let the agent know about it and where copies are located (or simply give the agent a copy).
The agent or agents can step forward at any time to take action. (You can change or revoke the power of attorney any time you have legal capacity.)
That’s all great in theory, but there are some estate planning disadvantages.
Financial firms, especially since the financial crisis and the publicity received by cases of fraud and abuse, developed their own standards for accepting power of attorney.
Many firms now won’t recognize a power of attorney that isn’t recent. A lot require the power of attorney to be signed within the last six months, but I’ve talked to financial firms that require the power of attorney to be no more than 60 days old unless it’s been certified by a bank officer.
Many financial firms have additional requirements.
Some require that you execute their forms, and require those forms to be re-executed every year or so. Some firms won’t accept a power of attorney executed in another state or when the agent is based in another state.
Of course, before taking action, your agent has to convince the financial firm that he or she is the person empowered by the power of attorney.
The agent can sue to have a power of attorney recognized. But that will take time and money, defeating the purpose of the power of attorney.
Also, courts give financial firms a lot of leeway in a declining power of attorney, and your agent will have to pay the firm’s legal fees if the court sides with the firm.
You might overcome many of the problems by working with your financial firms while you’re healthy instead of keeping the power of attorney in a file until it’s needed.
Ask firms what their standards are for POAs, and then comply with them.
The revocable living trust also is well-established.
Versions of the revocable living trust have been around for centuries. Financial firms are used to dealing with them.
In the revocable living trust, you and your spouse are the initial trustees and beneficiaries. You can do anything with the assets outright owners can, but you take action as trustees instead of individuals.
When you aren’t able to manage the assets, a successor trustee or co-trustee you named in the trust agreement is authorized to act.
As with the Power of Attorney, the transition might not work smoothly in the real world.
First, the successor trustee can manage only assets to which the trust has legal title.
Many people have living trusts drafted, but then don’t have ownership of bank accounts and other assets transferred to the trusts. The successor trustee has no ability to manage those assets.
Second, for the successor trustee to act, there often needs to be a finding that the initial trustee isn’t able. That usually requires certification by two doctors.
Third, the financial firm has to be satisfied that the trust agreement is genuine and the latest version.
Also, the firm has to be satisfied the person seeking to ask is the person named in the trust agreement.
The good news is many firms require significant documentation when an account is opened for a trust, such as copies of the trust agreement, or have their own paperwork that contains all the key points, including the identity of the successor trustee.
All that paperwork can make the transition easier, because the firm has the details and documents.
You can see either tool has some disadvantages in practice.
That’s why I recommend that you act well before there’s a need. Learn everything your financial firms will require, and have it all in place.
I also recommend you consider a transition strategy that might be more effective and efficient.
We’ll cover those steps in more detail in Part 2 of this article coming up next week.