Most estate plans need both a power of attorney and revocable living trust. The real issue is which 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. Let’s take a look at the pros and cons 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. We’ve discussed in the past 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 will focus on which of the two tools is most effective in achieving your goals.
The POA is a time-tested legal document. Each state has settled law. Since 2006, over half the states updated their laws by enacting versions of the Power of Attorney Uniform Law. Estate planners are very comfortable with the document and recommend one for every estate plan. It is widely recognized by financial firms and other businesses.
Once you sign the POA, you let the agent know about it and where copies are located (or give the agent a copy). The agent or agents can step forward at any time to take action. (You can change or revoke the POA any time you have legal capacity.)
That’s all great in theory, but there are some disadvantages.
authority, no one has to acknowledge it. Financial firms, especially since the financial crisis and the publicity received by cases of fraud and abuse, developed their own standards for accepting POAs.
Many firms now won’t recognize a POA that isn’t recent. Many require the POA to be signed within the last six months, but I’ve talked to financial firms that require the POA 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 POA executed in another state or when the agent is based in another state.
Of course, before taking actions your agent has to convince the financial firm that he or she is the person empowered by the POA.
The agent can sue to have a POA recognized. But that will take time and money, defeating the purpose of the POA. Also, courts give financial firms a lot of leeway in declining POAs, 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 POA 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 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 actions 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 POA, 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 the latest version and is genuine. 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 in place.
I also recommend you consider a transition strategy that might be more effective and efficient.
After identifying your trusted person, establish a revocable living trust naming the person as current trustee. You and your spouse can be co-trustees if you prefer. This way, when the accounts are established in the trust’s name, the person already is known to the financial firms and is on the account records as an active trustee. That makes succession issues less likely.
There are three routes you can take when executing the transition strategy.
The first route is for you to be a co-trustee and continue taking all actions as though nothing’s changed. You retain control of the paperwork, online passwords and the like. But the other trustee is on record as empowered to act and knows where all the information and documents are located. He or she can take over as soon as you need. Periodically, you should review everything with the co-trustee and explain any changes. It also is a good idea to have the co-trustee occasionally make transactions to ensure they’ll be accepted.
A second route is to have the trusted person be the main or sole trustee from the outset.
You determine the extent of your involvement and can change it over time. You can take an oversight role by receiving account statements and reviewing information online, for example. Or you two can discuss all actions before they are taken, and the trustee then pays bills, manages investments and takes other actions as agreed. Over time, as you are less able to handle matters and are comfortable with the person, you can reduce your role. Remember, the trust is revocable so you can take back everything if you become uncomfortable.
The third route is more of a hedge and hybrid. You create a revocable trust with the trusted person as sole trustee. But the trust has only one checking account funded with enough money to pay six to 12 months of expenses. Then, when you are unable to manage affairs, the trustee pays bills without delay. Some planners refer to this as a disability trust.
Meanwhile, most of your assets are covered by a traditional POA and revocable living trust and have the usual transition process. There’s less stress and time pressure to have that transition completed because you’ve ensured regular bills will be paid for an extended period.
A variation of the third route is for the trust not to have a funded account initially or to have one with a minimum balance. A different person has a POA that authorizes the transfer of money from one of your main accounts to the trust account. When you are unable to pay the bills, the POA agent transfers money to the trust, and the trustee begins paying bills. This route has additional controls because two people are involved.
These transition approaches are consistent with the way events develop for most people. Most people don’t go suddenly from being in full control of their affairs to being unable to manage them. Most people experience a gradual decline. They need a little help at first, gradually need more, and eventually it’s time to turn things over to someone they trust.
The transition approach lets you gradually turn responsibility over to someone. Over time. you are able to work with them, educate them, monitor them and overcome many of the practical problems with POAs and trusts.
The most important step is to start early. If you wait until help is needed, it often is too late to set up an optimal plan. To avoid wasting your assets and placing a great deal of stress on your loved ones, decide now on the plan you prefer and put it in place.