Planning and preparing for the unexpected is a crucial aspect often overlooked. A revocable trust is a critical component of a comprehensive estate plan, and its significance extends beyond just asset distribution on death. While a will is an essential estate planning tool, a will only takes effect on death; a revocable trust is effective on execution and works for you during your lifetime.
Incapacity can strike suddenly due to illness, accident, or natural aging. During such times, individuals may struggle to manage their financial affairs, make healthcare decisions, or carry out other critical tasks. Without proper planning, families may face legal hurdles and financial strain when trying to assist an incapacitated loved one.
A revocable trust is a powerful tool in assisting with incapacity planning and protection, providing individuals with a safeguard against unforeseen events that might render them unable to make sound decisions.
Planning for potential disability and mental incapacity is part of a comprehensive estate plan. Women, in particular, are at a higher risk of becoming disabled, with 44% of women 65 and older having a disability. Most people understand the value of an estate plan. Nevertheless, few know how to use a Revocable Living Trust, or RLT, when planning for incapacity, as explained in the article “Incapacity Planning: The Hidden Power Of A Revocable Trust” by Financial Advisor.
Revocable Living Trusts are highly effective tools to protect assets against failing capacity. Although everyone should have both, they can be more powerful and efficient than a financial Power of Attorney. An RLT offers the freedom and flexibility to manage your assets while you can and provides a safety net if you lose capacity by naming a co-trustee who can immediately and quickly step in and manage the assets.
Cognitive decline manifests in various ways. Incapacity is not always readily determined, so the trust must include a vital provision detailing when the co-trustee is empowered to take over. It’s common to require a medical professional to determine incapacity. However, what happens if a person suffering cognitive decline resists seeing a doctor, especially if they feel their autonomy is at risk?
Do you need an RLT if you already have a financial Power of Attorney? Yes, for several reasons.
You can express your intentions regarding the management and use of trust assets through the trust. A power of attorney typically authorizes the agent to act on your behalf without specific direction or guidance. A POA authorizes someone to act on your behalf with financial transactions, such as selling a home, representing you, and signing documents. The co-trustee is the only one with access to assets owned by the trust, while the POA can manage assets outside of the trust. Having both the POA and RLT is the best option.
Trustees are often viewed as more credible than a POA because RLTs are created with attorney involvement. POAs are often involved in lawsuits for fraud and elder abuse.
Your co-trustee can be the same person as your POA.
Adding a trusted family member as a joint owner to accounts and property provides some protection without the expense of creating a trust. However, it does not create a fiduciary obligation, enforceable by law, for the joint owner to act in the original owner’s best interest. Only POAs or trustees are bound by this requirement.
Once a POA is in place, sharing it with all institutions holding accounts is wise. Most of them require a review and approval process before accepting a POA.
Benefits of a revocable Trust.
- Immediate Effectiveness: A revocable trust is active as soon as it’s created, providing immediate protection in case of incapacity. Assets held in the trust can be seamlessly managed by the successor trustee appointed in the trust document.
- Asset Management The trust document outlines how assets are to be managed. During your lifetime, you control your assets in the trust. The trust ensures a smooth transition of your asset management in the event you become incapacitated. As you age, the trust protects you. The trustee you appoint can address paying bills, managing investments, and handling day-to-day financial responsibilities.
- Guardianship. The revocable trust and a power of attorney eliminate the need for a court-appointed guardian if you cannot manage your affairs. When you become incapacitated, your successor trustee (usually a family member or trusted friend) can take over your affairs as your trust directs.
- Privacy and Avoidance of Probate: Unlike probate, which is a public process, a revocable trust allows for a private transition of asset management. This confidentiality can be crucial during sensitive times, shielding personal and financial matters from unnecessary public scrutiny.
- Healthcare Decisions: Besides financial matters, a revocable trust can address healthcare decisions. The trust document can grant authority to a designated individual to make medical choices for the incapacitated person, ensuring their healthcare preferences are honored.
Talk to us about creating an effective plan that not only addresses death but incapacity and your well-being during an emergency. There are many considerations. Call us at (212) 661-3600 or book a call with us for a comprehensive review. We are here to help.
Reference: Financial Advisor (Oct. 18, 2023) “Incapacity Planning: The Hidden Power Of A Revocable Trust
