As they age, some seniors become less and less able to manage their own assets. Attorneys frequently use the phrase “incapacity planning” to indicate estate planning done for a client diagnosed with dementia, or with other mental or physical disabilities, who will require another responsible adult to eventually manage his financial (and legal) affairs.
THE FINANCIAL POWER OF ATTORNEY
The Financial Power of Attorney (FPOA), also called a Durable Power of Attorney (DPOA), allows a fiduciary, called an “agent”, to manage an impaired senior’s financial and legal affairs. The term “fiduciary” refers to a person who must act in the best interests of the principal when managing his assets. While the FPOA remains the most commonly known tool for managing an incapacitated senior’s assets, management through a Revocable Living Trust (RLT) can offer significant advantages.
HOW A REVOCABLE LIVING TRUST WORKS FOR INCAPACITY PLANNING
After a RLT is set up, the client’s assets are moved into the trust, and those assets are then managed by a fiduciary called a “trustee”. During the senior’s lifetime, and while the senior is mentally able, he serves as trustee for his own assets.
A spouse, and/or a trusted adult from a younger generation (such as the senior’s child), may also be added to the trust document as current co-trustees (along with the senior.) Then, at any time that the senior needs help managing his or her assets, a responsible co-trustee is available, and can step in immediately to help out, with no delay and with no additional legal requirements.
MANAGING FINANCIAL ASSETS THROUGH A REVOCABLE LIVING TRUST: ADVANTAGES
Using a RLT for incapacity planning conveys the following advantages:
- Higher Level of Authority. In both U.S. and European law, a trustee is generally provided a higher level of authority to manage assets than a FPOA agent, and a trustee usually receives a higher level of respect and deference;
- Clear Directions for Managing Assets. Trust documents normally give the trustee detailed directions for managing the senior’s assets. In contrast, FPOA documents typically do not provide any directions to agents regarding how the senior’s assets are to be managed or used.
- Banks Prefer Dealing With Trustees. Banks, brokerage firms, and other financial management firms greatly prefer dealing with trustees over agents, for these reasons, and with these results:
- FPOA Documents Are Frequently Associated With Fraud. FPOA documents are inexpensive, easy to obtain, and frequently forged. Seniors often sign these documents without understanding the repercussions, or are inappropriately pressured to sign these documents by unethical agents. In contrast, RLTs are more commonly drafted by attorneys, and signed in the lawyer’s office, thereby lowering the risk of fraud.
- Legal Department Review May Take a Significant Amount of Time. Because of the fraud risk associated with FPOAs, a financial institution’s legal department may take a significant time, sometimes months, to review a FPOA. When reviewing the application for a new RLT trustee, if any documents are required to be reviewed at all, a fairly straightforward review of the Certification of Trust document (a summary of trust terms), along with any required personal identification information, can be all that the financial institution needs.
- The Bank’s Own Form May Be Required. Because of the ongoing fraud risks, some financial institutions may require the use of their own FPOA forms, and not accept outside FPOA forms. If the senior has already become incapacitated, he or she will not be able to sign a new bank FPOA form. In contrast, such rules do not apply to RLTs.
- FPOA Forms May Become Outdated. Because of the ongoing fraud problem, some financial institutions may not accept FPOA forms which are greater than a certain number of years (5 years for example) old. If the senior has already become incapacitated, he or she will not be able to sign a new FPOA form. In contrast, however, even very old trust documents are commonly relied on.
Even where a RLT is successfully used for incapacity planning, a valid FPOA document signed together with the RLT remains useful in certain areas. The trustee provisions of the RLT only apply to the assets which are held by the trust (the trust estate.) Any of the senior’s assets not held within the trust (the probate estate) may still need to be managed through the FPOA. In addition, the FPOA may convey important authority to the agent to manage the senior’s legal affairs, in ways that may not be addressed by the RLT.
Because these subjects may be complicated, incapacity planning should be discussed directly with a licensed elder law, or estate planning, attorney.