While everyone should have a durable power of attorney that appoints someone to act for them if they become incapacitated, in some circumstances, it is not enough. In these cases, a revocable trust can help.
A durable power of attorney allows you to appoint someone you trust to step in for you to handle financial and legal matters if you become incapacitated. We all are at risk of incapacity from illness or injury, whether temporary or permanent. Of course, this risk rises as we get older. Without someone in place to handle legal and financial matters, bills can go unpaid, contracts can’t be signed, homes can’t be refinanced, leases can’t be terminated, investments go unmonitored and unadjusted, and families often fight over who is in charge. The remedy of seeking court-appointed conservatorship is expensive, cumbersome, and time-consuming. It’s best that you pick your own person or people for this role.
Nevertheless, however important taking this step can be, it’s not always enough. There are several reasons for this. First, financial institutions sometimes don’t honor older powers of attorney. Second, the Power of Attorney may not grant the specific authority needed to handle a specific transaction. Third, the Power of Attorney ends at the death of the person who established the Power of Attorney (the principal) so it cannot be used to transfer assets after death. These problems can be remedied through the use of a revocable trust.
Powers of Attorney Can Be Rejected
Financial institutions often reject older powers of attorney, claiming that they can’t know whether the document has been revoked since first signed. Financial institutions can be uncomfortable honoring powers of attorney because they do not want to be held liable for any malfeasance by the agent appointed under the document. In the opinion of most estate planning attorneys, such institutional rejection is contrary to law, but there is no good remedy when this occurs since any lawsuit against the likes of Bank of America or Fidelity will be expensive and time-consuming.
Fortunately, there are three ways to avoid this institutional intransigence:
- Refresh your documents periodically. Financial institutions are more accepting of newer documents than older ones, so it’s a good idea to execute new durable powers of attorney every five years. Of course, this is perverse. If the power of attorney is being used because of your incapacity due to dementia, you are more likely to have been experiencing cognitive challenges a year prior to its use than ten years earlier.
- Provide your Power of Attorney to your financial institution for their approval before it is needed Contact each financial institution where you have an account and provide your Power of Attorney. They will often tell you they need to have their legal department review and approve it. It will save time if you do this BEFORE the agent needs to use the Power of Attorney. In addition, the financial institution may have additional specific forms or procedures they want you to sign or implement.
- Create a revocable trust. Financial institutions seem to accept revocable trusts more readily than durable powers of attorney. Revocable trusts have the added advantage of continuing after your death and providing for your agent (trustee) to act with you or someone else as a co-trustee. If you decide to create a revocable trust, it is recommended that you also have a Power of Attorney.
A Trust Provides Financial Protection
As we age, we all become increasingly susceptible to making financial mistakes and falling victim to scammers. Having a financial advocate in place can help avoid both. An important step is to name an agent under a durable power of attorney. However, sometimes those agents don’t step in until it’s too late and the senior has already lost a significant amount of money.
A co-trustee on a revocable trust, however, is already named on the accounts and assets in the trust. Even if the co-trustee doesn’t take an active role, he or she can monitor the accounts to make sure nothing untoward is occurring. A co-trustee can also work with you to become familiar with your assets, your financial advisors, and your specific financial plans and investments. Further, when it’s necessary to step in, the co-trustee can do so immediately and seamlessly. If you have also named the co-trustee as an agent under your Durable Power of Attorney, that person can deal with assets and accounts you own outside of the trust as well as in the trust.
For these reasons, revocable trusts in addition to durable powers of attorney, are often a good planning tool. However, two caveats are in order: First, trusts only control the accounts actually held by them. So, for the trustee to be able to manage the assets, you must retitle your accounts into your trust. Alternatively, your trust can be the beneficiary of your accounts at your death. In that case, your agent under the power of attorney can deal with those accounts during your lifetime.
It is important to remember that if you have a revocable trust, you still need a durable power of attorney. This is for two reasons: First, you may not have transferred all your accounts into the trust and will need to give your agent control over those accounts and the ability to transfer them into the trust. Your agent under your durable power of attorney can also handle the signing of legal documents on your behalf outside of the trust, including signing income tax returns, deeds, contracts, and other legal instruments.
We can help you determine if a revocable trust is right for you. Call our office to schedule an estate planning consultation. We will review any existing documents you may already have and recommend options for any changes, updates, or additional documents.