Estate planning generally means planning for your death and your incapacity. We all know we are going to die so most of us want to make things easier and less expensive for their families, which frequently means creating a revocable living trust. There is also a great possibility that we love cognitive abilities as we age, so we also need to create a durable power of attorney and designation of health care surrogate and your living will. With this planning though, problems can occur to the unitiated, which is just about everyone.
When you create a revocable living trust, the trust creator is typically the initial trustee. The trustee of a trust manages the trust for the trust beneficiaries. So you create the trust, you manage the trust as trustee and you are the lifetime beneficiary of the trust. Simple enough! But what if you become incapacitated and are unable to manage your finances? Then the successor trustee would typically take over and manages the trust. But problems occur when the trust creator has a sudden downturn in health. Example:
Mom creates a revocable living trust and names herself as trustee, with her Son as alternate trustee and her attorney-in-fact (i.e., the person named as her power of attorney). Mom places her bank accounts/brokerage accounts into her trust so those assets avoid probate upon her death. But Mom has a sudden stroke and is in the hospital. Now, the Son, as the power of attorney, cannot access the trust assets to help pay bills.
Wait, the durable power of attorney does not interact with the living trust?
Not really. Only the trustee of the trust controls the trust assets. So the Son, in our example, cannot go to the bank and get access to Mom's bank accounts to pay her bills. The only way for the Son to access Mom's bank accounts is for Mom to either be removed as trustee due to her incapacity or for Mom to resign as trustee if she understands the resignation.
Is there any way to avoid this?
In any estate plan, there are often multiple ways to do both plan for your incapacity and avoid probate. We often want to transfer our probate assets (i.e., assets in our own, individual name) into our trust agreement, but that can create problems in certain situations like this. One way to avoid this problem is to name your bank account(s) as payable upon death (POD) to your living trust. Here, Mom could have her real estate, brokerage accounts, stocks, etc., owned by her trust but she could name her bank account as POD to her trust. If she does this, her bank account is subject to her power of attorney. This has the twin effect of:
- Letting her Son, as her power of attorney, manage her bills when/if she becomes incapacitated; and
- Avoiding probate with this bank account upon her death
In creating your living trust, you will need profesional help in making sure your assets are correctly funded. There are multiple ways to avoid probate and good legal advice will help you and your family avoid difficult circumstances.