Along with an increased life expectancy due to medical advances comes an increased chance of developing diminished mental capacity. Planning for this possibility should therefore be part of a comprehensive estate plan. While a durable power of attorney is the most familiar estate planning tool in planning for incapacity, and conservatorships are often sought for people who have lost legal capacity, people often overlook perhaps the best alternative—a funded revocable trust (also sometimes called a living trust).
A durable power of attorney allows the agent named in the document to manage the financial affairs of the principal, even if the principal is incapacitated. However, relying entirely on a durable power of attorney is not necessarily the best solution. It may be difficult to get financial institutions or other holders of assets to accept a durable power of attorney. In addition, some financial institutions will take the position that the passage of time makes a durable power of attorney "stale," and they may therefore refuse to accept a durable power of attorney that was executed several years ago. A principal could execute a durable power of attorney in one state and find it difficult or impossible to have it accepted by financial institutions in other states or countries.
A revocable trust is often introduced as a means of avoiding the delays and loss of privacy that result from probating a will. It is important to understand that a funded revocable trust can also serve a valuable function in the event of incapacity. It can:
As a result of the extensive use of revocable trusts in recent years for both estate planning and business planning, financial institutions are familiar with them and are accustomed to accepting a trustee's ongoing authority to act on behalf of a trust. The revocable trust can be provided to the financial institution at any time, and any questions or concerns can be addressed up front rather than after incapacity.
The benefits of a revocable trust generally include:
To give an example:
Settlor is competent but is concerned that he has been acting in ways that are against his best interests—making impulsive investment decisions or promising to make large gifts to acquaintances, for example. He is concerned, based on medical diagnoses or his own observations, that these problems may get worse. However, he does not want to give up the management of his investments or his ability to make gifts as long as he remains competent. Working with his Day Pitney estate planning attorney, he could amend his revocable trust to:
All told, when planning for incapacity, a funded revocable trust is likely the best solution. While the settlor is living and competent, the settlor can retain control over the trust property and the trust property continues to be treated as owned by the settlor during the settlor's lifetime for income tax purposes. Upon the settlor's incapacity, one or more successor trustees take over management of the trust property and administrative safeguards apply, all without delay, publicity or court involvement. Please contact your Day Pitney estate planning attorney if you would like to discuss this planning option.
Day Pitney Estate Planning Update
Day Pitney Estate Planning Update
Day Pitney Estate Planning Update
Day Pitney Estate Planning Update
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