Planning For Disability Part II
© 2005 Justin Dituri
In the first installment of this Planning For Disabilities article I discussed some legal issues you might want to consider to prepare for a time when you are mentally or physically incapacitated, and unable to take care of your financial assets.† I also looked at one of the most commonly used tools to allow one person to handle another personís assets for them, the durable power of attorney.
In this installment, I will discuss an alternative tool for the disability planning scenario, the revocable living trust.
You may have heard of revocable living trusts, and have wondered what they are.† It is actually quite straightforward.† A trust is a legal arrangement (a type of a contract) where a person, call him the Trustmaker, gives property over to a Trustee, and the Trustee must hold the property for the benefit of a Beneficiary.† A living trust is simply a trust that a Trustmaker creates while he is alive; a living trust is revocable if the Trustmaker declares that he can take the trust property back or change the terms of the trust arrangement.† Usually, there is a written trust document that instructs the Trustee as to when and how he should distribute the trust property to the trustís beneficiary (or beneficiaries).
Many people have heard that revocable living trusts are only used as a tool for avoiding probate when someone dies, or as a tool for minimizing estate taxes.† People are sometimes surprised to discover that there are a number of ways to avoid probate other than with a revocable living trust, and that a revocable living trust-in and of itself-will not necessarily minimize any federal estate tax burden when someone dies.† The details about the proís and conís of avoiding probate or how to minimize federal estate taxes are beyond what I will cover in this article.† I bring this up to show how any legal tool (revocable living trusts, wills, powers of attorney, to name a few) can be used to address many different problems, and usually do not exist to only solve one or two specific problems.† Disability planning is a situation where we can see this.
When a trust is created, the Trustmaker, Trustee, and Beneficiary can all be the same person.† This is very often the case when someone has an attorney create a revocable living trust for them.† The trust can then have a provision to appoint a new trustee if the original Trustmaker ever becomes mentally incapacitated.† So, if the Trustmaker becomes incapacitated, their property is now in a trust with a Trustee they chose before the incapacity set in, handling the property for them.
The revocable living trust can solve some of the problems of a general durable power of attorney that were pointed out in the first installment of this article.† When someone creates a revocable living trust they are not giving someone immediate, broad, authority to deal with any of their assets.† Generally, people do not name someone other than themselves as trustee of their revocable living trust unless they clearly want someone else controlling their property while they are well.† Also, the trustee of a revocable living trust only has the power to deal with property that has the name of the trust on it.†
You could create a revocable living trust with yourself as Trustmaker, Trustee, and Beneficiary, and hold the title to a bank account or brokerage account in the name of that trust.† In this way, as long as you are alive and well, you are in control of whatever is in the name of the trust.† But, if you become incapacitated, a person you named as your successor trustee, will be able to control the trust property.† You could still be the Beneficiary of the trust, and the trust document could say that the Trustee can only distribute the trustís assets to you (not to themselves).
Financial institutions holding accounts in the name of a revocable living trust should have no problem working with your successor trustee.† This is because the account is owned by the trust, and the financial institution must deal with the trustee.† This is different from a power of attorney, where you own the property and the bank can decide whether or not it wants to work with the person you have named as your agent in the power of attorney.†
Also, with a revocable trust there can be more flexibility to define when you are incapacitated, and to describe how you want your assets to be used for your care during any time that you are disabled.† It is unusual to see provisions such as these in a durable power of attorney.
I do not mean to say that trusts are good and powers of attorney are not good; I want you to see that both are tools that have proís and conís.† A possible downside of revocable living trusts is that the Trustee only has control of property that you place in the trust.† Attorneys usually call the process of transferring the title of assets from the Trustmakerís name to the trust as ďfundingĒ.† A revocable living trust will only be effective for minimizing hassles for your family during your incapacity if it is funded.
Here are some situations where a revocable living trust might be only partially funded, or not funded at all.† Sometimes people will have a revocable living trust prepared for them, but no one gives them any guidance or instruction to fund the trust and it does not get done.† Other times, people will have a revocable living trust prepared, and the person preparing it will provide some guidance, but will leave the actual work of changing title to the client.† In those cases, if the client does not ďget around toĒ funding the trust, it will not be funded or only partially funded.† Another scenario is that even if someone has a revocable living trust prepared for them, and the trust is completely funded, then over time assets will be sold and new assets will be acquired.† In that situation, there is a possibility that the newly acquired assets will not be owned in the name of the trust.† Finally, the Trustmaker may own some assets that either cannot be owned by the trust, or that the Trustmaker does not want to have owned by the trust.† In that case, there may still be a need to have a power of attorney to cover these assets.
So, if you are talking with an attorney about having a revocable living trust prepared, it is important to also ask about the amount of assistance the attorney will provide you to assure that the trust is funded.† If you have a revocable living trust as part of your estate plan, it is a good idea to review your assets to determine whether or not they are owned in the name of the trust, whether or not you want them owned in the name of your trust, and determine whether or not you have a need to update your trust funding.††††
†Mr. Dituri is a Colorado licensed attorney who, for the past ten years, has focused his practice on estate planning, business planning, and asset protection issues.† This article is meant to provide helpful information of a general nature, it should not be considered specific legal advice for any individual reader, and it does not create the author as the readerís attorney.† Anyone reading this article is strongly encouraged to seek out individual advice and counsel to address their own unique issues.