Does a Living Trust Replace Power of Attorney?
Which Is Better: RLT or POA?
When someone thinks about the reasons to create a living trust, it’s not common to first think about making it easier for loved ones to transact for you during your lifetime when you become incapacitated. In fact, when most people think about the living trust, they first think “avoid probate.” And when someone thinks about having another transact for them in the event of incapacity, they think durable power of attorney.
Three Incapacity Situations
So let’s start from the beginning and discuss what can and can’t happen if at some point during the rest of your lifetime, you become incapacitated AND a transaction needs to occur on your behalf.
No Incapacity Plan
If you have no estate legal plan in place and you get to a point in your lifetime where both: you can’t transact for yourself; AND your participation is needed for a transaction (let’s say, the sale of your home or a piece of property that is in your name; the sale of stock or other investments that are in your name; accessing an IRA or other retirement account that is in your name), then a guardianship proceeding will be necessary so that a judge can appoint someone to be your legal guardian to have the authority to transact for you during your incapacity.
Guardianship Proceedings
These guardianship proceedings are difficult, typically with multiple lawyers involved and with all of the costs and delays involved in a court proceeding or lawsuit. The way they typically work is as follows:
Someone hires a lawyer who prepares a petition seeking the appointment of a guardian on your behalf. The state where you reside provides due process protections such as the right to receive notice of the petition, be represented by an attorney, have a hearing on the necessity of the guardianship, present evidence and confront witnesses. After a hearing on the guardianship matter, the court may grant the petition, modify it, grant specific powers, and the court may decide who to appoint as your legal guardian. On the other hand, the court may dismiss the petition.
The Power of Attorney Solution
Most people, however, as part of the estate planning process, create a power of attorney. One of the purposes of the power of attorney is to eliminate the need for a guardianship proceeding. With your power of attorney, you designate who can transact for you in the future. Your power of attorney will likely be used in the future if, during your lifetime, you cannot transact for yourself and your participation in a transaction is required. So long as you have someone that you trust to handle your affairs for you when you can’t (such as your spouse, one or more adult children, or another trusted friend or relative), it’s common-sense practice to go ahead and put your POA in place because we never know when an illness or injury may occur in the future that renders you incapable of acting for yourself.
Power of Attorney May Not Be Perfect Solution
But a POA is not always a perfect solution for your future incapacity planning. Reasons a third party, like a bank or brokerage firm, refuse to honor a power of attorney can include: they say the POA is too old or it’s stale - the financial institution fears the liability that could result from relying on an old power of attorney that may have been revoked or updated. Or maybe the financial institution argues that the POA does not have the appropriate language or wording that the financial institution needs to see in the POA document. OR sometimes the financial institution will want their customer to sign the financial institution’s own POA form. But if you are incapacitated, you won’t be able to sign their POA form.
States Enacting Legislation Strengthening Powers of Attorney
This could be a big problem - you did everything you thought you were supposed to do and now third parties are not honoring your well-drafted legal documents. I will say that some states are enacting legislation to eliminate this problem.
Revocable Living Trust for Incapacity Planning
So now let’s discuss how a revocable living trust may play into your future incapacity planning. Let’s start by establishing that the primary reason most people set up a RLT is to enable their survivors to avoid the court and attorney-involved probate process when they pass away. Assets titled in the name of your trust avoid all that. You designate a successor trustee of your trust who, immediately after you die, can manage trust assets and distribute them to trust beneficiaries in accordance with the terms of your trust instrument. But another benefit to creating your trust during your lifetime, and transferring title of your home, investment accounts, businesses, and other assets to your trust during your lifetime is that a well-drafted trust will also provide that while you are alive but incapable of transacting as the trustee of your trust, your successor trustee can step in and transact for you.
Revocable Living Trust and Power of Attorney
So the solution for many includes creating your living trust - not only for probate avoidance purposes - but to make it easy for your successor trustee to manage your trust assets during your lifetime if you become incapable. Of course you will also want to have that DPOA in place so that your agent will have the best chance of handling non-trust matters without difficulty.