In my previous article I addressed the importance of having a will and estate planning. As part of the estate planning process, a Power of Attorney will likely by discussed and possibly the use of a Living Trust. It is important to understand each of these instruments.
Power of Attorney
A Power of Attorney (POA) may cover financial affairs and health care, or separate documents may be prepared authorizing chosen persons and identifying their lawful abilities to act on one’s behalf. A POA may be effective immediately, or upon a future event such as a medical assessment documenting one’s mental incapacity. Authority to act based on a POA is terminated upon death of the client or loved one.
A POA has limitations. Often financial institutions won’t accept them unless their in-house form is used or they will require payment for legal counsel to review it. The Social Security Administration (SSA) does not recognize POAs, instead a Representative Payee Account must be established for the financial agent to receive deposits or checks.
If the POA becomes effective upon determination that the client or loved one is mentally incompetent, it may be an unpleasant task to obtain that determination, especially if they are in the transition phase of some good days and some not so good.
Living Trust, aka Grantor Trust
A Living Trust typically refers to a revocable legal arrangement established by the grantor during their life and may be revoked by the grantor as long as he or she is legally competent to do so. The Trust may terminate or continue upon death.
A Trust is a separate legal entity with a written governing instrument simply called the Trust document. It must conform to state and federal laws. As with wills, using do-it-yourself Trust documents is fraught with opportunities to make colossal mistakes. You should engage an experienced attorney specializing in Trust and estate matters to craft a Trust document specifically tailored to your needs and desires.
If you have any type of Trust, or are a Trustee, you should read the Trust document and refer to it often. The Trustee ideally should either be familiar with laws governing Trusts or engage a professional to assist them who is. The Trustee has a fiduciary obligation to the beneficiaries of the Trust and can be held personally accountable for errors or omissions.
The Trustee also has certain legal notification and reporting obligations to trust beneficiaries that may not be spelled out in the Trust document. The Washington Trust Act made significant changes to probate and trust laws. The Act became effective January 1, 2012 and certain provisions apply to revocable trusts that become irrevocable after that date.
The laws also afford certain protections to the Trustees, if properly followed. Again, do-it-yourself software does not establish a connection with a professional. Who better to educate, guide and be accessible to the laymen Trustee then the one who drafted it?
Living trusts are set up for a variety of reasons, among others:
1. To avoid probate if all assets are in the Trust, including probate in other states for real property such as a second home (called an ancillary probate);
2. To avoid certain issues with institutions refusing to honor a POA (the Trust document is provided and proof of the individual being Trustee);
3. To avoid the work entailed in transferring assets from the name of the descendant into the name of his or her estate (the grantor completed the necessary paperwork when he or she transferred assets to the Trust);
4. The Trustee continues to have access and control over assets immediately after death just as they did prior to transfers to the trust or, if the Trustee is newly appointed, they immediately have access and are able to execute transactions;
5. To avoid challenges to an individual’s will (however, a Trust may also be challenged – and a will or Trust are vulnerable if there is any wrong doing); and
6. To avoid public disclosure of the assets.
A revocable Living Trust, contrary to many promotions, does not save income or estate taxes any more so than a properly crafted will and estate plan. While the grantor is living, all activity is reported on the 1040 of the grantor as if the Trust did not exist.
Whether or not you incorporate a Living Trust into your estate plan should be carefully considered and discussed with a knowledgeable and experienced professional. The good news is, if you change your mind, you can revoke, modify, or redo a Living Trust while you are still alive.
Ken Meissner, CPA is a partner at Alegria & Company and specializes in business and personal income tax and is a Certified Specialist in Estate Planning. He can be reached at firstname.lastname@example.org