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By: FEDweek StaffIncompetency protection—guarding against the chance that you might lose the ability to manage your own affairs—can be valuable to both you in your lifetime as well as for estate planning purposes. You might make bad investments, become the victim of a scam, or lose out on benefits due to you, which in turn would affect what is left for your survivors to inherit.
One strategy is to create a durable power of attorney. This document appoints one or more competent adult individuals (the “agent” or agents) to act on your behalf. The named agent can perform any legal task that you have the right to do, such as sign checks, gain access to a safe deposit box, collect Social Security, file tax returns, and so on.
A “durable” power is different from other powers of attorney in that it continues to be valid even if you, the “principal,” become incapacitated.
If you want to prepare such a durable power of attorney but you do not want the agent’s authority to take effect until you become incapacitated, you can create a springing power of attorney. This type of power becomes effective only upon certain events. You might specify, for example, that two doctors must certify in writing that you are incompetent.
Don’t create a revocable living trust for tax benefits, because such trusts don’t save estate or income tax. So why would you consider this type of trust?
* Probate avoidance. Assets held in trust aren’t subject to the time and expense of probate, which may be substantial. At your death, a successor trustee takes over the trust assets without court oversight. Moreover, if you place any property you own in another state into the trust, that property will avoid “ancillary” probate, which generally affects out-of-state holdings.
* Incompetency protection. If you lose the ability to manage your own finances, a successor trustee will step in. That trustee will have a fiduciary responsibility to manage trust assets for your well-being.
If you do create a revocable living trust, it’s critical to re-title assets so they’re held by the trust. Otherwise, you and your heirs won’t get the advantages such a trust can offer.
The following steps outline the steps needed to create a revocable trust if you decide to go that route. You’ll want to first clarify that the trust’s purpose is to manage your assets if you become incapacitated while still allowing flexibility during your lifetime. Next:
Choose a Trustee and Successor Trustee
- You serve as the initial trustee while competent.
- Name one or more successor trustees (family member, friend, or professional) who will step in if you are declared incompetent.
Draft the Trust Agreement
- Work with an attorney to create the document.
- Key provisions should define how incompetency is determined (e.g., certification by one or two physicians).
- Grant the successor trustee authority to manage, invest, and distribute assets for your benefit.
Fund the Trust
- Retitle assets (bank accounts, investments, real estate) into the name of the trust.
- Assets not transferred won’t be covered by the trust.
Make sure you don’t do this in isolation. Coordinate it with other related documents such as power of attorney and healthcare directives. Finally – although tempting with this sort of thing – don’t just file and forget it. Make it a point to review it once in a while, around tax time perhaps.
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