At TrustCounsel, we recommend revocable living trusts for the majority of our clients. A fully funded living trust avoids the time, trouble, and cost of a probate proceeding at the death of the grantor. However, this is not the only advantage of a living trust. Living trusts are a great tool for managing assets in the event of incapacity.
If someone becomes mentally incapacitated with no legal documents in place, he or she must be declared incompetent by a court and have a guardian appointed to ensure ongoing management of his or her affairs. This is similar to a probate proceeding, but while the person is alive, and can be an emotional process for both the individual whose capacity is being determined as well as their family. There are many rules and filing requirements that must be observed, as well as court costs and attorneys’ fees.
A comprehensive durable power of attorney (POA) can often avoid guardianship. However, there are many issues with getting third parties, such as financial institutions, to accept POAs. A POA generally must be submitted for review, which can take a week or more. Even after review, it’s not uncommon for a financial institution to reject the POA for one or more reasons that have to do with their own policies rather than state law. Even though state law provides a remedy for an unreasonable refusal to accept a power of attorney, it involves filing suit against the third party, which results in additional delay and expense.
When a family member needs to access a bank account to pay bills, a delay of weeks or months is unacceptable.
When the grantor/initial trustee of a living trust becomes incapacitated, depending on the terms of the trust, often the successor trustee need only obtain a statement from the grantor’s physician that the grantor can no longer handle his or her own affairs, and then execute a Certificate of Trust stating that he or she is now acting as trustee. The Certificate of Trust, provided for by state law, shows the legal authority of the successor trustee to act. When submitted to a financial institution, generally there is no lengthy review period, and objections are few, so the successor trustee can start acting quickly.
Of course, our clients with living trusts also have POAs, to cover any assets that aren’t in the trust for whatever reason, as well as dealing with things like insurance and taxes that aren’t related to the trust.
So, the bottom line is that living trusts are the best way to manage assets in the event of incapacity. But if you don’t have a trust, at least make sure you have an updated, comprehensive power of attorney.