April 4th, 2022

Incapacity Planning for Seniors – The Revocable Living Trust Reigns Supreme

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Author: Sarah J. Broder

Daughter caring for her mother

The Pandemic was the latest chapter reinforcing the use of Revocable Living Trusts (“RLTs”) for seamless management and administration far beyond the benefits of a Durable Financial Power of Attorney and Will for seniors.  Specifically, it can be difficult or burdensome for seniors, alone or in a group setting, to manage their finances and other property (e.g., real estate) as they age. While a Will can be a great tool to direct the disposition of a senior’s assets (other than assets that are jointly titled or have beneficiary designations) upon his/her death, it fundamentally cannot assist a senior with the management of his/her property during his/her lifetime. 

This is the situation where RLTs can be particularly useful. In its simplest form, an RLT is a financial arrangement whereby an individual (the “Grantor,” “Trustmaker,” or “Settlor”), during the individual’s lifetime, transfers assets to an individual (a “Trustee”) to hold, manage, and use the assets for the benefit of one or more individuals (the “beneficiaries”). Use of the RLT tempers the need for the Power of Attorney and the issues that often result therefrom.

Consider the following situation:

Irene is 85 years old and lives by herself in her own apartment. None of her three children live close by, with her closest child, Robert, living one hour away. Assume Irene is capable of going to the grocery store, bank, and other errands on her own. Robert only needs to check in on her from time to time. Then, assume that Irene falls in her apartment and ends up spraining her hip. Irene is no longer able to run basic errands on her own. Without an RLT, Robert is unable to use Irene’s assets to purchase groceries for her, or to pay her mortgage, utilities, and other bills. However, if Irene had established an RLT prior to her accident, wherein she named herself and Robert as Co-Trustees, Robert would have the authority to use Irene’s money for her benefit, without needing Irene to accompany him to the bank, grocery store, or any other place. If Irene’s capacity to manage her property deteriorated in the years following the accident, Robert would have the ability to take over management of Irene’s assets (including selling her apartment and moving her to an assisted living facility, for example) without the need to obtain a guardianship from the Court. The transition would be immediate and seamless, and Irene’s money would be safely managed by someone she trusts.  

Can’t We Just Add Robert to Irene’s Accounts?

A common question to a scenario like the one above is – why can’t Irene just make Robert a joint owner on her bank accounts? Won’t this allow Robert to manage Irene’s assets and use her money to care for Irene?

While adding Robert to Irene’s accounts solves one problem – allowing Robert to manage Irene’s money – it creates another – unintentionally changing the structure of Irene’s estate plan. Upon Irene’s death, the accounts on which Robert is named will automatically become Robert’s property, which means Irene’s two other children will be excluded from receiving an interest in those assets. Consider also the potential gift ramifications, including from a tax perspective, for Irene.

Also, adding Robert to Irene’s accounts does not permit Robert to assist Irene in selling her house, if necessary, or moving her into an assisted living facility.

What about a Power of Attorney? Can’t Irene Designate Robert as her “Agent” to Manage her Finances?

On paper, a Financial Power of Attorney (also called a “Durable Power of Attorney”) can function in the same manner as the RLT described above. Irene could sign a Power of Attorney, naming Robert, as her “agent,” to act on Irene’s behalf and manage Irene’s property during Irene’s lifetime. Robert would have the legal authority to manage Irene’s property as he saw fit.

But, an RLT is usually a better option because:

  1. Trustees Have More Authority: As Trustee, Robert would generally be afforded a higher level of respect and deference by financial institutions holding Irene’s assets than he would as her Agent under a Power of Attorney. This is generally due to the other reasons set forth in this list.
  2. More Directions on How to Use Irene’s Money: When Irene creates the RLT, she can express her intent on exactly how Robert should use the money for her benefit and what should happen to the money during her incapacity and even upon her death. With a Power of Attorney, Robert is given very broad authority, but generally with little direction from Irene about how to use it or under what circumstances.   
  3. Powers of Attorney are Often Associated with Fraud: Because they are relatively inexpensive to prepare (often, even free as a statutory form available from the State) and require little involvement from the senior (called the “principal”), it is no surprise that these documents are frequently forged or obtained from seniors under pressure or duress. In contrast, RLTs are almost always drafted by attorneys, and involve numerous meetings between the attorney and the senior before the senior signs them.
  4. Powers of Attorney are Only Useful to the Extent They Are Accepted: In light of the fraud risks noted above, many financial institutions require that an account owner sign the institution’s internal power of attorney form rather than accept externally prepared powers of attorney.  If the senior has already become incapacitated, he or she will not be able to sign a new bank form.  In contrast, such rules do not apply to RLTs.

Of course, every situation is different, and it is important to consult a knowledgeable estate planning attorney before implementing any estate plan.