Posts Tagged ‘revocable trusts’

 

A power of attorney is the most overlooked and under-loved document . . . but, oh, so important. Even then, a person with a power of attorney may not have all the fire power needed.

Also, I wrote earlier on how a power of attorney is an important way to avoid a common banking error. You can read about these make-or-break documents in less than 3 minutes right here . . . or if you want something a bit more in depth, just click on the video below and you can watch an excerpt from Elder Law University’s session on powers of attorney (the video is about 20 minutes long).

What Is A Power of Attorney?

A power of attorney (or a POA) is an instrument in which a person called a “principal” appoints a person called an “agent” or an “attorney in fact” to manage some or all of the principal’s financial affairs.

By the way, an “attorney in fact” need not be (and usually isn’t) an attorney. The word “attorney” comes from the old French Norman word “attourne” meaning “one appointed.”

Is All This Really Necessary?

Without a power of attorney, if a person becomes incapacitated many of her affairs may be unmanageable without a court-appointed guardian or conservator. This will likely involve paying an Appointed One (ok, ok . . . an attorney) to bring a conservatorship petition, court supervision of the conservator, likely payment of a bond, and add all sorts of additional pressure on the family.

It doesn’t matter a bit that the incapacitated one is married because the ability of a spouse to manage many affairs is limited.

In fact, as I have written, if a principal is concerned with managing money in case she becomes incapacitated, a power of attorney is a much better way to manage money than setting up a joint account with someone else (perhaps a child).

Broad? Or Narrow?

A POA can be very narrow. “I hereby appoint Joe to manage my checking account while I am out of the country through next month.”

A POA can be very broad. “I hereby appoint Joe to do anything and everything I could for myself until further notice.”

“Durable” confuses many. In many states a POA will become invalid after the incapacity of the principal unless the POA specifically states that the POA continues in effect after the incapacity of the principal. In any event, to use quaint terminology, a POA designed to last beyond the incapacity of the principal is said to be “durable.”

Now? Or Later?

A Principal may wish to appoint an Agent with immediate authority to act, but subject to a mutual understanding that the Agent will not do anything until needed. Thus, an “immediate” power.

On the other hand, the Principal may be a bit nervous about vesting too much power too soon in the Agent and might prefer to specify that the POA does not become effective until after the incapacity of the Principal. Thus, a “springing” POA.

My usual question to a client wanting a springing POA is: If you don’t trust the Agent NOW, how can you trust her LATER when you won’t be able to do anything about it?

Is It Christmas Yet?

By the way, unless the POA specifically allows for gifting, the Agent won’t be able to make gifts, even if the POA is otherwise broad. Gifting, by the way, isn’t referring to Christmastime, it is referring to the ability to move assets around for planning purposes . . . which could be critical.

Back to the old trust issue. Restrictions can be put on gifting. Perhaps written permission from a sibling, a trusted advisor or friend.

POAs are important. And tricky. The best approach is to have an attorney draft one for you.

Many people make big mistakes titling bank and investment accounts. Often advisors and bankers advise customers to “put your child’s name on the account” or to set the account up as a “pay on death” (or “POD”) account. However well-intentioned the advice, the results of either approach to titling an account can be surprising and unpleasant. Good intentions do not constitute good advice.

The Allure of Joint and POD Accounts

Often, the attraction is probate avoidance. Either a joint account with survivorship features or a POD account will pass as a nonprobate asset and avoid the state-mandated probate process.

With respect to joint accounts, the attraction is often convenience. Unlike a POD account, a joint account holder has immediate co-ownership rights, and, thus, immediate access to the account. An older person may feel better knowing that a trusted son or daughter has immediate access to an account “in case something happens.”

The Dangers of Joint and POD Accounts

If the POD or joint account payee is a child with disabilities, the result could be terrible for the child upon the parent’s death because the receipt of the account could jeopardize continuing qualification for public benefits such as Medicaid or SSI (to the extent those programs are relevant).

There are other compelling reasons why a “joint account” may not be the proper approach:

The co-owner child now owns the account as much as the parent. What if the child is sued? What if the child goes through a messy divorce? Or what if the IRS takes a keen interest in the child’s affairs? Those events happen to the best of children; nevertheless, in those cases the joint account will be deemed to be owned by the child.

Another problem is that the co-owner/child’s siblings may be “out of luck.” This happens all the time. For example, Mom wanted the kids to share equally, but after Mom is gone Sis suddenly “recalls” that Mom wanted her to have the accounts since she “was the one who always helped Mom.” Because Sis was a co-owner of Mom’s accounts and likely had “survivorship” rights, she owns the accounts now – and there is nothing an attorney can do about it.

A Better Way

If the goal is asset management in the event the owner becomes incapacitated, the best approach is a properly drafted power of attorney.

A “power of attorney” has nothing to do with appointing lawyers. The word “attorney” has its roots in an old French Norman word for “legal substitute”. A “power of attorney” is simply a document signed by someone called the “principal” appointing an “attorney-in-fact” or “agent” to manage some or all of the principal’s financial and business affairs.

The terms of the power of attorney control what the agent may, or may not, do. If the document covers a broad spectrum of duties, then it is a “general” power of attorney. An agent can be given very broad powers, and if that makes the principal nervous the instrument can require the agent to secure some other person’s permission.

It used to be that a power of attorney would lapse when the principal became incapacitated. That did not do any good if what was intended was to cover the situations when the principal did become incapacitated. The law stepped in and provided that a power of attorney could be “durable” (or be valid after the incapacity of the principal). Most powers of attorney now are “durable”.

If the goal is to avoid probate upon the death of the account owner, the likely better approach is a revocable (or living) trust. The assets in the trust will avoid probate. In fact, a revocable trust can also assist in post-incapacity management because a successor trustee named in the trust agreement can step in to handle continuing asset management. The assets in the trust are also protected from the trustee’s personal liabilities (in other words, the trust assets are not exposed to the trustee’s own problems with creditors).

Finally, all of the above considerations especially apply if there is a child with disabilities. There will rarely, if ever, be an appropriate time to name a child with disabilities as the co-owner of a joint account or the beneficiary of a POD account. Carefully consider a special needs trust, either under a will or as buy clomid online part of a revocable trust, to hold that child’s intended inheritance. Properly drafted, the special needs trust assets will not jeopardize the child’s continuing eligibility for various public benefits.

Here’s the point: Do not put the kids on the accounts as a joint owner. Instead, execute a power of attorney that grants the sorts of powers to the kids you are comfortable with to take over business affairs when, and if, they need to. Alternatively, consider a revocable trust. In the meantime, keep the accounts in your name.

The downside to the advice given here: Some fees to a lawyer. There is, however, an upside: You may avoid a train wreck.

Answer:  It Depends

A Will is a document signed by a testator that meets the other formalities specified by North Carolina Law needed to pass probate property in the manner specified in the Will. The process of submitting a Will to the clerk of the superior court and proving to the clerk that the Will is valid and should be given effect is called “probate”. In fact the word “probate” comes from the Latin verb “probare”, which means “to prove”.

The clerk of the superior court, unless serious disputes arise that are taken up to a superior court, supervises the process of administering an estate by requiring the personal representative (either an executor or an administrator) to provide a performance and surety bond to the clerk (unless waived), to give notices to creditors, and to furnish the clerk periodic inventories and accountings of the estate. The clerk’s basic function is to insure that the personal representative satisfies creditors of the deceased and distributes the estate to beneficiaries as required by the terms of the will or by law. The clerk’s jurisdiction generally extends, with some exceptions, to “probate property” – which is property of the deceased that is available to claims of creditors, as opposed to property that passes “outside” the estate as nonprobate property.

Probate Property Defined

Often it is easier to think of what nonprobate property is when attempting to define probate property. Common forms of nonprobate property are: retirement plan benefits (they pass according to the beneficiary designation form), insurance proceeds (again, they pass according to the beneficiary designation form), life estates (sometimes called “lifetime rights”), joint tenancy with rights of survivorship property (which will pass automatically to the other joint tenant), and annuities (beneficiary designation). Keep in mind, however, that nonprobate property can become probate property if the property passes to the personal representative (for example, an insurance policy may name as a beneficiary “my estate” and the insurance company will pay the proceeds to the personal representative). As will be explained below, compared to many other states North Carolina has a relatively “friendly” and inexpensive probate system.

One other important type of nonprobate property are assets that are held by a trust with beneficiaries other than the estate at the time of the grantor’s death. These are often called “living trusts” and are the sorts of instruments that are often advertised as a way to avoid probate. They avoid probate because they are nonprobate property as described above. Trusts enable the grantor to determine who receives the money, when they receive it, and what conditions must be met. While a living trust is set up during the grantor’s life, a testamentary trust takes effect upon the grantor’s death and is often contained within the terms of the Will.

Revocable vs. Irrevocable Trusts

Living, or inter vivos (more Latin meaning “between the living”), trusts come in two basic categories: Revocable and irrevocable. Revocable “living trusts” are perhaps the more common because the grantor can revoke it or amend it at anytime before his death and the proceeds remain nonprobate property. A living trust has no estate tax advantage at all over assets passed by will. The property in a revocable living trust generally will be included in the grantor’s estate. To avoid estate taxation of trust property, the trust must be irrevocable and meet a host of other technical requirements. We constantly work with these requirements in planning for our clients.

Living Trust Advantages

The most-touted advantage of a irrevocable living trust are substantial estate tax (and occasionally income tax) benefits to the grantor. Depending on trust design, assets placed in an irrevocable living trust are not attributable to the grantor, although the trust itself may be taxed. Estate taxes also may be avoided.

Other advantages cover both revocable and irrevocable living trusts. If a living trust covers all of the grantor’s assets, then he or she may not even need a will. Many people wish to spare their relatives from going through probate, and, as explained above, living trust assets are not subject to probate. Because there is no probate, survivors do not have to reveal the extent of the living trust’s assets through a public filing as happens with probate. If the grantor holds real estate in more than one state, a living trust covering that property may allow survivors to avoid probate in those states.

Aside from the advantages for the survivors, a living trust can help a grantor manage his or her financial affairs because a trustee takes over the administration of the trust’s assets if the grantor becomes incapacitated. Some people are particularly concerned about how their finances will be managed if they should fall ill. A living trust may provide peace of mind because a trustee can continue to manage the trust’s funds in the event the grantor becomes mentally or physically incapacitated. On the other hand, a property drafted power of attorney can usually address these concerns.

Living Trust Disadvantages

The main disadvantage of a living trust is that the grantor loses some flexibility and control over his or her property and funds. Because a living trust becomes effective upon creation instead of at the grantor’s death, the assets covered by the trust start to be administered by the trustee at that time. If the trust is a revocable trust, usually the grantor can elect to serve as long as he is able and control is not much of an issue (other than, perhaps, a slight accounting headache). If the trust is irrevocable, the grantor loses much control that he or she might otherwise have had. If an individual prefers to have unrestricted control over his or her assets, or feels that he or she may want to modify an estate plan, a testamentary trust or will provides the flexibility to change terms for as long as the grantor is able.

A living trust often costs more to establish than a will. In many states the costs of probate may be so high that the extra cost involved in establishing a living trust may be justified. In North Carolina, however, probate is generally a simpler process and often the costs of establishing a living trust are not justifiable solely to avoid probate. The question of whether to use a revocable living trust in lieu of a will must always be answered on a case-by-case basis.

So . . .

A “one size fits all” approach is not wise. Unfortunately, there are many “trust mills” that advertise the “wonderful advantages” of living trusts, hold seminars to tout those advantages (often with a free lunch!) and often “cold call” prospective clients at home. Unfortunately, this approach often furnishes the client a mass-produced (and very expensive) document that does little to address a client’s real needs. For more on this marketing topic, read Bob’s article The $99 Legal Special!

Nevertheless, we often design and use irrevocable living trusts to achieve certain gift and estate tax advantages and accomplish other important family goals. Life insurance trusts and qualified personal residence trusts are very common examples of these sorts of trusts. Unlike revocable trusts, these trusts are seldom, if ever, designed to hold all of the grantor’s assets.

The major advantage of a Will and a testamentary trust contained in the Will is that the grantor retains absolute control over his or her assets. Because a testamentary trust becomes effective only upon the grantor’s death, the grantor may make changes to its terms any time before death. For many people, retaining control of their property is an important goal that testamentary trusts help them achieve. Retaining control can have its disadvantages, though. If the grantor becomes incapacitated prior to death, the trustee cannot take charge of the trust assets in order to manage the grantor’s finances during that time. A guardianship may be required for such incapacitated grantors if adequate provision has not been made through powers of attorney. Guardianship issues, however, are easily avoidable through proper planning, usually through the use of a property drafted power of attorney.