will vs trust Will vs. Revocable Living Trust

As life expectancy extends, there is an increased chance that we will become disabled (incapacitated) before we die, and we simply do not know how long this disability will last. By “disability”, I am referring that our mental or physical health becomes so deteriorated that we cannot sign any legal documents, contractual papers or checks. Therefore, “Disability Planning” is a vital component of our estate planning, as well as “Death Planning.”

A Will-based estate plan focuses on Death Planning but not for disability because a will takes effect only upon a will maker’s death and it does not provide guidance in the event of a will maker’s disability.

Durable Power of Attorney (POA)

When you have a Will-based plan, you are totally dependent on a Durable Power of Attorney (POA) when you become incapacitated. This is a legal document which authorizes the named Agent in the POA to act on behalf of a Principal for the Principal’s financial affairs.

An increasing number of high ranking officials at major financial institutions are saying that they would not recognize the power provided to the Agent under the POA, but would accept the proscribed powers of Trustee(s) of (well-drafted) Revocable Living Trusts (RLTs). (It is assumed here that the trust maker’s assets have been titled in the name of the trustee(s) of the Revocable Living Trust. Unfunded Revocable Living Trusts do not function any better than Will-based plans.) If the agent under the POA can not act on behalf of the principal, a Guardianship procedure must be done in court. The court will have to determine if there is a need to declare the person legally incapacitated, and if so, the Guardian of the estate will be appointed to take care of the incapacitated person’s financial matters.

Guardianship Procedure

The Guardianship process involves:

  1. filing of a legal action, which necessitates hiring an attorney who handles guardianship cases;
  2. examination of the person by physicians, who must certify that the person is incapacitated;
  3. employing and paying Guardian Ad Litem (very often an attorney), who represents the best interest of the alleged incapacitated person;
  4. hiring an accountant;
  5. the court’s determination of who should be the guardian;
  6. the court’s determination of necessary expenses;
  7. the court’s determination of disposition of certain assets that are not suitable for the guardian to manage; the court might say the person’s business interest, such as LLC (Limited Liability Company) interest, should be sold and the proceeds should be invested in FDIC insured accounts. If this happens, the court will determine the fate of your business!
    (If judges are good at making business judgment, do you think they are sitting in the courtroom? )

The guardianship will exist for the rest of the incapacitated person’s life as long as the person remains incapacitated. The guardian then has to submit an annual accounting to the court every year, and has to hire a guardianship attorney and an accountant to perform the tasks. The expenses for all this will be paid for by the incapacitated person’s estate. It will deplete the assets in the estate. Also, the whole process is very time-consuming and it may well be too late before the care of any person, who was depending on the incapacitated person before his/her incapacity, or pets can be carried out.

Whether the POA is reliable or not depends on its acceptability by 3rd parties, when the agent in the POA presents it to 3rd parties such as banks, real estate dealers, stock companies, etc. Very often, the agent presents it to a bank and the bank officials cannot recognize the POA. The agent then hires an attorney, who would discuss the issue with the branch manager. The branch manager usually says that s/he has to consult with the legal department, which is usually located hundreds of miles away. This can take weeks before the branch manager receives a response from the legal department. The attorney then threatens the legal department with a law suit, which results in them finally accepting the POA. This process is very costly and time consuming and could have been avoided if you provided your disability trustee with powers and rights under your well-drafted Revocable Living Trust.

Death or Disability of Agent under a POA or Unavailability

The whole issue of the disability plan in a Revocable Living Trust depends on the quality of the trust agreement.

If the agent becomes disabled or dies and there are not successor agents designated in the POA, the POA is no longer effective. A guardianship procedure is then inevitable. Even if the agent does not become disabled or dies, the agent may have his/her own family crisis such as the disability of the agent’s spouse or child. The agent may still decline from assuming such a position. With a well-drafted Revocable Living Trust, there is a mechanism which designates a successor trustee, who would immediately take care of the incapacitated person’s affairs if the trust agreement permits such powers of the trustee. Again, the whole issue of the disability plan in a Revocable Living Trust depends on the quality of the trust agreement. A poorly-drafted Revocable Living Trust will do no good for an incapacitated trust maker.

Conclusion

Planning with a living trust is a superior planning method for Disability Planning. A Revocable Living Trust-based plan also has a POA, thereby enabling a trust maker to have a double protection (disability trustee in a Revocable Living Trust in addition to POA) while a Will-based plan solely depends on a POA for the will-maker’s disability plan.

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category: Power of Attorney, Trusts, Wills

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