While we don’t like to think about life’s uncertainties, putting a plan in place early on can protect your loved ones and assets when the time comes. Having a will is a good start, but sound advance planning should go further.
Granting a power of attorney and creating a trust are two additional planning vehicles to consider. There are pros and cons to each, and often, using a combination of the two brings added benefits.
Power of attorney
Generally, a power of attorney covers assets outside the grantor’s trust, whereas a trust document governs assets inside the trust. Upon incapacity, a springing power of attorney goes into effect and the attorney-in-fact — the person named in the power-of-attorney document — will have control over the assets of the incapacitated individual, — but only those assets outside the trust. Assets held in the trust will be controlled by the successor trustee or co-trustees.
Pros
- The attorney-in-fact can manage assets that fall outside a trust, such as real estate, tangible property, investments, bank accounts, business interests, and IRA assets.
- The attorney-in-fact can file taxes, make legal claims, gift property on behalf of the incapacitated individual, and even create additional trusts for estate planning purposes.
- The power of attorney can be deliberately limited to only allow assets to be appointed or re-titled to the grantor’s trust. The very best use of a power of attorney can be to “gather” any of the grantor’s assets into the trust that were inadvertently not titled to the trust at an earlier date.
Cons
- The attorney-in-fact can exercise only those powers specifically granted in the document, such as the power to make gifts. Unless a particular power is clearly stipulated, the attorney-in-fact won't be able to carry it out.
- While the individual may know the incapacitated person very well, issues can arise, such as conflicts of interest or family disagreements.
- Serving as an attorney-in-fact is time-consuming, and individuals may not have the knowledge or experience to fulfill such a role. Both circumstances can lead to poor decision-making.
- Often, attorneys-in-fact face a heavy burden of proof to demonstrate their right to make decisions and transact business on behalf of the incapacitated individual.
Trust
Individuals can ease the burden on the person designated as attorney-in-fact by establishing a trust and creating a trust document. The grantor of the trust can designate an individual, bank, or trust company to act as successor trustee or co-trustee. Upon the grantor's incapacity or death, property titled in the trust's name will be controlled by the successor trustee or co-trustees in accordance with any direction you have provided in your trust.
Pros
- Any property owned by an individual can be owned by a trust.
- It can be easier for a successor trustee or co-trustees to demonstrate their right to transact business on behalf of the trust than for attorneys-in-fact to demonstrate their power of attorney.
- The trust outlines the grantor’s wishes for the trust assets upon incapacitation — including instructions for caring for the grantor. For example, the grantor can provide specific direction regarding gifting, trust distributions, or handling real estate. The trust also can provide as little or as much flexibility as the grantor deems appropriate.
- The grantor is not limited to designating an individual as a successor trustee. Grantors can choose a professional trustee to carry out their wishes as specified in the trust document.
Cons
- Professional trustees may not know the family as well as a relative or trusted friend would. However, grantors have the option to name both an individual and a professional trustee as co-trustees.
- Only trust assets can be governed by the trust document; it's therefore imperative that the grantor title assets in the name of the trust.
Individuals would be well-served to consider the benefits of both a trust and power of attorney when planning. A power of attorney can serve as a safety net when some assets haven’t been titled in the name of the trust, while a trust offers the grantor the ability to control the distribution of their assets via the terms of the trust document.
It can be unsettling to think about a time when we or a family member might be unable to make decisions, but careful planning can bring peace of mind and security. Moreover, working with a trusted advisor on the proper execution of those plans ensures your assets are administered as you want them to be — and, perhaps, most importantly, reduces conflict and eases the burden on those you love.
