Most people wish to avoid the worst-case scenario for the money messes that can ensue as one grows old. The revocable trust document was supposed to cover everything. Mom or dad or the spouse when questioned would simply say, “we are all set.”
Then, a mental disability ensues. Mom or dad or the spouse no longer can talk intelligibly with a bank or investment firm about what to do with their money. The trust document makes no mention of incapacity. There is no “Plan B” for who takes over while the trust maker is still alive.
Or, the trust was inadvertently invalidated by one of the trustees naming a different person as a power of attorney than the named successor trustee. So, the bank or investment firm freezes the accounts until the matter can be resolved by a probate court. The original trustee(s) is living, but there is no authorized person to act on the person’s behalf until a judge resolves the confusion.
A bigger snafu: the trust document was created but no assets were retitled into the name of the trust. So, the $5K investment into the trust document becomes just a waystation on the way to a very expensive, 18-month probate court process.
Or, the person never created a trust agreement. Instead, he or she created the lower cost last will and testament, but there is no power of attorney to cover eventualities while he or she is still alive. Consequently, the bank or investment firm perceives a risk of elder abuse as the mentally inept person falters, and the accounts are frozen pending a court review. The beneficiary designation or pay on death instruction on the account does not instruct what to do when the person is still alive, but is mentally impaired.
Here is a short list of how to avoid these common pitfalls, to strengthen your estate plans before mental events intervene.
–Know the difference between a power of attorney (POA) document and a trust agreement document. The power of attorney grants certain powers to another person for a specified period of time unless it is declared to be a “durable” power, lasting until the author passes. The specific powers are defined by the document and without an accompanying trust, the document itself expires upon the death of the author.
In the event of a trust, if the person who is named as a power of attorney is not the same person as the person named as a successor trustee, there may be a problem. An attorney can resolve whether there is a conflict that may prevent a bank or investment firm from honoring the POA as written.
–Simplify finances to allow an authorized person to more easily manage the affairs of the elderly person requesting the help. When using a trust, establish the corresponding trust accounts at financial institutions and move assets into these named accounts.
–Provide clear instructions and access codes for the authorized person to be able to pay bills or manage money or withdrawals.
–Provide a list and contact details of professionals who can help, and who have knowledge already of the family finances. These may include the licensed family tax preparer, financial professionals with whom the family already has relationships, licensed fiduciaries recognized by the family’s state of residence, and the family lawyer.
–State what is not permitted, in the language of the power of attorney form. Can the person granted power of attorney rewrite the will or trust? Can the person open new accounts and transfer assets into them?
–Limit or prohibit the person receiving the power of attorney to make gifts while the original estate holder is still alive.
–If there are adult children or charitable beneficiaries named in the estate documents, name the accounting requested after the estate holder’s death before assets are distributed. This accounting will be necessary for preparation the last tax filing as well as in forestalling disputes about where the money from accounts was used to settle outstanding bills or claims.
The points that arise in this article were compiled from my experiences with actual real-life situations, including those with clients, as well as derived from conversations with other licensed professionals.
Be smart and be safe, as you plan ahead for life’s eventualities. Written instructions can help your loved ones navigate the trauma of what to do when emergencies arise. These can also help avoid a cash crunch that otherwise may occur, by providing financial institutions with the forms required in advance to establish clear lines of authority if the account holder or successor trustee is incapacitated.
Note:
This information is not intended to substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners LLC, a registered investment advisor and a separate entity from LPL Financial.
