|
Frequently Asked Questions
Living Trust vs. Statutory Durable Power of Attorney for Asset Management
Statistics show clearly that each of us is more likely to be disabled than we are to die. That means our sole focus in estate planning should not be the typical “what happens when I die”, but also the more likely possibility we will be disabled at some point during our lifetime. Unfortunately, most of us view estate planning as a stack of documents that tell a probate court what to do with their assets when we die. Clients aren’t as focused on disability as they are death until they receive competent professional advice, or until it is too late to effectively and efficiently manage the affairs of a loved one.
We don’t want to overlook the necessity of planning for our death. Everyone should have a will in place that covers asset transfers and possible guardianship issues. But, we also need to have a set of documents that deal with managing our affairs in the event we are disabled, whether the disability is temporary or permanent. In addition, for people who travel extensively a financial and asset management strategy in their absence is important.
Two primary methods of handling your financial affairs in the event you are disabled include using a Statutory Durable Power of Attorney and using a funded (or sometimes unfunded) Revocable Living Trust. The differences in each should be clearly considered before choosing what method is appropriate given your circumstances.
| Statutory Power of Attorney |
Living Trust |
| Pros |
Cons |
Pros |
Cons |
| Inexpensive |
Restricted |
Management |
Cost |
| Easy to update |
Updates needed |
Private |
Management |
| Common form |
|
Flexibility |
|
| |
|
Multiple uses |
|
A Statutory Durable Power of Attorney is actually drafted directly into a Texas statute (law) that deals specifically with financial affairs and incapacity of Texas residents. It can be copied directly from the statute, but it is often modified by an estate planning attorney to deal with specific client circumstances, issues not covered by the statutory form or changes in the law since it was last considered by the legislature. In general, it identifies an agent, and usually alternate agents, that will act for your benefit in the event you are physically or mentally unable to handle your own financial affairs.
A Living Trust is not statutory and is simply an agreement to have a Trustee manage and protect assets in trust for the benefit of a Beneficiary or Beneficiaries. It is funded by a Grantor (sometimes referred to as a Trustor), is managed by a Trustee, and is administered for the benefit of the Beneficiary or Beneficiaries according to the terms of the agreement. Assets owned by individuals or couples are typically transferred into the trust by changing the name of ownership on titles, accounts and other assets. Once assets are in the trust they are managed by the Trustee, often when a Beneficiary is disabled or a minor child.
The Power of Attorney is less expensive to prepare and execute, is easily updated and a form that is common enough to be recognized at most financial institutions in the State of Texas. It provides management of assets in the event of incapacity (or immediately if you so chose) but it doesn’t provide management of an estate when you die. Although it is designed by the legislature to be a legally binding document if properly executed and not revoked, there are documented cases where financial institutions refuse to recognize the document at all, or refuse to honor it in the event it is older than the institution permits. If used, clients are strongly encouraged to update them at least annually to be as effective as possible and check with their financial institutions prior to attempting to use the document to see if it will be accepted.
The Living Trust is more expensive to design and implement because of it’s greater complexity, customization to client’s needs and time needed to prepare the document and transfer assets. It simply takes more time to put it into place, and therefore a higher cost is associated with it. It also requires some minimal management from time to time. If the trust is revocable, it will not need a separate tax identification number and a separate trust tax return isn’t needed.
It is the author’s opinion that the benefits of a Living Trust will typically outweigh the costs and management of the trust assets. If a beneficiary of the trust, including the initial Grantor, becomes incapacitated the trust will privately dictate how the funds are to be managed. Since ownership of the assets has been moved to the trust during the Grantor’s lifetime, there is no need for a change in ownership or management when you become incapacitated. The assets continue to be handled for your benefit just as they were prior to your disability.
The other advantages of a Living Trust are its multiple uses. It can handle the management of your estate while you are living and also dictate how your assets are distributed and managed when you die. Since the Statutory Power of Attorney becomes ineffective upon your death, the Living Trust is the alternative best suited for both management and the transfer of assets when you die.
Ask your financial planner which method he prefers when managing assets for his clients, or speak with an estate planning attorney who can explain in more detail the pros and cons of each. Whomever you chose to speak with, do it soon for the benefit of you and your family.
© 2005, The Connor Law Firm
|
