Revocable living trusts serve two important functions in estate planning. The first is to provide for the potential disability of the settlor. The second is to avoid probate of the settlor’s estate at death. As a practical matter, for many individuals, planning for incapacity may be significantly more important than avoiding probate.
Facing the Issue of Potential Incapacity
What are the chances that you will become so incapacitated that you are unable to take care of your own affairs? None of us really knows. But, with the average lifespan becoming longer, we can all foresee at least the possibility of physical or mental incapacitation during our lifetimes. Most of us shy away from imagining life with a disability. Yet, if we take time to plan for the potential, we can save ourselves and our loved ones from the inevitable stress, stigma, and often family strife, that accompanies having a family member declared legally incompetent.
Consequences of No Arrangements
If you own property in your own name and become incapacitated, a guardianship will have to be set up by a court and a guardian of your property will have to be named by a court. Family members may compete for this position in an unseemly way. Of course any contact with a court involves additional expense, such as court fees and attorneys fees. Judicial proceedings are generally public information, which may require public airing of your family’s dirty laundry. Moreover, to protect the incompetent person, court supervision of a guardianship is ongoing. A guardian must file annual accountings and reports with the court, which involves additional expenses of preparation and filing. Although many appointed guardians who are family members serve without charge, a guardian who does take a fee will further deplete the funds of the ward. Also, guardians are limited in many ways by state guardianship statutes. For example, they do not have the broad powers of administration and investment as are given to trustees of trusts.
What a Revocable Living Trust Can Do
When you create a revocable living trust, you are the trustee of the trust until you die or become incapacitated. Upon either of those events, a successor trustee will take over without the necessity for a guardianship or probate. When you don’t make prior arrangements for potential incapacity, control of your assets is taken out of your hands and placed in the authority of a guardian and supervising court. If you plan ahead, you make as many of the decisions as possible by appointing persons you trust as successor trustees of your revocable living trust and by giving the successor trustee broad management powers in the trust document.
Note: Even when you have a revocable living trust, it is advisable to have a durable power of attorney as well. The trustee of the trust has power only over property properly funded into the trust. Other actions, such as decisions with respect to a life insurance policy or annuity, can be taken pursuant to the durable power of attorney.
How is Incapacity Determined?
As a practical matter, you are incapacitated if you are unable to take care of your routine affairs such as banking, paying bills, signing tax returns, or shopping for necessities. In some cases, the settlor himself or herself will request that the successor trustee take over the administration of the trust. If the settlor becomes mentally incapacitated, however, the settlor may not realize that he or she is impaired. For this reason, the trust should set up a mechanism for determining incapacity. Options include leaving the decision to: adult children; the successor trustee; your physician; or a panel of physicians.
The trust should also provide for temporary incapacity. For example, if you are in a coma from a car accident but later make a full recovery, you should be able to return to the position of serving as trustee of your revocable trust.
Many people create revocable living trusts to avoid probate. An equally important function of a revocable living trust is to provide for the settlor’s potential incapacity during life. If properly drafted, a revocable living trust allows your chosen successor trustee to take over administration of the trust if you become incapacitated, avoiding a costly guardianship and a lot of family anguish.