Use of Trusts in Planning for Disability
Many individuals today are concerned about the management of their financial affairs in the event they become incompetent or disabled. When an individual is disabled and unable to manage his or her own affairs, every effort must be made to ensure maximum flexibility so financial matters can be handled as smoothly as possible using trusts, powers of attorney and wills. When complex or substantial assets are involved or when a durable power of attorney may be inadequate, trusts offer the most efficient means of administering an incompetent or disabled person's estate. Revocable trusts have major advantages, ensuring the continuity and financial security individuals desire as they face incompetency. This article explains how such trusts can be used to manage a disabled person's affairs and why a trust, rather than a will, should be considered the primary instrument for disposing of an estate. ADVANTAGES AND DISADVANTAGES If a person becomes disabled and has not made provisions for managing his or her financial affairs with a power of attorney or trust, family members will petition the court to appoint a committee, conservator or guardian. A committee generally is appointed by the court to oversee the person and property of someone who has been judicially declared incompetent. A conservator or guardian generally is appointed by the court to oversee the property of an individual deemed to have suffered a substantial impairment in ability to manage his or her own affairs. For individuals concerned about disability, a revocable trust's major advantage is it provides a prearranged vehicle that becomes effective when disability occurs. Drafted properly, it can provide maximum administrative flexibility, giving the trustee far greater powers than those of a durable power of attorney, committeeship, conservatorship or guardianship. Depending on local law, a trustee can be given broader operating discretion than the holder of a power of attorney (an attorneyin-fact). Almost all entities recognize a trustee's ability to act, while banks, insurance companies and government agencies often refuse to honor a power of attorney. A revocable trust also can help avoid the cost and delay of appointing a committee, conservator or guardian. Questions always exist about the relationship between attorneys-in-fact and subsequently appointed committees, conservators or guardians. The holder of a durable power of attorney may be required to report to and be subject to the subsequently appointed committee, conservator or guardian's control. This is not the case with a trustee. Major disadvantages of revocable trusts are the initial expense of creating them, the annual costs often incurred to prepare fiduciary income tax returns (required unless the grantor also serves as trustee or cotrustee) and the cost of holding title to trust property in the name of a trustee or nominee. However, such expenses generally are less than the costs of a committee, conservator or guardian proceeding. USING A POWER OF ATTORNEY A trust can be fully or partially funded immediately or fully funded upon subsequent disability. If an unfunded trust already exists, it should be funded immediately when the person is declared disabled. Clients reluctant to forgo control of property before disability can use a limited durable power of attorney in conjunction with a trust. The limited durable power of attorney can be drafted so the attorney-in-fact's sole power is to fund the trust. He or she merely acts as a conduit for delivering property to the trust when the client is deemed incompetent. Executing a limited durable power of attorney before incompetency can, with a re* vocable trust, remove the need for a committeeship, conservatorship or guardianship, which has great advantages because of the weaknesses of court-supervised administration of a disabled person's affairs. The process of appointing an administrator is time-consuming and expensive. …