Someday you may want or need to have someone help you manage your assets and financial life. Two common methods of authorizing someone to step in are the financial power of attorney and the trust. While both of these tools are used to authorize someone to handle financial matters for you they have some significant differences.
The Power of Attorney
In my experience the financial power of attorney is the method clients use most frequently to appoint a surrogate for financial matters. With a financial power of attorney one person (the “principal”) gives another person (the “agent”) the authority to make decisions for and manage the assets of the principal to the extent authorized in the document. The powers granted can be very broad or very limited. The power can take effect immediately or only in the event of your incapacity.
With a power of attorney legal title to the managed assets remains with the principal. A power of attorney ceases to operate when you revoke it or when you die. This is a powerful (and potentially dangerous) document that should be carefully drafted by your lawyer to fit your specific circumstances, needs and wishes.
With a trust you (the “settlor”) transfer legal title to specific assets to a “trustee” to be managed by the trustee for the benefit of specified persons (the “beneficiaries”). You can name yourself or a family member or a trust company as trustee or co-trustee. You can also name yourself as primary beneficiary and designate other “contingent” beneficiaries in the event of your death.
There are dozens of different types of trust. Trusts are used to protect assets from nursing home and other care costs, provide for a spendthrift child or one with special needs, save taxes, protect assets from divorce or creditors, obtain professional financial management and so on.
In order to plan for the possible reduced capabilities that can come with aging, many people create a revocable trust which is funded with some or most of their assets. The trustee then manages the trust assets as directed by the settlor. (If the settlor names himself or herself as initial trustee, an alternate trustee can be named to step in when that becomes appropriate.) This type of revocable trust, which becomes effective during the settlor’s lifetime, is sometimes called a “living trust.”
The revocable trust is commonly used by individuals who want to get professional management of their investments and other assets. The settlor hires a trust company, like a bank trust department, to serve as trustee. Professional management can offer a number of advantages for settlors and their families although that discussion is beyond the scope of this article. Since the trust is revocable it can be modified by the settlor to change the trustee or the beneficiaries and can even be cancelled entirely.
The power of attorney and the revocable trust are both tools people use to authorize someone else to manage their finances when that becomes desirable. But the trust and power if attorney approaches have a number of important differences that you should discuss with your lawyer. For example, a trustee can only manage assets that have been legally transferred to the trust. Powers of attorney can cover a broader set of financial issues such as signing personal tax filings and dealing with assets that are not held in trust. So, it may be wise to have a power of attorney even if you are setting up a trust. On the other hand, unlike the power of attorney, a trust can continue to operate after your death. This means that a trust can serve, to some extent, as a will substitute.
Power of attorney or trust. Which is the best planning option for you and your family? Or should you have both? The answer will depend on your particular individual and family circumstances and goals. One size does not fit all. Discuss your situation with an experienced elder law attorney to determine the approach that is best for you.