Living Trusts: A Simple Way to Avoid Courts and Guardianships

It’s not a pleasant subject, but according to a recent study by the Alzheimer Association, if you live to age 85, chances are you will suffer from Alzheimer disease or another form of mental impairment, and in many cases such mental incapacity could be enough to require that your affairs be handled by a court-appointed guardian.

Guardianship, a court process in which a person is appointed by the court to handle the affairs of another, is an extremely restrictive supervisory arrangement that most people want to avoid. When the court appoints a guardian over an individual, that person loses most of his or her civil rights and liberties, and, consequently, much of his or her personal autonomy.

Instead of simply providing assistance with specific functions or transactions (such as paying bills or selling a home), the guardian and conservator are awarded complete control over virtually all decisions affecting the individual’s life. If a guardianship is brought, the incapacitated person has little or no control over who is appointed his guardian or custodian, and it can be a stranger selected by the court.

Additionally, expenditures made by a custodian or guardian on behalf of the individual will be closely supervised by the court, whose primary goal is preserving the estate, and who is not familiar with your wishes for your living situation or medical care.

Fortunately, it is easy to avoid this problem. By taking a few simple steps, you can insure that your day-to-day business matters and investment decisions are managed properly and in your best interests. Just follow these basic guidelines to save yourself and your family major headaches down the road.

Lawyers use three primary tools to help their clients prepare for future incapacity without court involvement: durable powers of attorney, revocable living trusts, and medical directives.

Through a Durable General Power of Attorney, you ( the “principal”) delegate authority to another person (“the attorney-in-fact”) to act on your behalf in carrying out financial transactions. The Durable General Power of Attorney is used for routine purposes, such as paying your bills, investing your money, signing legal papers, and selling your real property. The attorney in fact is given unlimited power over the principal’s assets and can even use this power to access the assets without the owner’s knowledge. It is very important, therefore, that the person you choose is trustworthy, has the time and financial expertise to serve, and is willing to serve.

An alternative and more comprehensive way to prepare for incapacity is by creating a Revocable Living Trust. To create a Revocable Living Trust, you must first establish the trust through a written document and then transfer your assets into it. You can revise or revoke the trust at any time. If you want to manage the assets yourself (as most people do), you can name yourself as trustee. You can also name a person (“successor trustee”) to manage your trust assets if you should become incapacitated. Should a catastrophe strike and you are no longer able to handle your affairs, your successor trustee may step in to pay your bills and manage your investments and generally spend liberally on your behalf.

A Revocable Living Trust is generally used as a substitute for a will. At your death, the successor trustee can distribute the trust assets to your heirs immediately without probate court involvement. In addition, the distribution remains private and without probate court oversight. The successor trustee is not required to account to anyone unless the trust itself requires it. Therefore the trust document should require the successor trustee to report on the receipts, disbursements and investment performance of the trust assets to the beneficiaries at least once a year.

It’s important to understand that the mere creation of a Revocable Living Trust does nothing for you until you transfer assets into it; without assets, a Revocable Living Trust is like an empty shell, and you will not have protected yourself from anything. The method of transferring assets into your Revocable Living Trust depends on the type of asset. Bank accounts and brokerage accounts can be placed into the living trust merely by changing the name on the account by providing a letter of instruction to the financial institution. Be aware, however, that many financial institutions have their own forms that must be completed before the title on the account can be changed. Real estate can be retitled into the trust by creating a new deed of gift. In most states, transferring real estate into a living trust is a non-taxable transfer except for nominal recording fees. Stock certificates, certificates of deposit, and treasury instruments (i.e., EE bonds, HH bonds and treasury notes) must be reissued into the name of the trust. These particular assets each have their own process for retitling; stock certificates must be remitted to the company with a stock power of attorney form; CDs should not be reissued until you have checked with the bank to determine if you will be penalized for retitling the CD prior to maturity; and treasury instruments have to be remitted to a federal reserve with the proper government forms.

A Medical Directive can protect you from undergoing unwanted medical treatment. In a Medical Directive, you state that if you are terminally ill, in a prolonged irreversible coma or in a persistent vegetative state, you want to die naturally and you do not want to be kept alive by machines. In addition, in a Medical Directive, you can appoint a person to make medical decisions for you if, at any time, you are unable to make decisions for yourself as certified in writing by two licensed physicians. Once the Medical Directive is signed, a copy of it may be provided to your physician and to the local hospital.

Mental or physical incapacity is scary for all of us to think about. But, if you prepare some simple estate planning documents, you can make a very difficult situation much easier on you and your family.