Planning for the Unexpected with Living Trusts: Part I
Disability planning is perhaps one of the most important parts of an estate plan for a client while the client is alive, but it is often overlooked. This two-part article explores some of the advantages and disadvantages of living trust planning, the challenges for taking care of the client and the client’s loved ones, if a client becomes disabled, and the essential parts of a good disability estate plan.
Good living trust planning should focus, first and foremost on:
- Planning that keeps the trust maker in control of his or her property, while alive;
- Planning that takes care of the trust maker during his or her lifetime and if a disability occurs;
- Planning that takes care of the people that the trust maker takes care of and;
- Planning for the payment of a disabled trust maker’s debts, liabilities and obligations.
Secondly, good living trust planning should help the trust makers give what they have to whom they want, the way they want and when they want. This is known as the “estate planning golden rule;” the person who owns the gold, makes the rules.
Lastly, good living trust planning should help the trust maker save every last taxes dollar, court cost and professional fee that is legally possible.
Before exploring the advantages of planning for disability with a living trust it is helpful to first explore some of the other techniques for disability planning.
Probate (Living Probate and Death Probate)
Probate helps to answer these questions:
- How can you manage titled assets owned by a person who has become disabled?
- How do we change the ownership of titled assets when the owner dies?
Titled assets are assets for which paper proves ownership and paper is needed to change ownership. For example: the ownership of real estate is proven by a deed. Disabled and deceased people can no longer sign the paper to change the ownership of titled assets. When a living trust is created, the title to titled assets are transferred to the living trust, so the problem is eliminated. The title to the titled assets is now owned by the living trust, a legal entity that does not become disabled and does not die.
Living Probate (Guardianship or Conservatorship)
The exact legal procedures involved with the living probate systems of various states and territories will vary from jurisdiction to jurisdiction, but most of the living probate systems will have similar procedures and safeguards. For simplicity, the term Probate Court is used when referring to the court that has probate jurisdiction.
When an individual loses his or her mental abilities, a probate court will determine if there is a need to declare the person legally incapacitated. If that happens, the person will no longer have the legal capacity to enter into binding contracts, much the same as a person under the age of 18 will lack the legal capacity under the law to enter into binding contracts.
Whenever a determination of disability is made by a probate court, several needs will arise:
- Someone will need to be legally appointed to physically care for the now disabled person. The person who is legally appointed by the probate court to take physical care of the disabled or minor person and is referred to as the guardian of the person.
- Someone will need to be legally appointed as the guardian of the estate or conservator. This person will manage titled assets, including real estate, bank or securities accounts, insurance policies and retirement plans.
Living Probate can be costly, time-consuming and cumbersome. A will cannot be used to avoid living probate because the person must die before it can be submitted for admission to death probate.
Joint tenancy with rights of survivorship designations on property
With the possible exception of a joint bank account that only requires one signature to sign checks or to make withdrawals, all other property (including real estate, securities and securities accounts) that is held in joint tenancy with rights of survivorship will require both signatures to transact any business with that property when the joint tenants are alive.
The rights of survivorship provision in this form of ownership only works when one of the joint tenants die. If one of the joint tenants is disabled and not dead, the rights of survivorship provision does not apply. Without a living trust that owns the property, a living probate will be necessary, and all transactions involving the management and disposition of the jointly owned property will have to be approved by the probate court.
Power of attorney
The functionality of a power of attorney is totally dependent on its acceptability by third parties when it is presented by the agent or attorney-in-fact. For a power of attorney to come anywhere close to matching a living trust, it must be drafted to be extremely broad, which means that the principal must be willing to give the agent or attorney-in-fact extremely broad powers under an extremely low fiduciary standard. Some lawyers will make the power of attorney so broad and with such comprehensive instructions that the document may even approach the broadness of the instructions of a living trust, only to have third parties hesitate to accept them because they are too complicated.
While a durable power of attorney will endure the disability of the principal, it will not endure the disability or death of the agent or attorney-in-fact. If no one can act under the power of attorney when the principal is disabled and the agent or attorney-in-fact is also disabled or is deceased, it could result in a situation where a living probate may become necessary to take care of the principal. With a living trust, if a trustee dies or becomes disabled, a successor trustee can easily be named or appointed within the trust to continue the trustee services of taking care of the trust maker, the persons that the trust maker takes care of, and paying the trust maker’s debts, liabilities and obligations.
It is also important to understand that the Social Security Administration will not honor a durable power of attorney.
Planning with a living trust is a far superior planning option for disability planning.
What kind of disability instruction can be contained in a living trust?
With a living trust, the trust maker can provide extensive instructions to the successor trustees about taking care of the trust maker, continuing to take care of the people the trust maker had been taking care of, and paying the trust maker’s financial obligations.
Who are the beneficiaries that are taken care of if the trust maker is disabled?
The beneficiaries taken care of in the living trust can range as follows:
- The trust maker;
- The trust maker and the trust maker's spouse or significant other;
- The trust maker, the trust maker's spouse or significant other and any other persons such as descendants or parents who are dependent upon the trust maker;
- The trust maker, the trust maker's spouse or significant other and any other persons such as descendants or parents of the trust maker who may not necessarily be dependents.
The second article in this special two-part series will dive into how to handle disability planning for life insurance, long-term care insurance, disability insurance, retirement plans and IRA benefits.
To better understand this topic, be sure to register for the June 30 Advisor Advantage webinar, “Planning for the Unexpected: The Advisor’s Role in Disability and Incapacity Planning." This no-cost webinar offers 1.0 CFP CE credit upon completion. Registration is available at heart.org/advantage.
About the Author
Peter J. Parenti is a Wealth Strategies Estate Planning and Tax Attorney in private practice in the Law Offices of Ramirez & Parenti, PLLC. He is also an author, lecturer and one of the founders of WealthCounsel, LLC.
Note: This is a condensed version of an article that previously ran in The Journal of Practical Estate Planning.
