Trusts and Incapacity

Revocable trusts have many benefits.  They typically allow for a smooth transition of assets when an individual dies, they can avoid the probate process, and they may incorporate transfer tax planning techniques such as disclaimers, QTIP trusts, and GST provisions (to name a few).  While these benefits are great, the unsung heroes of the revocable trust just might be the incapacity provisions.  These provisions are guidelines and standards for what to do when the settlor is incapacitated.

The increasing rates of dementia and Alzheimer disease coupled with the fact that people are living longer presents issues with regard to elderly individuals’ financial independence.  In many instances, elderly individuals are searching for a way to delegate the management of their finances yet still maintain ownership of their assets.  Revocable trusts are an excellent means to achieving such delegation.  The settlor may act as trustee and manage their assets for as long as they are able, and if he or she is deemed incapacitated, a successor trustee will step in to assist.

Trust vs. Joint Tenancy

It is common for elderly individuals to name an adult child as joint bank account holder.  However, as explained in a recent New Old Age article, joint tenancy is not ideal for a multitude of reasons.  At the top of the list is this: the creditors of a joint tenant can make claims against and seek payment from all of the assets in the jointly held account.  A revocable trust is far superior at avoiding this issue because assets transferred into a trust are not available to creditors of the elderly parent’s adult child.  [NOTE: This does not apply to fraudulent transfers for the purpose of avoiding creditor claims, assets that are subject to a personal guarantee made by the settlor trustee, or assets pledge under any other contractual obligation].

Trust vs. Convenience Account

An alternative to joint tenancy, the “convenience account without rights of survivorship” as described in the New Old Age article, is better than creating an account in joint tenancy.  With a convenience account, the assets are owned solely by the elderly individual, but another person is named to make deposits and transfers.  Although they are convenient, revocable trusts have a leg up on the convenience account.  The reason: they allow an individual to plan for a multitude of scenarios.

For example, the revocable trust document may outline who will become successor trustee and under what conditions that individual can name additional trustees, co-trustees, or corporate trustees.  In addition, the trust document defines incapacity, so an individual can predetermine the conditions for which he or she may be deemed unable to act as trustee.  The trust will name beneficiaries so that there is no confusion over who owns an asset.  And last but not least, the successor trustees have a fiduciary duty of loyalty to the settlor and any other beneficiaries of the trust.

Conclusion

Thoughtfully preparing for incapacity with a revocable trust can avoid family conflict by clearly naming and instructing the trustees.  It can also reduce the opportunity for impropriety on the part of whomever is assisting the elderly individual with their finances.  Although a revocable trust is not appropriate for everyone, it should be considered by individuals concerned with incapacity and the issues surrounding the delegation of financial responsibilities.

As always, confer with your estate planning attorney, tax advisor, and financial planner to determine the best planning tools for you.