You May Need a Revocable Trust With Your Power of Attorney
Everyone should have a durable power of attorney in place that appoints someone to act for them if they become unable to do so. However, in some circumstances, this legal document may not be enough. In these cases, setting up a revocable trust can help.
A durable power of attorney (DPOA) allows you to appoint someone you trust implicitly. This individual can step in and handle your financial and legal matters if you cannot carry them out yourself. We all are vulnerable to serious illness or injury, whether temporary or permanent. Of course, this risk rises as we get older.
Without someone in place to handle legal and financial matters, you could, for example, fall behind on your bills. You may be unable to sign contracts, refinance your home, terminate your lease, or monitor and adjust your investments. Your family members may also fight over who is in charge of your affairs.
Without a power of attorney in place, it may be necessary to have a guardian appointed by the court. Unfortunately, this can prove expensive, cumbersome, and time-consuming. The best route is to pick your own person (or people) ahead of time to fulfill this role if it ever becomes necessary.
However, this important step is not always enough. For one, financial institutions may refuse to honor POAs, and agents sometimes don't step in until it's too late. You can avoid both of these problems through the use of a revocable trust.
Financial Institutions May Reject Your DPOA
Financial institutions often reject durable powers of attorney for various reasons, especially if the document was signed many years ago. They might claim that they can't know for certain whether you've revoked the document since initially signing it. Financial institutions don't want to be liable for any misconduct by the agent you have appointed in your POA.
Although financial institutions may try to refuse the power of attorney, depending on the law in your state, they may be required to accept the power of attorney. Under the North Carolina Uniform Power of Attorney Act, a person who refuses to accept an acknowledged power of attorney may be liable for reasonable attorneys fees and costs incurred in any action that mandates acceptance of the power of attorney. Although there are remedies for the failure of a financial institution to accept a power of attorney, you may lose valuable time while the issue is resolved.
Financial Institutions Can Refuse Certain Acts by the Agent Under a DPOA
Under North Carolina law, no person is required to do any of the following if requested by the agent under the power of attorney:
Open an account for a principal at the request of an agent if the principal is not currently a customer of the person.
Make a loan to the principal at the request of the agent.
Permit an agent to conduct business not authorized by the terms of the power of attorney, or otherwise not permitted by applicable statute or regulation.
Consider a Revocable Trust in Addition to a DPOA
For whatever reason, financial institutions seem to accept revocable trusts more readily than durable powers of attorney. Revocable trusts give you the extra advantage of appointing a co-trustee to serve with you. This way, if you become incapacitated, the co-trustee can step in and act with less delay.
A Trust Provides Financial Protection
As we age, we all become increasingly susceptible to making financial mistakes and falling victim to scammers. Having a financial advocate in place can help avoid both.
As mentioned above, an important step is to name this agent under a power of attorney. However, there are some instances where a power of attorney may not be enough. For example, I’ve witnessed situations where adults with incapacity were taken to the bank by someone who did not have their best interests in mind and directed to take money out of their account to give to the individual. When the agent under the power of attorney reports their suspicions to the bank, they are often surprised to find the bank cannot deny the incapacitated person’s right to take money out of his or her account, even if they suspect misconduct.
With a revocable trust, you can name a successor Trustee who can step in when you become incapacitated and once the successor Trustee is serving, the bank is able to take direction from him or her. You could also name a co-trustee whose name will appear on the accounts in the trust. The trust could provide that the two of you must make decisions together while you have capacity. Even if the co-trustee doesn't take an active role, they can at least monitor your accounts to make sure nothing untoward is occurring. Further, when it's necessary to step in, the co-trustee can do so immediately and seamlessly.
In contrast, an agent under a durable power of attorney may have to jump through more hoops. They'll likely need to present credentials to the financial institutions and go through the institution’s vetting procedure. This can delay their account access. In turn, such a delay may prohibit the agent from protecting the accounts or paying bills on time on behalf of the grantor.
Consult With an Estate Planning Attorney
For these reasons, revocable trusts often work better than durable powers of attorney. However, there are two caveats: First, trusts only control the accounts actually held by them. So, for the trust to work, you must retitle your accounts into your trust.
Second, even if you have a revocable trust, you still need, for several reasons, a durable power of attorney. For example, some assets, such as Individual Retirement Accounts (IRA)s, do not get titled in your revocable trust.
In addition, the trust only governs financial matters. Your agent, under your DPOA, can also handle legal matters on your behalf, including signing your income tax returns.
To determine whether a revocable trust is right for your situation, give us a call to schedule an appointment.
