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By: Cava and Faulkner

Protecting Your Financial Legacy: Trusts as Tools for Incapacity Planning

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What Is Incapacity Planning?

Many people understand the value of estate planning that prepares for the eventual death of the estate’s owner (known as the decedent) and allows the estate to be distributed according to the decedent’s wishes. But all too often, the estate’s owner may lose control of the estate not because of their death but because they’ve become temporarily or permanently incapacitated while still alive.

In California, incapacitation is legally defined as someone being of unsound mind, without understanding, or suffering from mental deficits. That could be related to situations such as someone being in a coma or suffering brain damage after an accident. It means the person is no longer mentally competent to manage their affairs, at least for the time being.

Incapacity planning prepares for that possibility. Just as wills and some types of trusts prepare for the estate owner’s death, incapacity planning prepares for the temporary or permanent mental incapacity of the estate owner while they’re still alive. It determines who will handle the various financial and legal matters on the estate owner’s behalf until they recover or until they pass.

This type of planning can also determine who can make healthcare decisions for the incapacitated person and also handle questions of where the person should live if they’re not able to live independently at their home. Creating a power of attorney and healthcare directive is crucial to avoid a conservatorship and choose the people who will handle these matters if you cannot. In addition, trusts can also address incapacity when it comes to trust assets.

What Is a Trust?

A trust is a financial arrangement in which assets are placed and managed by a third party known as the trustee. Technically, the trust owns the assets rather than the estate owner. The trustee doesn’t own the assets but is responsible for managing them and overseeing their distribution at the estate owner’s death.

There are numerous types of trusts that can be used for various purposes. One primary reason people create trusts is that the assets held in a trust don’t have to go through probate, meaning the details of the assets and their distribution remain private, unlike assets that are handled through a will that usually have to go through probate. Probate is a public process.

What Types of Trust Could Be Used for Incapacity Planning?

While there are many types of trusts, many are designed for estate distribution upon the estate owner’s death. The type of trust used for incapacity planning is called a revocable living trust. In a revocable living trust, the asset owner places all relevant assets into the trust but appoints themselves as the trustee. They name someone to be a successor trustee who will take over management of the trust if the original trustee becomes incapacitated. If the original trustee doesn’t become incapacitated, they still have control of the trust.

Besides being an excellent incapacity planning tool, a revocable living trust is highly adaptable. The trustee can move assets in or out of the trust as needed. They can also change who the successor trustee is if circumstances warrant it.

What Should I Look for When Choosing a Successor Trustee?

In many ways, choosing a successor trustee is similar to choosing an executor for your will. It’s a choice that shouldn’t be made lightly. Family members are frequently the first choice, and that works if they meet the following qualifications.

  • Trustworthiness. Do you trust the person to abide by your wishes? The best way to determine this is to have a frank discussion with the person you think should be the successor trustee. This is especially important for decisions regarding healthcare options and where you might end up living if incapacitated. If you don’t think you could trust someone to pay back a $50 loan or keep a secret, they’re probably not a good choice to be your successor trustee.
  • Financial understanding and condition. Depending on the size and complexity of the trust, the successor trustee may have to make complicated financial decisions on your behalf. It’s vital that they understand the basics of those decisions. But it’s also essential that they be financially sound themselves. Someone struggling with debt may not always be relied upon to do the right thing.
  • Preferably not a beneficiary. Legally, a trust’s beneficiary can be a trustee, but that should be avoided if possible. The trustee could end up in conflict with the other beneficiaries, especially if the others think they are mismanaging the trust for their own benefit.
  • Good communication. A trustee should be able to communicate promptly and effectively with anyone involved with the trust, whether beneficiaries, bankers, lawyers, or anyone else. This especially comes into play if the trustee has to make healthcare decisions. They need to be able to inform healthcare professionals clearly–and possibly very assertively–as to what the incapacitated person’s wishes are.
  • Strong organizational skills. Because the trustee may be tasked with paying bills and filing taxes for the incapacitated person, among other things, it’s critical they know how to manage their time and meet deadlines. If they don’t, errors such as filing taxes late or not at all could cause additional fees and penalties that could eat away at the trust’s assets.

What Should I Do if I Need Help Setting Up a Trust as Part of My Incapacity Planning?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Every estate is unique, and we’ll go through the specifics of yours to determine the best approach to protect you in the event of you becoming incapacitated. Having plans in place, even if you never need them, can be reassuring for you and your loved ones.