If you are currently embarking on creating or updating your estate plan, then you already know it is extremely wise to consider a variety of scenarios that could arise for you and your loved ones. Although it can be difficult to imagine, this includes the potential for incapacity, or the inability to make decisions for oneself.
Two common roles that often come into play in the event of incapacity are a power of attorney and a successor trustee. Although both are helpful to consider including in your plans, it is important to understand the purpose and authorities of each, the limitations on each and the best way to ensure you and your estate are covered from all angles should you need these in the future.
In this article, we will review the role each serves, discuss the differences between them and offer guidance for avoiding unnecessary complications or challenges that could arise without the right preparation.
A power of attorney is a legal document that authorizes someone to act on another person's behalf. A general power of attorney typically gives the authority to make financial and other decisions for that person, and it ends when the person becomes incapacitated or passes away.
When planning for a scenario like incapacity, many people establish a durable power of attorney, which expressly allows someone to make decisions on another's behalf even after they become incapacitated. Alternately, a springing durable power of attorney is an option for those who only want someone else to have this kind of authority if and when they become incapacitated.
In a general power of attorney, you typically give another person the ability to manage your personal finances and take actions such as:
- Paying medical or other bills using funds from your accounts
- Opening new financial accounts
- Making investment decisions
- Collecting any debt owed to you
- Applying for federal or state benefits for you
- Filing your taxes for you
A successor trustee is a person who takes over administration of a trust if the original trustee is no longer able to do so. Although trusts of all types usually name a successor trustee, this is especially important for anyone whose estate plans include a revocable living trust.
A revocable living trust is very common estate planning tool that is established during one's lifetime and includes flexibility to make changes in the future. With a revocable living trust, the person who creates the trust (the “grantor”) is often the same person who administers the trust (the “trustee”). The successor trustee's role in this circumstance is critical, because he or she will assume management of the trust if the grantor becomes incapacitated.
The successor trustee administers the trust once the grantor is either incapacitated or deceased. In the case of incapacity, the successor trustee typically manages the trust assets, but you can set forth their exact responsibilities and duties in the trust agreement. This may include:
- Identifying and protecting your trust assets
- Investing your trust assets
- Paying the trust administration expenses and fees
- Filing all required tax returns for the trust
- Determining your income tax or estate tax liabilities
- Deciding how and at what time to raise cash from your trust assets to pay ongoing expenses, taxes and debts
Yes, it is often advisable to have both. Although the successor trustee will have the authority to manage any assets held in trust, they will not have the broad financial decision-making authority that may be necessary to protect your overall financial health during a period of incapacity.
In addition, the successor trustee will not have control over any of your assets not titled in the name of your trust, and they will not be permitted to act on your behalf personally (e.g. filling a personal tax return for you).
Yes, the same person can serve in both capacities. This is common where one adult son or daughter is the designated “estate affairs” person of the family. Naming the same person for both roles can simplify things and may prevent confusion, as we will explain below, but who you name for both roles depends entirely on your personal preference.
Although the power of attorney and successor trustee are invaluable positions to plan for and deploy in the event of incapacity, there are a few foreseeable challenges with these roles that you can mitigate by taking action now:
When the successor trustee and power of attorney are not the same person, the successor trustee can easily misunderstand the scope of their role. Instead of focusing solely on the trust and the assets within it, they might try to make decisions relating to other personal finance issues. If they do, that could cause unnecessary embarrassment, damage to their pride or even additional work to untangle any actions they improperly take.
Similarly, the power of attorney may misunderstand and overreach on his authority when these roles are taken by two different people. By trying to manage assets that are actually held in the trust and therefore under the successor trustee's control, the power of attorney can unintentionally interfere or cause issues with the management of the trust assets.
In addition, unlike a successor trustee, the power of attorney loses their authority upon the person's death. If the power of attorney is not aware of this, they might be surprised or feel put out when their decision-making abilities end and the successor trustee's continue.
When a trust is partially funded, the likelihood for confusion is even greater because the assets will be a mix of those held in trust and those held personally. The assets held in trust should be managed by the successor trustee, and the assets in the name of the incapacitated person should be managed by the power of attorney. However, tracking down and determining the ownership of each asset can be challenging, especially during a stressful time when their loved one is in the hospital.
This can be an issue even when the same person serves as both successor trustee and power of attorney, but in either case, the proper paperwork showing that the person seeking to access an account is authorized to do so will be critical for managing affairs. When the successor trustee and power of attorney are the same person, then she will need to bring the correct document as proof — either the trust agreement if the asset is titled in the name of the trust, or the power of attorney when it is titled in the person's name. Without that documentation, it could cause added delays or avoidable frustration.
When different people act as successor trustee and power of attorney, they might assume an adversarial or competitive stance with each other simply because they both believe they are acting in the best interests of their loved one by taking charge. In reality, these two roles have entirely different focuses, but with the same overall goal: to protect and provide fiduciary support. However, the stress of having their family or friend in the hospital could cloud that judgment and cause unnecessary strife.
The best way to prevent these and other issues from arising is to communicate clearly with your loved ones as soon as you decide upon your power of attorney and successor trustee. By explaining each role, its responsibilities and scope and your expectations, you can ensure that every member of your decision-making team understands their part to play and does not experience added pain as a result of any confusion.
|Successor Trustee||Power of Attorney|
|Decision-making authority is provided in the trust agreement||Decision-making authority is contained within the power of attorney document|
|Authority to manage assets is limited to assets held in the trust||Authority to manage assets is limited to assets titled in the person's name, but broader authority given to handle other personal affairs|
|Authority begins when the person becomes incapacitated or passes away||Authority either begins immediately and ends upon incapacity (general POA), begins immediately and continues after incapacity (durable POA) or begins upon incapacity (durable springing POA)|
|Authority continues after the grantor is deceased||Authority is terminated upon the person's death|
|Permitted to make financial decisions on behalf of the trust||Permitted to make financial decisions on behalf of the person|