ESTATE PLANNING – NOT JUST WILLS AND TRUSTS : PART II

A. Mental Incapacity and Your Finances (cont’d)

Incapacity planning can also include preparation of a durable power of attorney. Powers of attorney are discussed at length in our blog, here. Basically, a durable power of attorney allows another person, your “agent,” to make decisions for you, the “principal;” the scope of power that your agent has is set forth in the document that you sign granting them the power of attorney. Generally, your agent has the power to represent you in financial and contractual matters, such as being able to put assets into your trust, sell, buy or invest your property, and enter into contracts with you. Assets such as retirement accounts (IRAs, 401Ks, etc.) and life insurance are not put into trust, and can only be changed or managed by you, or your agent. Further, things such as the legal power to pick up mail or take over care of one’s pets cannot be dealt with in a trust. Because of this, a power of attorney should be used in conjunction with a trust.

The “durable” in durable power of attorney means the agent can still act for you, even after you’ve lost capacity. By having a durable power of attorney in place, even without a trust, you ensure that someone of your choosing will be able to handle some aspects of your finances.

The downside of a power of attorney versus a trustee is that the power of attorney terminates at your death. More importantly, a power of attorney doesn’t provide guidance on how you would like your finances handled, and doesn’t provide much in the way of safeguarding against bad acts by your agent. Both agents and trustees are “fiduciaries” under California law, and therefore must act with the highest standard of care for the individual according them the power. However, a breach of fiduciary duties may not be detected because the principal is incapacitated. A trust, however, sets forth specific guidelines for the trustee with regard to how the trust assets should be managed, and usually has successor beneficiaries who have an interest in monitoring the trustee’s expenditures and activities. In certain scenarios, the beneficiaries can bring an action against a trustee for breaches of his or her fiduciary duty.

A conservatorship is a legal proceeding wherein the relevant probate court selects someone to preside over a person’s finances, and/or personal care. It is a lengthy, public, and pricey process. By designating the means by which you are declared incapacitated, by naming the people who will take over for you, and by providing the means by which they will take over, a conservatorship can be avoided.