You May Need a Revocable Trust With Your Power of Attorney

A post-it with the words revocable trust written on it, on top of cash and next to an adding machine

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.

The remedy of seeking court-appointed guardianship 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 often don’t honor older 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 Can Reject Your DPOA

Financial institutions often reject older durable powers of attorney. They might claim that they can't know for certain whether you've revoked the document since initially signing it.

Sometimes, the institution will require the drafting attorney to confirm that you have not revoked the document. An institution can set this requirement even if the attorney has not met with the client for many years. The attorney, in such a scenario, of course won't be aware of everything the client has done during that time.

Financial institutions don't want to be liable for any misconduct by the agent you have appointed in your POA. Most estate planning attorneys consider such institutional rejection is contrary to law. However, no good remedy exists when this occurs. Any lawsuit against the large banking institutions will only prove expensive and time-consuming.

Fortunately, there are three ways to avoid this institutional intransigence:

  • Refresh your documents on a periodic basis. Financial institutions are more accepting of newer documents than older ones. So, it's a good idea to execute new durable powers of attorney every five years or so.

    This may be to your disadvantage in some cases. Let's say your POA is in use because you have developed dementia. You'd be more likely to have been experiencing cognitive challenges in more recent years than 10 years earlier. However, your financial institution may not give you a real choice in this matter.
  • Use the forms your financial institutions use. Most banks and investment companies have developed their own durable power of attorney forms. They may be more comfortable accepting these than general one you may have found online or had your attorney prepare.

    Contact each financial institution where you have an account and ask whether it has its own DPOA form. Note that you'll still need a general durable power of attorney of your own. The financial institution's form only governs accounts held at that institution. But using its form should prevent any problems with its acceptance.
  • Create a revocable trust. 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.

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 DPOA. However, such agents often fail to step in until it's too late. Your agent needs to act before you have, for instance, already lost a significant amount of money.

With a revocable trust, you can name a co-trustee whose name will appear on the accounts in the trust. Even if the co-trustee doesn't take an active role, they can at least monitor your accounts. They can 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, perhaps you have not transferred all your accounts into the trust. You'll need to give your agent control over those accounts, along with the ability to transfer them into the 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, work with a qualified attorney. Search for an estate planning attorney near you today.

For further reading on these types of legal documents, be sure to check out the following informative articles:

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Questions? Contact us at Chambliss, Bahner & Stophel, P.C.

Chambliss, Bahner & Stophel, P.C.
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Phone: 423.756.3000