Most people think estate planning is all about what happens when a person dies. It is, but it’s also important for the living. One special case: When you realize you need protection from yourself. Maybe you have a mental illness and can’t always be attuned to financial matters. Maybe you have a family history of dementia and fear money will go missing before anyone notices you are slipping. Or maybe you are optimistic and generous and know you are vulnerable to scams or exploitation.
In such situations, an estate plan can help. Estate plans name fiduciaries to handle a person’s affairs upon incapacity. But incapacity is not a requirement. The creator of the plan can determine when the fiduciary power vests. That can be immediately upon signing or any other time spelled out in the document.
Trusts for Protection Planning
Trusts are particularly good tools for this type of planning because they can be highly customized.
With a trust, you transfer assets to the trust, then name a trustee to manage them. The trustee is a fiduciary, meaning they are held to the highest standard of duty toward you. They must act in accordance with your wishes and in your best interests.
In situations where a trust is designed to provide protection, the trustee provisions are crucial. If you realize you need protection from yourself, you serving as sole trustee doesn’t provide much protection; you would be monitoring yourself. Instead, you could name a co-trustee who must act with you. Or you could name someone else entirely.
Consider several different options. Family, friends, professionals. In Arizona, the state licenses professional fiduciaries who serve in these roles. (Fleming & Curti the firm and several staff members are among them.) A professional fiduciary can be a good option because they are a neutral party.
Choosing a Trustee
If the goal of the plan is to protect yourself, the last thing you want is a trustee who turns out to be untrustworthy and puts you and your assets at risk. A few considerations:
- Trust. You must trust them completely. Your trustee will have access to trust assets, you will be counting on them to provide for you. You must be 100% comfortable with giving them control.
- Your relationship. What will this new dynamic do to your existing relationship, and will the result be positive for both of you?
- Skill set. Acting as a fiduciary can often be a big responsibility, so consider whether they have the time, temperament, and skills.
- Capability. Consider the age and health of the person and also where they are located. Much can be accomplished remotely, but is that true for your situation?
Tailoring trust provisions to a specific specific situation is key. The trust terms dictate what the trustee does. Here are just a few provisions to consider in situations where the goal is to protect yourself:
- The trigger. If you want to remain in control for now, you can set a trigger that determines when your successor trustee steps in. As noted above, incapacity is common but not required. You can have a different measure of capability or simply allow someone you trust to decide. Your child, friend, doctor or financial adviser. Or a committee of them all. Or you could require yourself to take a cognition or math test on an annual basis, demonstrate the ability to manage medications, or have a medical evaluation. It’s totally up to you.
- Amend or revoke. You can determine whether you have the power to change the document and if so, the circumstances. Again, if you are protecting yourself from you, you don’t have much protection if you can easily undo the plan. If you want the plan firmly set in stone, you can make the trust irrevocable. You could not amend or revoke the documents without considerable effort. That’s safest, but there are other options. You could require that another person (or committee, doctor, adviser, etc.) approve an amendment or revocation. Or you could build in a cool-off time. Any amendment or revocation could become effective only after, say, perhaps 30 or 60 days, to help minimize rash decisions.
- Control. You can determine whether you can direct or participate in certain aspects of trust administration such as investments or distributions and under what circumstances. For instance, your trust could say that you receive income generated but no more unless certain conditions are met, such as a serious medical event.
- Checks and balances. Putting trust in another person can make anyone feel uneasy. For that reason, adding oversight to ensure the fiduciary is properly performing their duties can provide more protection. Your trust could name a “Trust Protector,” and you can grant that additional person specific powers. They can receive and review accountings, approve distributions, or remove and replace the trustee if the spot a problem. Your documents could require that the trustee provide information and/or accountings to you plus others, such as your children, accountant, financial adviser, estate planning attorney.
Note that some assets (such as retirement accounts) shouldn’t be transferred to a trust. Those require an agent under power of attorney for finances to manage them. You also can customize that document. Note also that your plan can build in even more protections for your beneficiaries by leaving their inheritances in trust. This type of customized estate plan is best undertaken with assistance from an attorney; this is not a time to DIY.
Have the Talk
Although the trust or power of attorney document can spell out many specifics, there’s no substitute for talking. It’s a good idea to have a thorough discussion with those you have selected. Talk about the role they will have and when, why you chose them, your intentions and goals, and whether they are up to the task.
You also will need other estate planning documents. A will operates only after death. With a trust-based plan, it’s called a “pourover will.” It names a Personal Representative (a/k/a “executor”), who would collect any assets left outside the trust and move them into the trust for administering according to trust provisions.
It’s also important to designate someone to make medical decisions. A health care power of attorney document names an agent for that purpose. If at any time you are unable to make informed medical decisions, your health care agent would make decisions on your behalf. He or she would follow your wishes as best they can determine them, often explained in a living will. For your own protection, talk about your health care wishes, too.