Revocable living trusts have long been an important tool to minimize estate taxes and avoid probate. But these benefits are realized after a death. Growing in importance as the baby boomer generation ages are the benefits a Living Trust can provide long before death. A fully funded Revocable Living Trust can help prepare for the aging process and the cognitive disorders that many elderly experience.
In the normal case a husband and wife creating a Living Trust (the Trustors) name each other as co-trustees and choose a child or a relative to be their successor trustee—the person who takes over management of the Trust when the original Trustors die or become disabled. This works fine until the Trustors can no longer manage their finances. Then the nominated successor trustee takes over. Results will vary widely depending upon the skill and honesty of the person chosen for the job. Most successor trustees will do their best. But many have been chosen because of a relationship—e.g. a firstborn child—and not for his or her competence. Such a trustee may have no concept of what it means to be a fiduciary and might have no experience in managing significant assets. Or, worse, a successor trustee may find it impossible to withstand the temptation of “borrowing” money from the estate or using estate assets for their personal needs. These successor trustees can commit substantial financial abuse and can ruin a lifetime of prudent financial planning. In our practice we have often seen that a child is responsible for the financial abuse of a parent.
In planning for older age, there are some steps that can be taken to minimize this risk. Creating a Revocable Living Trust is a good first step. Then it should be funded it as fully as possible to place all possible assets under the protection of your nominated successor trustee.
The successor trustee must be carefully chosen. A family member may be an appropriate choice but only if he or she has the necessary skills to do a competent job. If no family member has the necessary skill set, an independent professional fiduciary should be named as successor trustee. A fully funded trust with an independent professional fiduciary is often a top choice for the protection of an elderly person’s estate.
In addition, a CPA monitor can be created with the job of monitoring the estate books and records and providing periodic reports to the Trustor or to a person selected by the Trustor. This is always appropriate but can be very important when a family member is serving as Successor Trustee.
Finally, a Trust Protector can be created with, among others, the powers to remove a trustee and change the interest of any trust beneficiary. A.R.S. § 14-10818 authorizes the creation of a Trust Protector.
With careful planning, a Revocable Living Trust can not only avoid probate and minimize estate tax, but it also can help avoid financial abuse and safeguard the assets you have accumulated for your benefit and the benefit of your beneficiaries.