A trust and a power of attorney for finance serve two separate but complementary functions.
A financial power of attorney names someone to handle your money, property, and bills when you are incapacitated. The person nominated must be good with money and responsible enough to take care of their property. The person appointed is called an “attorney,” which has nothing to do with being a lawyer. A lawyer is a “procurator.” A financial power of attorney is sometimes called a durable power of attorney. “Durable” means that the power of attorney remains valid, even if you become incapacitated. There may also be a “health care power of attorney,” which is a separate document unrelated to your finances. Most lawyers refer to a financial power of attorney when they say “power of attorney.” If they mean the kind that is for health care, they usually say so.
A living trust can provide greater protection and easier administration than relying on a power of attorney alone. Think of a trust as a special box in which you put your assets (bank accounts, stocks, your house, rental properties, etc.). This person is NOT the “Executor.” An executor is appointed in a will, approved by a court, and has authority only after the executor’s death. A trustee generally does not need a brief approval and can handle things during his lifetime “and” after his death. That is why it is called a “living” trust. It is customary (but not required) to appoint the same person as Trustee and proxy so that control of Trust and non-Trust financial affairs are centralized in one person.
Even if you have a trust, you still need a power of attorney because it applies, during your lifetime, to the management and control of your property that is “not” in the trust. Certain assets are not placed in your Trust during your lifetime. For example:
- If you try to entitle your IRA to your trust, the IRS will treat it as an early withdrawal from the entire account. Your agent can direct IRA investments, contributions and withdrawals.
- If you are receiving social security, your entitlement to benefits can only be held personally, not in a trust. Once a monthly benefit is paid to you, the amount paid may be deposited into your Trust, but not before payment. Your agent can transfer social security payments to your Trust and access your records with the Social Security Administration.
- Your agent has the authority to prepare and sign your personal tax returns or speak to the IRS about your taxes. Your Trustee does not.
- Your agent, but not your Trustee, can choose Medicare benefits and assert your rights under Medicare.
- If you forgot to put an asset in your Trust, your agent can make that transfer.
A good estate plan contains these two important documents, but if you can only have one, choose the power of attorney. Without it, your loved ones will need a court-ordered conservator or guardian to manage your property. This requires a very public expense and procedure. Whether you choose both documents or one over the other, they should only be prepared with the help of an attorney. This will ensure that you receive the full benefit of your rights and options, while avoiding unintended consequences.