Trust and Power of Attorney for Finance serve two separate, but complementary functions.
A Power of Attorney for Finance appoints someone to handle your money, property, and bills when you can’t afford it. The nominee must be someone who is good at managing money and responsible enough to care for your property. The person appointed is called the “real lawyer”, which has nothing to do with being a lawyer. Lawyers are “lawyers in law”. A Power of Attorney for Finance is sometimes called a Durable Power of Attorney. “Durable” means the Power of Attorney remains in effect, even if you become incapacitated. There may also be a “power of attorney for health care”, which is a separate document and is unrelated to your finances. Most attorneys mean Power of Attorney for Finance when they say “power of attorney.” If they mean the kind that is for health care, they generally say so.
Living Trust can provide greater protection and easier management than relying solely on a Power of Attorney. Think of a Trust as a special box where you place your assets (bank accounts, stocks, your house, rental property, etc.) The person you appoint to take care of the box is called a “Trustee”. This person is NOT an “executor”. An Executor is appointed in a will, approved by the courts, and only has authority after you die. Trustees generally do not require court approval, and can handle matters during your life “and” after your death. This is why it is called a “living” belief. It is customary (though not required) to refer to the same person as the Trustee and as the attorney, so that control over the financial matters of Trusts and non-Trusts is concentrated in one person.
Even if you own a Trust, you will still need a Power of Attorney as it applies, for the rest of your life, to the management and control of your property that is “not” in the Trust. Certain properties are not entered into your Trust during your lifetime. As an example:
- If you try to give your IRA your trust, the IRS will treat it as an early withdrawal of the entire account. Your attorney can actually direct IRA investments, contributions, and withdrawals.
- If you receive social security, your rights to benefits can only be held personally, not in the Trust. Once the monthly benefit is paid to you, the amount paid can be placed in your Trust, but not before payment. Your attorney can actually transfer social security payments to your Trust and access your records with the Social Security Administration.
- Your attorney actually has the authority to prepare and sign your personal tax return or talk to the IRS about your taxes. Your Trustee does not.
- Actually your attorney, but not your Trustee, can make Medicare benefit selections and enforce your rights under Medicare.
- If you forget to put assets in your Trust, your attorney can actually make the transfer.
A good inheritance plan contains both of these important documents, but if you can only have one, opt for a Power of Attorney. Without it, your loved ones will need a conservator or court-ordered guardian to handle your property. This requires very general fees and procedures. 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 choices, while avoiding unintended consequences.