Planning for potential disability, and particularly mental incapacity, is a cornerstone of a well-rounded financial plan. Women in particular are at a higher risk of becoming disabled, with 44% of women aged 65 or older having a disability. While physical disabilities may not impact a client’s ability to manage their own assets, mental illnesses and age-related cognitive impairment can eventually lead to incapacitation and the inability to manage their own assets. Many financial advisors know the asset protection, administrative,and cost reduction benefits of revocable living trusts (RLTs),  but few know the power of an RLT to plan for a client’s incapacity. RLTs are highly effective tools to protect a client’s assets against failing capacity. In fact, RLTs can be even more powerful and effective than a durable (financial) power of attorney (POA), although the client should have both.

RLTs offer the client (the grantor) the freedom and flexibility to manage their own assets while they can, but provides a financial safety net when and if the client loses capacity by naming a co-trustee who can immediately and easily step in and take over the assets.

It is important to understand that cognitive decline can appear in a variety of ways, and incapacitation can be difficult to determine, so the provision detailing when the co-trustee can take over is critical. For example, it is common to include a requirement that a medical professional’s determination of incapacity is required. However, patients suffering from cognitive decline often become resistant to seeing medical professionals, especially if they suspect their autonomy is at risk.

Clients may question the need for an RLT if they already have a financial power of attorney document. RLTs offer several advantages over a POA:

• Through the trust terms, the client can clearly express their intentions regarding the management and use of the trust assets. In contrast, a POA typically only authorizes the agent to act, but does not provide any specific direction and guidance. Only a POA authorizes someone to assist with financial transactions (such as selling a home), represent the client and sign documents on behalf of the client. In addition, the trustee in an RLT only has access to assets inside the trust, while the POA can manage assets outside of the trust. Therefore, a client would benefit from a POA in addition to the RLT.

• Trustees are often viewed more credibly than POAs because RLTs are created with attorney involvement, whereas POAs can be created online in some states and are often involved in lawsuits for fraud and elder abuse.

• If the client is a victim of fraud or identity theft, RLTs provide protection against identity theft and fraud since the trust has a taxpayer ID independent of the client’s taxpayer ID and Social Security number.  

• The co-trustee can be the same individual named as the POA.

Clients may believe that simply adding a trusted family member as a joint owner to their accounts and property provides the same level of protection without the hassle and expense of creating a POA or an RLT. However, the joint owner does not have any fiduciary obligation to use the assets on behalf of the client. Only a POA or trustee are bound by this requirement. In addition, unlike a POA, the joint owner has no authority to act on behalf of the client. The POA is responsible for acting according to the principal's wishes and in the person's best interest.

Once your client has a POA, make sure you share it with each institution holding accounts. Most institutions require a review and approval process. Don’t wait until you need to use the POA.

By planning ahead and creating a POA and a RLT while a client still has capacity, and by providing the POA to the appropriate financial institutions prior to incapacitation, you will help ensure your client’s assets will be better protected.

Sophia Duffy, J.D., CPA, AE­P, is assistant professor of business planning at the American College of Financial Services.