A trust and a power of attorney for finances have two separate but complementary functions.
A power of attorney for finances designates one person to take care of your money, property, and bills when you are disabled. The designated person should be someone who is good with money and responsible enough to take care of your property. The designated person is called an “attorney-in-fact,” which has nothing to do with being a lawyer. A lawyer is a “lawyer”. A power of attorney for finances 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 “power of attorney for health care,” which is a separate document and is not related to your finances. Most attorneys refer to a power of attorney for finances when they say “power of attorney.” If they mean the type of medical care, they usually say so.
A living trust can provide greater protection and easier administration than relying solely on a power of attorney. Think of a trust as a special box in which you place your assets (bank accounts, stocks, your home, rental properties, etc.). This person is NOT the “Executor.” An executor is appointed in a will, approved by a court, and only has authority after your death. A trustee generally does not need court approval and can handle things during your life “and” after your death. That is why it is called a “living” trust. It is customary (although not mandatory) to appoint the same person as Trustee and attorney-in-fact, so that control of the financial affairs of both the Trust and those that are not Trusts is centralized in a single 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 property is not deposited in your Trust during its lifetime. For example:
- If you attempt to title your IRA to your trust, the IRS will treat it as an early withdrawal from the entire account. Your proxy can direct IRA investments, contributions, and withdrawals.
- If you are receiving social security, your entitlement to benefits can only be maintained personally, not in a Trust. Once a monthly benefit is paid to you, the amount paid can 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 talk to the IRS about your taxes. Your administrator does not.
- Your agent, but not your Trustee, can choose Medicare benefits and enforce 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 power of attorney. Without it, your loved ones will need a short-term conservator or guardian to manage their property. This requires a very expensive and public 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.