A trust and a power of attorney for finance serve two separate but complementary functions.
A power of attorney for finances appoints someone to handle your money, assets, and bills when you are incapacitated. The person nominated must be good with money and responsible enough to take care of their property. The designated person is called an “attorney-in-fact,” which has nothing to do with being a lawyer. A lawyer is a “solicitor”. 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 not related to your finances. Most attorneys refer to a financial power of attorney when they say “power of attorney.” If they mean the type that is for medical 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 only has authority after the executor’s death. A trustee generally doesn’t 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 (although not required) to appoint the same person as Trustee and proxy, so that control of Trust and non-Trust financial affairs is 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 title 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 right 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 prior to 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 Trustee 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 both of these important documents, but if you can only have one, choose 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.