Who'll Watch the Shop? FAQs About Trusts and Power of Attorney
Picture yourself in a typical soap opera plot: You're involved in a car wreck that puts you in a coma for three weeks. When you awaken, you find yourself with a shocking bout of amnesia, facing at least a fall season's worth of rehabilitation. You'll need someone to pay the bills, help your doctors make decisions, and keep Uncle Sam happy right through sweeps week—after which you make a startling recovery.
If all you have is a will stashed away in your sock drawer, you may be at a disadvantage. Wills, while a necessary part of your estate plan, function only after your death. They're little help in determining who'll look after your kids or handle your finances while you're still alive. A power of attorney or POA, on the other hand, can name someone to act on your behalf in many financial, personal, and health matters during your lifetime.
It's a good idea to consult your attorney or other estate-planning professional before making any alterations to your plan. Here are a few frequently asked questions to get you up to speed.
What is a power of attorney?
A power of attorney is a document that authorizes an
individual to act on your behalf on matters of legal or personal significance if you're unable to act for yourself.
"You can appoint an attorney to do anything legal—walk your dog, clean your dishes, handle your finances—while you're alive, and make medical decisions on your behalf. It's a very broad term," says Alan G. Orlowsky,
president of A.G. Orlowsky Ltd., a law firm in Northbrook, Ill.
You still need a will, even if you have a trust.
A typical POA continues until you revoke it, become incapacitated, or die. A durable power of attorney remains
effective even if you become incapacitated. You can limit the POA to a specific time period, to accomplish a
particular goal, or to perform a specific task such as writing checks. You can revoke power of attorney at any time,
unless you're found to be without the mental capacity to do so.
Whom should I appoint?
A POA can cover a spectrum of responsibilities. The person
you choose—called an attorney in fact—needs to be responsible and reliable, and ideally should live close
by. If you can't find someone to match that description, you may ask a corporate trustee or your personal attorney
What is an estate plan?
An estate plan provides written directions for how you want
your assets managed while you're alive and distributed when you die. It could include a will, a trust, a health-care
power of attorney, and a durable power of attorney. It also should indicate whom you want to take care of your minor
children if you become incapacitated.
An estate-planning attorney can help you set up a plan and administer it over your lifetime.
What is a trust?
A trust is often the centerpiece of an estate plan. Typically you,
the grantor, transfer some or most of your assets into the trust. The trustee, whom you appoint, carries out the
instructions in the trust. During your life, you may want to act as your own trustee and name a successor to take
over for you when you die or become incapacitated. Assets in the trust can be invested and continue to earn money
for your beneficiaries long after your death. There also can be significant tax advantages to setting up a trust.
Is a trust better than a will?
You still need a will, even if you have a trust. The
will addresses distribution of any assets outside of the trust. It also can name your children's guardians and
contain burial instructions.
"When you die, assets not held in trust must be [distributed or] 'probated,' and your will gives instructions to
your executor on how you want these assets distributed," explains Orlowsky. He adds that probate can take six months
or more. What's more, your will must go through probate in all states where you own property, which can be a
time-consuming and costly process.
Trustees cannot use trust assets for their personal gain.
People often set up a trust to protect the privacy of their beneficiaries. Your probated will is public record
and will be available for others to view. Trusts are not subject to probate so your affairs are kept private.
A trust can be a useful instrument for parents of minors. With a will, money that minor children inherit will be
available to them when they turn 18 or 21 (depending on the state), regardless of their ability to handle money. A
trust allows you to schedule payments to your children over a number of years, or to outline an "incentive" plan
that will reward them for achieving goals like graduating from college.
What is a trustee?
A trustee is the person or entity you appoint to carry out the
instructions in your trust. Among other things, your trustee must manage the trust assets as you have instructed,
pay taxes and expenses, and distribute assets according to the terms of the trust.
After death, "A trustee's first responsibility will be to administer the post-mortem trust estate," says Orlowsky.
"This may include locating and inventorying all trust assets, filing estate tax and income tax returns and paying
tax liabilities, collaborating with the executor to marshal probate assets through the court and, most important,
working with the guardians of surviving children to provide for their support."
Power of attorney covers a spectrum of responsibilities.
Every state has its own laws concerning the duties and responsibilities of a trustee. But most state laws are
written in conformity with the Uniform Trust and Trustees Act. Trustees cannot use trust assets for their personal
gain. You should include a provision in the trust for removing a trustee. Without it, your beneficiaries may have to
take legal action to rid themselves of an incompetent trustee.
Whom should I choose for my trustee?
It's common for the person setting up the trust
to act as his or her own trustee, or to appoint a spouse, partner, close relative, or friend. Consult a professional
before putting pen to paper—your choice could have serious ramifications. No matter whom you choose, your ideal
trustee should be honest and reliable, have a good relationship with your beneficiaries, live close by, and be
likely to outlive you.
Family members often fit this description but they don't always have the financial expertise necessary to handle
a trust. Family members also may become too emotionally involved and unable to make difficult decisions.
A trust is often the centerpiece of an estate plan.
Alternatively, you can appoint a corporate trustee such as a credit union, bank, or law firm with a trust
department. The advantages of corporate trustees are that they have extensive expertise, immortality, resources to
cover their mistakes, and they're regulated by government agencies. A corporate trustee will be emotionally detached
from decisions—which is not always a benefit. Many people opt for a family member with a corporation as
co-trustee. The arrangement allows you to benefit from the strengths of both parties.
Should I pay my trustee?
Corporate trustees usually charge a fee for their
services—often a percentage of the assets being administered, with a minimum fee for assets less than a certain
Even though family members often are willing to work for free, trustees have a huge responsibility that can carry
legal liability if they mismanage funds. Be sure to ask first and offer to pay a fee for their time.
Home & Family Finance® Resource Center
Copyright © 1997-2013 Credit Union National Association Inc.