A trust and a financial power of attorney serve two separate but complementary functions.
A financial power of attorney assigns someone to handle your money, possessions, and bills when you are incapacitated. The nominated person must be someone who is good at money and responsible enough to take care of your belongings. The person appointed is called a “real-world attorney”, and has nothing to do with being a solicitor. A lawyer is a ‘lawyer at law’. A financial power of attorney is sometimes called a permanent general power of attorney. “Permanent” means that the power of attorney remains valid, even if you become incapacitated. There can also be a ‘Healthcare Power of Attorney’, which is a separate document and has nothing to do with your money. Most attorneys refer to a financial power of attorney when they say “power of attorney.” If they mean the type intended for healthcare, they generally say so.
A living trust can provide greater protection and easier management than relying on a power of attorney alone. Think of a trust as a private trust in which you put your assets (bank accounts, stocks, your home, rental properties, etc.) This person is not the “executor”. The executor is appointed in a will, approved by the court, and has power only after your death. A guardian generally does not need court approval, and can handle matters during your life “and” after your death. This is why it is called a “living” trust. It is customary (though not required) to name the same person as a true trustee and solicitor, so that both fiduciary and non-fiduciary financial matters are controlled with one person.
Even if you have a trust, you still need a general power of attorney because, during your lifetime, it applies to the management and control of your property “that is not” in the trust. Some possessions are not placed in your trust during your lifetime. for example:
- If you try to grant your IRA to your trust, the IRS will treat that as an early withdrawal of the entire account. Your attorney can actually direct IRA investments, contributions, and withdrawals.
- If you receive Social Security, your right to benefits can only be held in person, not in a trust. Once you are paid a monthly indemnity, the amount paid can be placed in your will, but not before payment. Your attorney can 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 returns or talk to the IRS about your taxes. Your guardian does.
- Your attorney, but not your trustee, can actually conduct Medicare benefits elections and enforce your rights under Medicare.
- If you forget to put an asset in your trust, your attorney can actually make that transfer.
A good estate plan contains these two important documents, but if you can only get one, choose a power of attorney. Without it, your loved one will need a court order or a trustee to handle your property. This requires expenses and a very general 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 get the full benefit of your rights and options, while avoiding unintended consequences.