You may have come to the conclusion that you need someone to manage your finances just in case something happens to you.
You look to creating an estate plan with this goal in mind, and now maybe you are wondering whether you need a Financial POA or a living trust. After all, as far as financial management is concerned, they seem to do the same thing.
In this article we take a look at the differences between a Financial POA and a living trust and, rather than choosing one or the other, learn how both can work together and complement the other’s functions for a more comprehensive estate plan.
Do You Really Need Both?
To answer this question, we take a look at the core difference between these two estate planning tools.
The Scope of Properties Covered
In a living trust, the trustee has authority to manage or administer only those assets that have been transferred to the trust. If a certain property was never funded into the trust, the trustee has no authority over that property at all.
In a Financial POA, the Agent or Attorney-in-Fact has authority over the assets that are owned and titled under the name of the principal. It must be noted, however, that this authority only extends to the extent that it is granted in the POA document. The principal can very well limit the authority of the Agent only to specific assets or specific transactions.
In general, however, most POAs do grant the Agent broad authority to manage the Principal’s assets outside of a trust. This allows the Financial POA to complement the trust, ensuring that no asset or property is left without proper oversight.
The Duration of Authority
Another crucial difference between a Financial POA and a living trust is the time period within which the authority granted is effective.
Because they don’t really operate for the same period of time.
The Financial POA takes effect only during the lifetime of the principal. Depending on how it is intended to operate, it may take effect immediately upon execution, or is triggered by the principal’s incapacity. The person appointed as Agent or Attorney-in-Fact then acts pursuant to the Financial POA, to protect, preserve and administer the principal’s properties and to handle all other financial transactions, for the benefit of the principal.
Such authority is only valid, however, during the lifetime of the principal. As soon as the principal dies, the source of the delegated authority no longer exists, rendering the POA ineffective. After all, a person can’t exercise delegated authority if the person delegating that authority has already passed away.
This is in sharp contrast to a living trust. Typically, a living trust is effective throughout the principal’s lifetime, and even after the principal’s death.
Most living trusts are administered by the trustee during the lifetime of the grantor. Once the grantor passes away, the living trust becomes irrevocable, and the trustee continues to manage the trust assets until the purpose of the trust has been fulfilled. For instance, the trust assets may eventually be distributed to the grantor’s children as soon as they reach a certain age.
Only once the trust assets have been distributed according to the grantor’s wishes is the living trust terminated.
They Do Different Things
The most significant difference between the Fiduciary POA and the living trust, and the reason why one cannot really be a substitute for the other – is the fact that these two estate planning instruments really do different things.
While in both, the person authorizes a fiduciary to act on his behalf in managing his finances, the similarity ends there. “Finances” is, after all, not an entirely homogenous thing.
The Agent or Attorney-in-Fact to a Financial POA is primarily tasks with handling the practical financial matters of everyday life. These are the things that the principal would have done himself, if he were able to, and must be handled by someone else, if the principal is incapacitated or otherwise indisposed. Things that must be handled quickly and without too much fanfare, as they ensure the orderly running of daily life.
For instance: paying bills, filing tax returns, managing and ensuring access to bank accounts, communicating with creditors and government agencies, collecting income, or handling insurance matters.
On the other hand, the trustee of a trust is tasked with managing and administering the assets of a trust, and ensuring that the purpose of the trust instrument is fulfilled. This may involve the preservation and protection of the trust assets, paying out support for the trust beneficiaries, paying the costs of maintenance of trust properties, and otherwise making distributions from the trust based on the terms specified in the trust document.
Combining the Two
Because these two estate planning instruments cover different properties, different time periods and fulfill different purposes or objectives, the question isn’t really about Financial POA vs. a living trust. Though they may both fall under the broad category of taking care of a person’s finances, both can actually coexist and complete a more comprehensive way to manage one’s finances in one’s estate plan.
Each serves a different purpose. Neither replaces the other.
If you’re intending to create an estate plan and would like assistance in designing one that fully protects your finances, don’t hesitate to reach out to us today. Our estate planning attorney can help you analyze your options and draw up a Financial POA and a living trust that meets your specific needs.