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It's a Matter of Trust

03/08/2017  |  By: Gretchen Bates, Manager, Tax

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Americans today are living longer than any previous generation. While some fortunate senior citizens remain mentally acute their entire lives, others are not so lucky.

Age-related cognitive impairment and dementia among senior citizens are on the rise in the United States. In an increasingly complicated world, even a mild impairment can make it difficult for a once independent person to manage his or her own financial affairs.

Early estate planning is one way to insure that as you age, your assets will be protected and managed with your best interests in mind. One common method is the creation of a revocable living trust (“living trust”). The living trust is the simplest form of all trusts. It is created by “the grantor” while he or she is alive and of sound mind. The terms of the trust agreement are entirely up to the grantor. Because it is “revocable” the grantor can change the terms of the trust as their circumstances or wishes change. The grantor acts as trustee of the living trust until he or she is no longer able to do so, at which time, a successor trustee, selected by the grantor, manages the trust on behalf of the grantor.

The trustee is legally bound to manage the assets in the trust for the long-term benefit of the grantor and any beneficiaries that the grantor has named. As the grantor’s capacity to manage his or her own financial affairs diminishes, the trustee acts on their behalf to pay bills and oversee bank accounts, make investments, pay taxes, collect rent or unpaid debts, purchase insurance, and other duties written in the living trust.

Careful selection of a trustee is important because once the grantor has become incapacitated or has passed the trustee holds ultimate authority over the trust. The trustee should be an independent person, bank, trust institution or trusted family member. The trustee’s primary responsibility is to administer the trust in strict accordance with the trust document.

One way to provide an additional layer of protection is by appointing a Trust Protector. A Trust Protector’s sole purpose is to ensure that the trustee is not taking advantage of its authority. In the unfortunate event that a trustee is charging excessive fees or mismanaging the trust corpus, the Trust Protector has the ability to fire the trustee. The Trust Protector serves as a balance of power between the trustee, the grantor’s wishes as written in the trust agreement, and the trust’s beneficiaries. He or she is usually a person that was close to the grantor and is familiar with their long-term financial and personal goals. Family lawyers, wealth advisors, and CPAs are often asked to serve as Trust Protectors.

Prenuptial (or antenuptial) and postnuptial agreements are becoming increasingly popular asset protecting tools. A prenuptial agreement is a contract between two people intending to marry, which details how their assets will be divided, payment of alimony, and spousal support in the event of divorce or death. A post-nuptial agreement (allowed in some states) serves the same purpose but is created after a couple marries. Pre and postnuptial agreements are becoming increasingly common, not only as a way to safe-guard assets in case of divorce, but also as estate planning tools. As more people are getting married later in life, and for a second or third time, pre and postnuptial agreements are being used as a means of preserving assets amassed prior to marriage. They are also being used to ensure assets will be passed to an individual’s children, rather than potentially becoming tied-up in a surviving spouse’s estate and passed out to step-children or a new spouse. Depending on state law, without a trust or pre or postnuptial agreement in place, a surviving spouse might automatically claim up to one-half of a deceased spouse’s estate. Many pre and postnuptial agreements waive this spousal claim.

All estate planning and asset protecting tools should be taken into consideration together as a whole and should be updated when lifechanging events occur. Any time a prenuptial agreement is created, an attorney should insure that it agrees to any trusts that have been created, and the most current last will and testament.

Estate planning can get complicated but it doesn’t have to be daunting. With careful planning and key advisors in place you can spend your remaining years in peaceful reflection of a life well lived rather than fretting over financial matters.

Gretchen is a Senior on the Wealth Management team at LBMC. She focuses on tax planning for high net worth individuals. Gretchen prepares corporate, partnership, individual, trust, gift and foundation tax returns. She is a Certified Public Accountant and holds an Intacct Accountant Partner Certification.

Posted in: Financial Solutions
Tagged with: wealth management