No tool or technique, no matter how useful, should be employed in a vacuum. For this reason, coordinating the revocable life insurance trust must be meshed with the overall estate plan. Therefore, the planner must consider the following when suggesting the use of a revocable trust (no matter how it is to be funded).
Importance of a Will in Coordinating the Revocable Life Trust
A will is necessary in almost every estate plan for many reasons:
- Few clients will take the time or trouble to place all their assets into a revocable trust no matter what real or even perceived advantages there are.
- No matter how careful and diligent a client may have been about assigning assets to a revocable trust, there will almost always be some asset, such as a car, household items, or jewelry, that will unintentionally be missed and that will pass through intestacy absent a valid will. There may be some assets, such as the proceeds from a lawsuit arising out of the wrongful death of the client that would be impossible for the client himself to assign to the trust. But if the will is coupled with a revocable trust, such assets can be poured over from the probate estate to the trust and unified with other estate assets. (Note that the trust should be in existence before the execution of the will since, in some states, a provision in a will referring to a trust created after the signing of the will is not recognized).
- There are certain objectives that can only be accomplished by will. For instance, a client can’t appoint guardians of the person for his children in a trust, but a will can provide for both guardians and backups.
Importance of a Durable Power of Attorney
A power of attorney is a relatively simple and inexpensive legal document by which a client gives a spouse, child, other relative, or trusted friend (technically called the attorney-in-fact) the legal right to act on behalf of the client and in his place with respect to specified financial matters. The power of attorney can be drawn as broadly or as narrowly as desired.
The power of attorney should generally be durable. This means the power given to the agent is not affected by the client’s subsequent disability or incapacity. (Each state has slightly different magic words that make a power durable).
In coordinating the revocable life trust, a well-drafted power may negate the need to petition a court to have a guardian or conservator appointed for handling assets during the client’s lifetime that have not already been placed into the revocable trust. In the case of a revocable life insurance trust where the trust has been formed but the only asset in the trust is the trust’s right to receive life insurance proceeds, the coordination of the durable power with the trust is essential to protect the client. This planning is essential, not only if the client is suffering from a physical disability or illness that could lead to permanent or long-term incapacity, but also by healthy clients who would like to assure continuity of asset management if for any reason they can’t handle their own affairs for a period of time. If the power is broad enough, the attorney-in-fact could transfer assets into the previously established revocable trust.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM