Funding a Trust Avoids Guardianship or Conservatorship

Funding a Trust Avoids Guardianship or Conservatorship

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Another common and simple way to avoid a court-supervised guardianship or conservatorship if you become mentally incapacitated is to establish and fund a Revocable Living Trust.

Setting Up a Revocable Living Trust

A Revocable Living Trust is established by writing a trust agreement and involves three primary players: the Trustmaker, also called the Grantor, Settlor or Trustor, the Trustee, and the Beneficiary.

In the typical situation, when the Revocable Living Trust Agreement is created the three players - Trustmaker, Trustee, and Beneficiary - will be one in the same person.

Once the Revocable Living Trust agreement has been signed, the Trustmaker will proceed with funding the trust with all of his or her assets and designating the trust as the beneficiary of retirement accounts, life insurance, and annuities. The Trustee (who, as mentioned above, is also the Trustmaker) will then manage, invest, and spend the trust property for the benefit of the Beneficiary (who, as mentioned above, is also the Trustmaker).

How a Revocable Living Trust Avoids Guardianship or Conservatorship

Because the Trustmaker will not own any property in his or her individual name after the assets have been funded into the name of the Revocable Living Trust - they will instead be owned by the Trustee for the benefit of the Beneficiary - if the Trustmaker becomes mentally incapacitated, then the trust assets won't need to be subjected to a court-supervised guardianship or conservatorship.

Why? Because the Disability Trustee named in the trust agreement will have the legal authority to step into the Trustmaker's shoes and take over control of bank and investment accounts and business interests without the need for a court-supervised guardianship or conservatorship.

One word of caution: A Revocable Living Trust can only control assets that have been funded into it.

This poses a problem for life insurance, retirement accounts, and annuities. What if the Trustmaker owns a life insurance policy or annuity or has some assets tied up in a retirement account? In this situation there are two options: (1) Change the owner of the life insurance or non-qualified annuity to the Revocable Living Trust (note that this can't be done with retirement accounts or qualified annuities because a change of owner for these types of assets will trigger immediate income tax on them); or (2) Sign a general Power of Attorney and/or specific Power of Attorney from the account custodian. In the former case, because some states offer creditor protection for life insurance or annuities that are owned by an individual and not a Revocable Living Trust, change of ownership should be avoided. In the latter case, if a general Power of Attorney is used, then it must contain the specific ability to deal with life insurance policies, annuities, and retirement accounts.