Funding a Trust to Avoid Guardianship or Conservatorship

This trust lets you name someone to manage your affairs

Senior couple meeting with financial advisor

vgajic / Getty Images

Establishing and funding a revocable living trust is a simple way to avoid a court-supervised conservatorship if you should become mentally incapacitated. You can nominate someone now to take care of your personal affairs later, rather than rely on a court to select someone you might not want to act on your behalf.

What Is a Conservator?

A conservator isn't the same as a guardian, although a mentally incapacitated individual—referred to as the ward—might require both. A guardian tends to the individual's medical care and physical needs. A conservator manages the ward's finances for them.

A court might appoint both a conservator and a guardian, or it might name the same person to assume both roles. If the ward's finances involve handling more than $20,000 or so annually, a conservator will generally be appointed. A guardian can typically handle smaller amounts of money on behalf of the ward.

Setting Up a Revocable Living Trust

A revocable living trust is established by writing a trust agreement that sets its terms. A trust involves at least three primary players: the grantor—also called the trustmaker, settlor or trustor—a trustee, and one or more beneficiaries. These parties will typically be the same person.

This sets a revocable living trust apart from an irrevocable trust, which requires that the grantor step aside after they've created the trust—naming someone else as trustee and designating the beneficiaries.

After a revocable living trust agreement has been signed, the grantor will proceed with funding the trust with all or some of their assets. This involves transferring ownership of the assets into the name of the trust. They can designate the trust as the beneficiary of retirement accounts, life insurance policies, and annuities. The trustee—who is typically the grantor—will then manage, invest, and spend the trust property for the benefit of the beneficiary, who is also the grantor.

How Can a Trust Help to Avoid Conservatorship?

The grantor will not own any property in their individual name if all assets have been funded into the name of the revocable living trust. They'll instead be owned by the trust and managed by the trustee for the benefit of the beneficiary. The trust assets therefore won't be subject to a court-supervised conservatorship should the grantor become mentally incapacitated, although the grantor might still need a guardian to see to their medical care and to oversee small daily expenses.

The grantor can name a successor or disability trustee in the trust agreement, someone to whom they give legal authority to step in and take over management of trust assets should a time come when they can no longer do so independently.

A Word of Caution

A revocable living trust can only control assets that have been funded and transferred into it. This can pose a problem for life insurance, retirement accounts, and annuities.

The grantor can change the owner of the life insurance or a non-qualified annuity to the revocable trust, although this can't be done with retirement accounts or qualified annuities. A change of ownership for these types of assets will trigger an immediate income tax on their value.

Power of Attorney

The grantor can sign a general power of attorney or a specific power of attorney with the account custodian, but this must be done before incapacitation occurs and ideally well in advance. Courts will generally not honor powers of attorney if there's any question as to whether the individual was incapacitated at the time they signed it.

Some states offer creditor protection for life insurance or annuities that are owned by an individual rather than a revocable living trust, so changes of ownership should be avoided with these assets. And if a general power of attorney is used, it must contain the specific ability for the agent—the individual authorized with these powers—to deal with life insurance policies, annuities, and retirement accounts.