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Mental incapacity and its potential impact on your estate, P.3

We’ve been discussing in recent posts strategies for addressing potential incapacity in estate planning. That this is an important thing to do is certain, as it can help ensure not only that estate planning documents clearly express the known wishes of the estate owner, but also that an the proper steps are taken for the management of financial affairs and health care decisions.

Another potential strategy for addressing potential incapacity, besides those we’ve already mentioned, is to establish a living trust for mental incapacity. A living trust is a trust created during the lifetime of the grantor, and in which the trustee is the grantor and also the sole lifetime beneficiary of the trust. The grantor names a successor trustee for the trust in case the grantor loses mental capacity to manage the assets, as well as successor beneficiaries to receive the assets at the grantor’s death.

One important point about a living trust is that the terms of may be modified, or the trust may be altogether revoked, until death or incapacity, providing flexibility for the grantor in managing the assets. Because of this great flexibility, though, living trusts don’t have the same tax benefits as other types of trusts. Neither do living trusts protect assets from creditor claims, which is an important point to keep in mind as well.

One of the benefits of a living trust is that it can allow a grantor to avoid probate court, provided that all the grantor’s property at death has been transferred to the living trust. Grantors who want to ensure that this occurs should be sure to provide the appropriate instructions in his or her financial power of attorney document. Typically, grantors will also create a pour-over will as a safety net to catch any property that has not been transferred to the trust at prior to death.

In a future post, we’ll at how living trusts function with respect to Medicaid planning for long-term care.  

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