CHAPTER 5
Who Should You Select as the Lifetime Agent of Your Living Trust? OR IF YOU BECOME INCAPACITATED, WILL YOUR LIFETIME AGENT MANAGE YOUR LIVING TRUST FOR YOUR BENEFIT . . . OR FOR HIS?
A longer life is one of the blessings of our times. However, a longer life capacity brings with it the likelihood—perhaps a near certainty—that one spouse will become severely injured, incapacitated, or unable to make clear mental decisions before the death of the other spouse.
If you become physically, mentally, or emotionally incapacitated, you are no longer able to effectively and efficiently control and manyou are no longer able to effectively and efficiently control and manage your own assets. Therefore, someone must step in and fill that role. This person is known as the court-appointed conservator. A conservator is someone who receives an order from the court, which allows him or her to take over the incapacitated person’s medical and financial affairs. Generally, this person is your spouse, your child, your cousin, or even some professional caretaker. Although conservator agreements appear to be a sound option, they are time-consuming and expensive. Moreover, there is the unnerving possibility that someone you don’t know or don’t like will manage your financial portfolio and in essence be your boss!
As an experienced attorney who has seen his fair share of disgruntled conservatorship relationships, I believe that they should be avoided at all costs. On a selfish level, preparing conservatorship documents can be one of the most time-consuming, work-intensive, and tedious tasks that falls on an estate planning attorney’s desk. Yet, I suppose that is the way it should be. After all, if a court is going to take away your right to make your own medical and financial decisions and then surrender that power to someone else, the court needs a boatload of information about you and the person who has applied to take over. On many occasions, this paperwork has to be done yesterday in order to give the applicant the power to deal with an emergency that could result in harm to you, like revoking the power of attorney you signed while in your haze that gave some predatory fortune hunter unfettered access to your bank accounts.
But do not fear. The conservatorship process can be avoided if you appoint someone to be your financial agent in a non-Living Trust document called a “power of attorney for asset management.” In this document, you appoint someone to sign your name to financial documents—deeds, checks, contracts—if you become incapacitated as determined by a licensed physician.
However, the power of attorney is not effective over Living Trust assets. In other words, this financial agent does not have any power to manage or wheel and deal your Living Trust assets.
Therefore, in your Living Trust, you must appoint someone known as the successor trustee to act as your lifetime agent over your Living Trust assets. The successor trustee comes into play during your lifetime if you become incapacitated to the point where you can no longer manage your Living Trust assets. Translation: You become so physically or mentally addled that you can no longer write checks or pay bills without someone guiding the pen in your hand.
In addition, your successor trustee can also kick in during your life if you resign as trustee because, for example, you no longer want to be bothered with the seemingly endless details of managing your financial affairs. If your successor trustee takes over during your lifetime for either of these reasons, he or she becomes your lifetime agent. (If your successor trustee kicks in because you have . . . ahem . . . kicked the bucket, he or she becomes your after-death agent.) Because the person who inhabits the role of lifetime agent has tremendous power of your finances, this chapter focuses on selecting your lifetime agent.
Your Lifetime Agent’s Duty to Accomplish the Three Ps of Asset Management
Your lifetime agent’s major objectives are to manage your Living Trust assets and to pay (or apply) the income and principal for your benefit. From an administrative standpoint, the responsibilities include collecting the income from your Living Trust assets, writing checks for your day-to-day needs, and making sure that none of the assets are used for any purpose other than your support, health, education, comfort, and maintenance. The lifetime agent also has the duty to engage in all steps that are “reasonable and necessary” (lawyer lingo) to accomplish what I call the Three Ps of asset management: preserve your assets, protect them, and make them productive.
1. Preserve your Living Trust assets. Your lifetime agent cannot allow the assets to be diminished or wasted through diversion, bad management, or inappropriate or risky investments. In other words, your lifetime agent cannot use your Living Trust assets to purchase a vacation home for you when you do not need that property for vacation or investment, and cannot spend your money on that “can’t miss” tip on that horse in the third race at Santa Anita that he got from his shady brother-in-law.
2. Protect your Living Trust assets. Your lifetime agent must ensure that assets are sheltered from such outside interlopers who may attempt to secure and access the assets for purposes other than those set forth in your Living Trust. For example, say your son-in-law is the type of guy who mentally sizes up the value of your estate every time he comes over to your house. You just know that if you become incapacitated he will somehow worm his way into your money and property. This is where your lifetime agent steps in. During your incapacity, your lifetime agent is on the scene to ensure that your Living Trust assets stay in your Living Trust and are protected from any con job that your son-in-law will muster.
3. Make your Living Trust assets productive. Your lifetime agent must invest your Living Trust assets so that their value at least keeps pace with inflation. This is not an exacting standard. For example, a dollar in your Living Trust today can purchase a dollar item today. Ten years from now, when inflation has jacked up the price of that dollar item, the purchasing power of that Living Trust dollar must be raised to purchase that same item. That lift occurs through simple investment in interest-bearing accounts and conservative blue-chip brokerage assets.
The Not Very Scientific Method of Selecting the Lifetime Agent of Your Living Trust
Okay. So now that I’ve trained you on the role of the lifetime agent—the successor trustee—the time has come to select the person or persons or entity that will play that role if you, the trustee of your Living Trust, become incapacitated.
First off, the one who automatically takes over as your lifetime agent is your spouse. This is a no-brainer. Your spouse is already a co-trustee of your Living Trust. If your spouse is alive and competent, he or she will assume control as the sole trustee—the sole manager of the Living Trust assets.
As the sole manager, your spouse will have the power to wheel and deal the Living Trust assets all day long, just as your spouse had that power since both of you signed your Living Trust. Nothing has changed. Your spouse can still sell the Living Trust assets, exchange them, buy them, and borrow against them . . . whatever your spouse wants to do.
And just as before your incapacity, your spouse collects the income. As the sole manager, your spouse distributes all income generated by the Living Trust assets to the persons who are the beneficiaries of the Living Trust during your joint lifetimes (that is, to you and your spouse).
And just as before your incapacity, your spouse has control over the principal. As the sole manager, your spouse has the power to dip into the Living Trust assets and distribute funds for the support, health, and comfort of the Living Trust beneficiaries, who, again, are you and your spouse.
It’s easy to see how your spouse, as the sole manager, distributes income and principal to you. But here’s a head-scratcher: How does your spouse, as the sole manager, distribute income and principal to himself or herself as a beneficiary? Isn’t your spouse just one person? Yes, but your Living Trust refers to you and your spouse in two capacities—trustees and beneficiaries. That is a name game that must be played so that your Living Trust can qualify as a true trust under the law of your state. So, even though your Living Trust describes this elaborate procedure of delivering income and principal from the trustee to the beneficiaries during your joint lives, you really do not have to engage in the existential exercise of giving a check from your “trustee hand” to your “beneficiary hand.” Remember, you are the Living Trust . . . the Living Trust is you.
Do You Trust Your Children to Watch Your Back (Financially Speaking)?
However, the plan of your spouse taking over as the sole manager is dependent on several assumptions: that your spouse will be alive when you become incompetent; that your spouse will outlive you; and that your spouse will remain alive and competent during your entire incapacity.
Of course, we all know that it is entirely likely that your spouse may die before you, or will experience a period of time before death in which she becomes incapacitated herself to the point where she cannot be the sole manager of the Living Trust. Therefore, you now need to engage in the process of selecting the person, persons, or entity that will take over as your lifetime agent—your successor trustee—in the event of your incapacity when your spouse cannot play that role.
Before you determine the person who will be responsible for managing your Living Trust, you must figure out whom you trust to be your successor trustee. If you are like most of my clients who have children, you will select your children as your lifetime agent. This makes sense since, well, they are your children and your selection of them to serve is natural and instinctive.
When it comes to your children serving as your lifetime agent, there are two inquiries that must be made: Will they step up and serve when called upon? And do you trust your children with your Living Trust assets?
Will Your Children Serve?
If your children are like the vast majority of those who are appointed as lifetime agent of the Living Trust, they will accept the responsibility of managing your Living Trust assets for your benefit. Perhaps they will not be thrilled with the idea of taking over your financial affairs when they have their own fish to fry, but they will still take the job of being your lifetime agent. Why? Because of blood and instinct. The blood connection between parent and child creates an instinctive moral obligation to help parents when they need help.
I realize this may not be true in all cases. And I know that I do not possess the academic qualifications to bring forth such a psychological explanation. But, after being a percipient witness to hundreds of Living Trust takeovers by the children during my 20-year practice, I can say that not one child has declined to serve as the lifetime agent when the parent became incapacitated. Even children who initially kicked and screamed in resentment wound up serving as lifetime agents.
Let me ask you this rhetorical question: If not for blood and instinct, what else would cause somebody—for no compensation—to spend a considerable amount of time on the often enervating and thankless function of managing the financial affairs of another person? Except for those who wish to capitalize on the opportunity to raid the Living Trust assets for their own use, the only motivation can be that a family member requires assistance.
Do You Trust Your Children?
How dare I ask this question about your precious children, who you may believe can do no wrong? Oh, I dare! If you have seen what I have seen—the financial loss and abuse after children have taken over their parents’ Living Trust assets—you would dare, too!
At first blush, selecting your children as your lifetime agent makes sense. After all, your children are your children, and they would never do anything to cause harm to you or loss to your Living Trust assets. As your children, they have a moral obligation to ensure that your Living Trust assets are used entirely for your benefit and that they are protected for you and from any potential risks of loss.
I know I am supposed to sound like a lawyer in order to convey to you a sense of professionalism, but . . . Oh yeah?! Moral obligation, my a**! You are not a jaded Living Trust lawyer who has seen happen all the things that were never supposed to happen, including financial abuse from children who just cannot wait to spend their inheritance while you are alive. Check out this dialogue to give you a sense of my take on that so-called moral obligation:
Client: Mr. Condon, I would like to tell you what my husband’s last words were to me.
Me: Go ahead.
Client: He said, “Watch out for the children.”
Me: Oh, how lovely! He really wanted to make sure that your children are always protected and taken care of.
Client: No, no, no.
Me: Oh, then you mean he wanted you to be financially generous with them so they never have to worry about money. What a lovely man your husband was.
Client: No, no, no. You don’t understand. He meant that he wanted me to be on guard against them.
Me: Why?
Client: Because he knew I would need to protect myself against them.
This brief passion play actually took place in my office, word for word. And yes, I am fond of peppering my sentences with the word “lovely.” Not very manly, I admit. But I digress from the point I am making by relating this dialogue. Your children are not getting any younger. They want to use their inheritance to enhance the remaining years of their lives. But the problem is, you are not dead yet. They can see their inheritance. They can touch it and smell it. But if you keep on living, they will be too old to enjoy their inheritance.
Is this the mind-set of your children? You will never know, because they will never tell you, even if the thoughts have crossed their minds. But, it certainly is prevalent among children with elderly parents. In one conversation I had with an attorney in the Los Angeles district attorney’s elder abuse unit, I learned that 85 percent of their caseload involves financial elder abuse perpetrated by children of the victims, and many of those cases deal with pressures imposed upon diminished surviving spouses by their children for an early inheritance.
Let me put it another way. Your lifetime agent is supposed to use your Living Trust assets solely for your health and support, but if you select your children as your lifetime agent, they realize that the more of your money spent on you, the less there will be for them when you die.
So, as unpleasant as the task may be, you must ask yourself the same question posed in the preceding chapter: Are your children going to pay for the best home health care or assisted living facility that your Living Trust assets can buy, or are they going to dump you into that nursing home that was profiled on 60 Minutes?
If you consider the possibilities—however remote—that your children will look at your Living Trust assets as their checkbook during your incapacity, you are able to make an informed decision on whether your children should serve as your lifetime agent. Most likely, you will dismiss this possibility out of hand, as in “My children would never steal from me, and I’m going to keep them as my lifetime agent.” Fine.
Can You Trust Your Friend to Protect You?
However, even if your children are willing to accept the office of your lifetime agent, you may want to consider someone else in that role if:
• Your children are geographically distant from you, making the logistics of taking over impracticable.
• Your children are not even capable of managing their own affairs, let alone yours.
• You simply feel uncomfortable with the idea of your children taking over your assets.
• You don’t have children.
• You just know or strongly suspect that your children are the type of people who will spend less on your medical care in order to have more of your assets left over after you die.
In these situations, the question becomes: Should you select any other individual to take over as your Living Trust’s lifetime agent in the event of your incapacity?
The answer is . . . No! Never let one individual hold and manage money for another individual. (I suppose if I were less dogmatic, the answer would be: If you can possibly help it, do not let one individual hold and manage money for another individual.)
Why such a vituperative and negative response? Actually, there are a bunch of reasons. The individual you have selected may be dead by the time you become incapacitated. Your choice may be a lousy money manager or not be equipped to fulfill the administrative and investment duties necessary to achieve the Three Ps that I discussed earlier in this chapter. Your choice may not have the time or inclination to take over your Living Trust affairs. But the numero uno reason for not selecting a private individual as your lifetime agent is: There is no police officer looking over that individual’s shoulder to ensure that he or she is using your living trust funds for your benefit!
Notice I said, “for your benefit.” This means that your lifetime agent cannot legally use your Living Trust assets for his or her own benefit. A lifetime agent who uses your Living Trust assets for any purposes other than providing for your needs is committing a breach of trust and becomes subject to civil and criminal prosecution. Of course, in your incapacitated state, you may not have the cognitive ability to become aware of such an illicit activity and will therefore be powerless to protect your Living Trust assets.
For example, your spouse is dead, you become incapacitated, and your best friend is appointed in your Living Trust as your lifetime agent. Your best friend gladly accepts the job. Just as the Living Trust dictates, he adds income to principal and writes checks to pay for your day-to-day expenses.
One day, your buddy is presented with the opportunity to go on that trip he has been dreaming about for a lifetime—a package tour of attending a baseball game at every Major League stadium in the United States. He does not have his own funds, but he notices that your Living Trust assets are just sitting there. So after much handwringing, he somehow justifies using your Living Trust assets for that trip. (“He’ll never miss it.” “I promise to pay it back.” “Damn it, I deserve it with all the work I’m doing for him.”).
For the baseball purist, it’s tough to be a fan these days in light of Senator George Mitchell’s report on the rampant use of anabolic steroids and human growth hormone. But for the casual fan like me, it’s still nice to go to the occasional Dodgers game with my children and their friends, and a trip around the Major League ballparks sounds like a lot of fun. But I cannot go on your dime, and neither can your lifetime agent.
The baseball trip does not provide for your support or health. It does not provide comfort to you by any stretch of that word. There is no direct or indirect connection between this expenditure and your well-being. The use of your Living Trust funds for that purpose is a breach of trust. Unless there is some police officer looking over your lifetime agent’s shoulder, such as the beneficiaries who will inherit your Living Trust assets after your death, this type of activity can, and probably will, take place on a recurring basis.
The foregoing baseball story is true, as one of my clients unfortunately suffered that fate when I was first starting out in this area of practice. Since this incident took place, I have adjusted my antennae to become intensely sensitive to receive signals that indicate that my clients are being victimized by their lifetime agents, the same persons appointed by my clients in their Living Trusts to protect them during incapacity.
A Good Alternative
As your Living Trust coach, I want you to take notice of this incident. You need to take great care in deciding who will serve as your Living Trust’s lifetime agent in the event you become incapacitated after the death of your spouse and your children, for whatever reason, do not, will not, or cannot serve as your lifetime agent. And, in my opinion, the best route you can take is to appoint an institutional third party, such as the trust department of a bank, to be your lifetime agent.
In all cases where children do not serve as lifetime agent, I advocate the selection of the corporate trustee over any other private individual trustee. The corporate trustee treats asset management as a full-time job with personnel who have the sophistication and experience necessary to manage the assets of others. A private individual, in contrast, probably can give your assets only part-time treatment, and may not have the necessary skills for the job. Also, while there is no police officer looking over the shoulder of the private individual to ensure your funds are being used for proper purposes, the corporate trustee has multiple levels of internal management review and is subject to audit by state and federal regulators. In addition, the corporate trustee has facilities to manage all your Living Trust assets, whether real estate, securities, or other assets, while an individual may not be so equipped.
I am not a shill for the corporate trustee industry. I am, however, an advocate of protecting your ownership and control of your Living Trust assets during your incapacity. I have seen too many situations where even the most well-meaning of individual lifetime agents inadvertently mismanaged and misused my incapacitated clients’ Living Trust assets. I have seen the parade of horribles of all those things that were not supposed to happen. As your Living Trust advisor, my function is to give you the training you need, which you can use to ensure that your Living Trust assets will be protected and used for your benefit. Even if that training involves a step you may have never before considered—selecting a corporate trustee as the lifetime agent in your Living Trust.