Preparing for the Unexpected: Appoint a Successor Trustee in Case You Become Incapacitated

Estate Planner May-Jun 2001

Among a living or revocable trust’s benefits is that you can draft it to manage your assets without court involvement should you become incapacitated. Generally, the trust’s creator also acts as its trustee. But who becomes trustee if you are declared disabled? To answer this question, let’s examine circumstances that may occur if you become incapacitated.

Declaring Incapacitation

Typically, a trust should provide a definition of incapacity and specify how the successor trustee will take over for the disabled trustee. The trust may also mandate that an attending physician, committee, court finding, or your spouse or child determine your incapacity.

And though you may worry about giving your spouse or child the power to declare you disabled, doing so may simplify and diminish the cost of using a court proceeding or physician. In the event that you disagree with the declaration, the court can protect your rights and allow you to manage your own affairs.

For example, Ed is the acting trustee of his revocable trust with approximately $3 million in assets. He has four children and eight grandchildren. The trust provides that his attending physician, Dr. Goodhealth, is to determine his incapacity and ability to serve as trustee.

But what if Ed suffers a stroke while traveling, and his family can’t reach Dr. Goodhealth? A physician at the emergency room — who is unfamiliar with Ed’s medical history — may treat him but refuse to sign a document attesting to his incapacity. Without a certification of disability, Ed’s successor trustee may not be able to make critical business or investment decisions, or make last-minute annual exclusion gifts to reduce Ed’s taxable estate.

If no other trust mechanism exists for determining Ed’s incapacity, his family may have to file a court action to declare Ed disabled. This can be costly and may not timely resolve the problem because of court-imposed notice requirements and waiting periods. And though Ed’s family can file a petition for guardianship immediately, they may have to wait up to a month before a judge rules on the disability.

Take Control Of Who Becomes Trustee

To avoid needing a physician to determine incapacity, some jurisdictions allow your successor trustee, a family member or committee to make the decision. In the case of Ed, his trust instrument may specify that his family can immediately attest to his disability and Ed’s successor trustee can then take control of the trust.

If you are uncomfortable with a family member having the power to determine your incapacity, you can name a special trustee. You can even empower the special trustee to make gifts. As further protection, you can name a co-trustee to act with authority and to act alone if you become disabled.

Be Prepared

When creating a revocable or living trust, you act as its trustee. But what if you become incapacitated? Plan ahead to specify who will take over as trustee. In addition, include in your trust document who — such as your attending physician, committee or a court finding — should declare you disabled. If you have an existing trust that you would like us to review, or have questions about a prospective one, please give us a call.