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Defining Incapacity in a Revocable Living Trust

In my last post, I discussed the ability to provide for incapacity as one of the primary advantages of a revocable living trust in estate planning. Today, I look at the options estate planning clients have in regards to how their revocable living trust defines incapacity. Once the creator (a/k/a grantor) of the trust is determined to lack capacity, the successor trustee(s) named in the document takes over and begins managing the property and assets of the trust on behalf of the grantor and the trust’s beneficiaries.

One possibility for defining incapacity in the revocable living trust is to rely on the opinion of a medical professional, typically a physician licensed to practice medicine in the state where the trust was created. Sometimes, the trust also dictates that the physician be board certified in the specialty most closely related to the condition that caused the incapacity. With this option, the client can choose how many doctors are required to make a finding of incapacity (two is a popular number). The trust usually provides that the physician must state in writing that due to physical or mental illness, the grantor cannot manage his or her financial and personal affairs.

Another option to define incapacity for purposes of a revocable living trust involves the courts. This type of provision declares that the grantor of the trust will be deemed incapacitated if a court having jurisdiction over the trust makes such a finding or appoints a guardian of the person or estate of the grantor. The downside to defining incapacity this way is the potential for expensive, drawn-out litigation and details of the trust being made public knowledge.

Finally, the revocable living trust can appoint a panel of family, friends and advisers to decide whether the grantor is incapacitated. Many people like this option because several individuals working together must make the decision about incapacity; the trust can be written so that a unanimous or majority vote is required. However, there are couple of drawbacks. First, the panel’s members may not all be doctors or medical professionals; therefore, the panel might lack the expertise to make an accurate determination. Second, if the grantor of the trust disagrees with the panel, the matter could end up in court.

As we have seen, there are several ways to define incapacity in a revocable living trust. Whenever you are creating your trust with an estate planning attorney, this is one of the most important issues to discuss. What is right for one person is not always desirable for another.