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Trusts and planning for possible incapacity

If you become "incompetent", it might become necessary for a friend, relative, or government entity to go to court to seek the appointment of a "custodian" (called a "guardian" in some states) to manage your financial affairs. The court will then conduct a hearing to determine whether you are able to deal with your personal and financial affairs. Psychological or psychiatric evaluations will probably be required. To avoid this embarrassment and uncertainty, it is a good idea to plan for this possibility ahead of time.

• Set up a trust
• "Custodial trusts"

Set up a trust

If you are considering setting up a "living trust" in which you are both the lifetime beneficiary and the trustee, be sure to include a provision for the appointment of an alternate or successor trustee in the event you become incompetent.

Also, include in the trust a mechanism for determining whether you have become unable to deal with your affairs. You might provide that if your family doctor and your children and spouse all agree that you can no longer deal with your property, the successor trustee will take over.

Also include a provision dealing with the possibility that you will regain the ability to deal with your property.

"Custodial" trusts

A few states have adopted the Uniform Custodian Trust Act, which permits a person to deliver property to a custodial trustee much in the same manner as property can be transferred to minors under the Uniform Transfer to Minors Act.

As long as the owner of the property remains competent, the custodian trustee must follow the owner's instructions. In effect, the trustee is acting as the owner's agent while the owner is competent. However, once the owner is deemed to have become incompetent, the custodian trustee takes over and uses the property for the benefit of the owner and the owner's dependants.

While it is very easy to set up these custodial trusts in states that permit them, once established these trusts cannot be revoked.