In the face of long lives and a rise in the number of people experiencing cognitive decline, some attorneys point out that incorporating a “cognitive continuity clause” in revocable trust instruments can serve as a safeguard against the risk of financial exploitation.
Guarding Against Trustee Incapacity
Revocable trusts have become popular estate planning tools given their many advantages, including enabling assets to by-pass the public process of probate and thus be gifted swiftly to beneficiaries upon the death of the settlor (aka person who established the trust). However, as attorney Klaus Gottlieb points out, when spouses establish a trust together, it may be wise to consider a new approach, such as a “Revocable Living Trust with a Cognitive Continuity Test” (RLT-CCT) to protect a surviving spouse from being exploited in the event of a capacity decline:
The most common revocable trust typically has the husband and wife as initial co-trustees, with the surviving spouse subsequently serving as sole trustee for an indefinite period, often until death. This arrangement was reasonable when the incidence of dementia was relatively low. With increasing life expectancy, many more survivor trustees will experience cognitive decline…making them particularly vulnerable to financial elder abuse.…. Innovative legal structures like the RLT-CCT become crucial in protecting trust assets and beneficiary interests.By addressing cognitive decline explicitly within the trust instrument, providing additional safeguards against financial malfeasance, and offering a clear framework for trustee succession, we can enhance trust administration stability….While implementation requires careful consideration of applicable state laws and thorough client counseling, the potential benefits of the RLT-CCT in reducing future litigation, protecting vulnerable individuals, and guarding against financial exploitation make it a valuable tool….to consider in our aging society.
Specifically, Gottlieb suggests that a Cognitive Continuity Clause, drawing on established legal principles related to term limits and aged based restrictions, be carefully incorporated into the revocable trust instrument, requiring trustees to either:
- Submit to a cognitive evaluation acceptable to the settlors every 2 years upon reaching age 80 or
- Transition control to a pre-designated successor trustee within 6 months
Underscoring that diligence drafting the RLT-CCT for compliance with state laws, as well as ensuring all trust parties understand and consent to the CCT, Gottlieb details these advantages of the approach in The National Law Review:
- It establishes an objective criterion for initiating the evaluation process, mitigating potential claims of discriminatory treatment.
- It provides a clear, predetermined mechanism for trustee succession, potentially reducing litigation related to trustee removal.
- It allows competent trustees to continue serving while offering a dignified exit strategy when necessary.
- It adds an extra layer of protection against potential financial exploitation by advisers or other bad actors.
Good To Know
When establishing a trust, it can be helpful for families to know that it is possible to name a professional trustee. The appointment of a neutral, experienced, professional fiduciary to administer a trust can make a lot of sense if conflicts or disagreements are a possibility. For those aging solo, as more people are, the services of a professional fiduciary can also be reassuring. Given the significant responsibilities involved in serving in the fiduciary role of trustee, a type of bond, referred to as a fiduciary or trustee bond is frequently required. Essentially, fiduciary and trustee bonds serve as a guarantee that duties will be carried out in accordance with the law and in the best interests of beneficiaries. Colonial Surety makes it easy and speedy for fiduciaries and trustees in every state to obtain their bonds: simply: get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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