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Military Finances 201: A Trust's Secret SuperPower Thumbnail

Military Finances 201: A Trust's Secret SuperPower

Estate Planning

On Saturdays the local radio station has a lot of financial shows on during the day. They also have one that covers estate planning. I listen to both types when I can. On the financial shows, I’m likely to criticize or correct them. The estate planning show I listen to, to learn. Granted, a lot of what they talk about was covered in the CFP® coursework I did, and I partake in continuing education that covers estate planning as well.

A common theme on the radio show is using a trust-based estate plan to avoid probate. To their credit they also cover a trust’s Secret Superpower. I’ll get to the superpower in a minute. Let’s review how a trust can help with your estate planning.

Why a Revocable Trust can be a Good Idea for an Active or Retired Military Member

For the purpose of this article and for most the stuff you’ll hear on the radio, were talking about a revocable trust (or if you’re a tax geek like me, they’re also called grantor trusts). You’ll also hear them called Living Trusts. For most purposes while you’re alive, you and your trust are one in the same. A revocable trust doesn’t have any effect on your taxes (you and the trust are the same taxable entity). It also doesn’t provide any asset protection or reduce your taxable estate. There are trusts that can accomplish these things, but not this type of trust.

When you (or you and your spouse) pass away, the trust becomes irrevocable and becomes its own taxable entity. It also provides a level of asset protection as creditors can’t get assets inside the trust to settle a claim against a beneficiary (once the trust pays out the assets, they could be subject to payment to settle a judgement).

In a sense, the trust owns your assets (if you funded the trust). That means when you pass away, the assets transfer in accordance with the trust instructions and outside of probate. This is the advantage most people talk about when discussing trusts for estate planning. But like I said, trusts have a hidden superpower.

What is a Trust’s Superpower?

A trustee of a trust has authority over the assets inside the trust. A person who isn’t a trustee has no authority over those assets. Normally while alive the grantors of the trust (the people who set up the trust) are the trustees. A successor trustee is named for when the grantors pass away.

But that’s not all. The grantors can be removed as the trustees while they’re alive and a successor trustee can step in too. In a perfect world, Mom and Dad (or you if it is your trust) realize that they really can’t handle their financial affairs anymore and they voluntarily step down as trustees.

We don’t live in a perfect world, so most trust documents have language to remove a trustee without, necessarily, his or her concurrence. There normally is language that triggers the removal of the grantors as the trustees. Here is one example (don’t use this, it wasn’t written by an attorney):

For purposes of this trust, a Trustee is considered incapacitated if:

  • The Trustee’s licensed physician provides a written statement that the Trustee is unable to manage financial or legal affairs; or
  • Two licensed physicians provide written statements confirming such inability.


Upon a determination of incapacity:

  • The incapacitated Trustee shall be removed automatically, without court action; and
  • The next named Successor Trustee shall assume all duties and powers of Trustee.

If the incapacitated Trustee later recovers and provides written certification from a licensed physician that they are able to resume their duties, they may be reinstated as Trustee if all acting Trustees agree in writing.

Why is this a Superpower?

You can handle someone’s affairs with a Power of Attorney (PoA) as well. But I have concerns.

  • No one is required to accept a PoA. Right when you need to start using it, you find out that the bank won’t accept it and Mom and/or Dad don’t have the mental capacity to execute one the bank will accept.
  •  As harsh as it sounds, using a successor trustee freezes out the incapacitated individual. It protects him or her from scams. If a person is removed as a trustee he or she can’t send trust assets to the scammer. Using a PoA doesn’t accomplish this. It allows someone to act on the individuals behalf, but it doesn’t provide the protection as trust does, as the individual can still access and use the funds.

It’s a whole lot better than having to go to court. If there isn’t a trust or PoA and you need to take over Mom and/or Dad’s affairs, and they’re unwilling or unable to set up the documents, you’ll need to go to court against Mom and/or Dad to take over his or her affairs. Doesn’t sound like a lot of fun to me.

Get Something in Place

I like trust-based estate plans. The scales tip for me when it comes to incapacity planning. On the other hand, a will-based estate plan is a whole lot better than the estate plan the State writes for you (if you die without a will or trust, your assets will be distributed in accordance with state law…if that doesn’t scare you, it should).

Military Finances are Different

Trusts operate the same for active and retired military members and civilians. That isn't always the case. There are several parts of the Tax Code tax treat active military members and veterans differently than civilians. Active and retired military members also have benefits not available to civilians. That is why we think Active and Retired Senior Military Officers and NCOs should work with a financial planner or advisor that deals with your unique issues each and every day. If you'd like to see how we work with clients just like you, use the button below to schedule a free, initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 401: IRA Considerations in the Year Dad (or Mom) Passes Away


Retired Military Finances 201: What Happens When You Inherit Investment Funds?


Retired Military Finances 101: How Often Should I Update My Estate Plan?



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