A durable power of attorney allows you (the "principal") to name someone (i.e., your "agent") to manage your assets. This can be especially helpful if you become incapacitated and want to avoid having a conservator appointed.

In fact, most comprehensive estate plans prepared by lawyers include a durable power of attorney. Durable powers of attorney, however, have some disadvantages that revocable living trusts do not have. 

Probate

A durable power of attorney does not avoid probate at the time of death.

Fiduciary Duty

Agents under a durable power of attorney generally have fewer obligations than trustees of a trust, and are tasked with only typical fiduciary obligations. The agent under a power of attorney is also not required to act on your behalf.

Accountings 

Agents under a durable power of attorney are not required to keep beneficiaries reasonably informed, unless demanded by the principal or by court order.  In contrast, a trustee of a trust has an obligation to keep beneficiaries reasonably informed of the trust and its administration.

Acceptance by Financial Institutions

One practical downside of durable powers of attorney is that financial institutions are often reluctant to accept the document. Sometimes banks and other institutions have internal policies requiring their own forms be used. Assets titled in the name of a trust, on the other hand, typically do not have this problem as financial institution usually feel more confident in relying on trust documents.

For most who own real estate in California or assets in excess of $150,000, a revocable living trust helps minimize the risk of probate. However, there are still some challenges associated with utilizng a revocable living trust. 

Startup Costs

If you don't own much in the way of assets, the cost of creating a revocable living trust may not be worth the benefit. For those with small estates, the California Statutory Will, which is free, may be all that is needed.

Re-titling of Assets

Many people who are tricked into the allure of cheap document preparation services to create their trust often don't take the crucial step of re-titling assets or updating beneficiary designations.

A trust is only effective if there are assets held within it. Because this step can take time, document preparation companies are often not in a position to advise and guide you through this process. Remember, a trust is totally useless to avoid probate if it does not hold title to your assets or if it is not named as a beneficiary in your beneficiary designations.

Court Supervision

Although the main benefit of revocable living trusts is probate avoidance, sometimes clients who anticipate disagreement among beneficiaries may wish to subject the estate to probate to ensure that there will be judicial supervision. This is very, very rare, but for clients who want this, use of a revocable living trust may be a disadvantage.

Lack of Family Protection Laws

Because a trust is not subject to probate, the family protection statues (e.g., probate homestead) are not applicable. Many clients, however, consider this a benefit, as they don't want their trust assets subject to these specific laws.

Creditor's Claims

In probate there's a 4-month period after "Letters" are issued in which creditors may bring a claim. After that time, claims are cut off. In contrast, a revocable living trust requires the trustee to affirmatively take steps to file, publish, and serve notice on possible creditors to start the time limit.

Although the list of disadvantages may seem extensive, for most clients, the benefits of a revocable living trust far outweigh the downsides. In fact, for many, the need for court supervision, family protection laws, and creditor claim limitations are more beneficial in theory, than in practice.

Sometimes we provide for gifts in our Will or other testamentary documents without thinking about the debt that is on the asset or what happens to it. This often comes up when someone wants to gift real estate to others, since real property tends to be purchased through financing.

Generally, we look to the express provisions of a deceased person's Will or Trust to determine his or her intent with respect to gifts that are made. California Probate Code Section 21102 provides as follows:

(a) The intention of the transferor as expressed in the instrument controls the legal effect of the dispositions made in the instrument.

(b) The rules of construction in this part apply where the intention of the transferor is not indicated by the instrument.

(c) Nothing in this section limits the use of extrinsic evidence, to the extent otherwise authorized by law, to determine the intention of the transferor.

In addition, where property is subject to a mortgage or debt, a specific gift of that property will be transferred and remain subject to that mortgage and debt, as provided in California Probate Code Section 21131, which states:

A specific gift passes the property transferred subject to any mortgage, deed of trust, or other lien existing at the date of death, without right of exoneration, regardless of a general directive to pay debts contained in the instrument.

To avoid this outcome, it is important for you to specify whether the debt on the property is to be paid off prior to the transfer, i.e., should the debt be "exonerated". Moreover, if your estate is not large enough to fully exonerate the debt, you may also need to think about which of your other gifts can be cut back and in what sequence they should abate.

When a person dies with excessive amounts of debt or there are lots of expenses related to the administration of his or her estate, certain gifts laid out in the deceased person's Will or Trust may need to be reduced. There's a specific sequence in which the gifts get cut back, and California Probate Code Section 21402 provides the sequence:

(a) Shares of beneficiaries abate in the following order:

(1) Property not disposed of by the instrument.

(2) Residuary gifts.

(3) General gifts to persons other than the transferor’s relatives.

(4) General gifts to the transferor’s relatives.

(5) Specific gifts to persons other than the transferor’s relatives.

(6) Specific gifts to the transferor’s relatives.

(b) For purposes of this section, a “relative” of the transferor is a person to whom property would pass from the transferor under Section 6401 or 6402 (intestate succession) if the transferor died intestate and there were no other person having priority.

For details on specific versus general gifts see this earlier blog post.

The abatement applies to debts, expenses, and the satisfaction of gifts from high to low priority; however, it does not apply by default to how estate taxes get apportioned.

Often a client may have grand ideas about giving gifts to certain family members and friends, without considering the fact that the assets they want to distribute at the time of their death may be insufficient to satisfy all of the gifts.

For example, a client may create his or her Will or Trust at a time when he or she is wealthy, but pass away at a time when much of the estate has been depleted for the client's care. It is therefore, important to consider the sequence in which the client may want gifts fulfilled to ensure that those that are most important to the client have the highest likelihood of being distributed to the chosen recipient.