Power of Attorney vs. Trustee

By Tom Speranza, J.D.

Power of Attorney vs. Trustee

By Tom Speranza, J.D.

Powers of attorney and trusts are legal arrangements often used in estate or financial planning when a person seeks the advice of lawyers and financial advisors to structure the handling of their assets during their lifetime and after their death. A power of attorney is a legal contract in which someone, called the principal, grants another person, referred to as the agent, the power to make decisions for the principal about financial and asset matters. A trust, however, is a legal entity that holds title to assets that someone, called a settlor, transfers to the trust.

Blonde woman sitting next to an elderly woman showing her a tablet

The settlor appoints a trustee to manage the assets for the beneficiaries of the trust. The beneficiaries are the people named in the trust as entitled to receive the income generated by the assets or a distribution of the assets themselves upon or after some date or event, such as the death of the settlor.

Legal Differences Between a POA and Trust

The agent under a power or attorney and a trustee appointed to manage trust assets have some similarities—they each have the power to act on behalf of other people, for example—but there are important legal differences between the two positions.

Type of Person

The agent appointed under a power of attorney is usually an individual such as a spouse, a child, or a lawyer. But a trustee can be an entity or institution, such as a bank, investment advisory company, or law firm.

Scope of Authority

A power of attorney can grant a limited or expansive scope of authority depending on the circumstances, but in most cases, the principal appoints the agent to make decisions about all of their individually owned assets if the principal becomes incapacitated. For assets jointly owned with the principal's spouse (for example, their primary residence), the spouse does not typically need power of attorney. The spouse already has the legal right to make decisions about joint assets if something happens to the principal.

A trustee, in contrast, only has the right to manage the specific assets transferred into the trust. A trust agreement, sometimes referred to as a deed of trust, spells out the powers of the trustee and the procedures to follow in connection with the trust assets.

Duration

Powers of attorney are valid only during the principal's lifetime. The principal can revoke the power of attorney at any time during their lifetime, but if the principal doesn't revoke it, the power of attorney terminates automatically when the principal dies. The assets the agent managed under the power of attorney usually then become part of the principal's estate.

A trust is different; it survives the settlor, who typically establishes it for that reason. Most estate plans use so-called living trusts to avoid probate, the court-supervised process that verifies a decedent's will and then distributes assets to the heirs named in the will. By transferring assets into a living trust as an alternative to establishing a will, the settlor ensures that the trust assets transfer privately and that the estate avoids some of the costs of probate.

Since a power of attorney ends when the principal dies, an agent cannot perform the post-death duties that a trustee handles: for example, gathering assets, collecting debts and paying bills, making investments, and compiling an accounting. Unlike a power of attorney, a trust is a legal entity that can last for a very long time. In theory, a trust can manage asset distribution for multiple generations of the settlor's descendants.

Ownership of Assets

When a principal grants power of attorney, the agent does not assume ownership of the principal's assets. The principal continues to own their assets and transfers only the right to make certain decisions involving the assets (and complete transactions based on those decisions). With a trust, the settlor transfers assets through the deed of trust. The trust takes title to and becomes the legal owner of the assets.

Managing and protecting your assets is important. You can do this by drafting a power of attorney or establishing a trust. But before doing so, first understand the differences between the two so that you can determine which one is more appropriate for you.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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