Your Guide to Better Incapacity Protection in Your Estate Plan
Most people think of estate planning as being limited to the distribution of assets after death, but another critical aspect of estate planning is preparation for incapacity. An incapacity plan provides many estate planning benefits like privacy, freedom, and control. However, they apply while you’re still living — and no estate plan is truly comprehensive without one.
How To Lose Time, Money, And Control During Incapacity
Mental incapacity caused by an injury or illness means you will be incapable of making informed decisions about your finances and well-being. Without a comprehensive incapacity plan in place, a judge will appoint someone—possibly someone you would not have chosen—to take control of your assets and make all personal and medical decisions for you through a court-supervised guardianship or conservatorship. You and your loved ones could lose valuable time, money, and control until you either regain capacity or die.
The Two Essential Documents For Financial Management During Incapacity
Two foundational legal documents for managing finances must be in place before becoming incapacitated:
Financial power of attorney: This legal document gives your agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are described in the document. Financial Powers of Attorney can be effective immediately or “springing.” A power of attorney that is effective immediately does not require your agent to prove that you are incapacitated in order to act. In contrast, a springing power of attorney only goes into effect after you have been determined to be mentally incapacitated and your agent has documentary proof of the same. As deep trust is a prerequisite to naming a power of attorney, I often recommend that my clients choose “effective immediately” to spare their agents the added hassle of proving incapacity to the satisfaction of a banker.
Without an enforceable power of attorney in place, your loved ones will likely have to go to probate court and obtain a conservatorship over your assets if you become incapacitated. You can avoid a time-consuming and expensive trip to court for your loved ones simply by putting a power of attorney in place.
Revocable living trust: This legal document has three parties to it: (1) the person who creates the trust (you might see this written as “trustmaker,” “grantor,” or “settlor” — they all mean the same thing), (2) the person who legally owns and manages the assets transferred into the trust (the “trustee”); and (3) the individual who benefits from the property transferred into the trust (the “beneficiary”). In the typical situation, you will be the trustmaker, the trustee, and the beneficiary of your own revocable living trust. But if you ever become incapacitated, your designated successor trustee can step in to manage the trust assets for your benefit. Many people who have served as both Incapacity Trustee and Agent under a power of attorney report that it is administratively easier to serve as trustee than as agent.
Planning Tips: To be part of an effective incapacity plan, your revocable living trust should contain provisions to determine your mental status through a private process (i.e., a disability panel, an attending physician, the opinion of two doctors, or some other method) instead of a public court process. Also, the trust agreement should contain specific instructions about how to take care of you (and your family if you are the sole breadwinner) if you are declared mentally incapacitated.
You may believe you are protected if you become mentally incapacitated because you hold your assets in joint names with your spouse, a child, or another family member. While a joint account holder may be able to access your bank account to pay bills or access your brokerage account to manage investments, a joint owner of real estate will not be able to mortgage or sell the property without the consent of all other owners. Aside from this, adding names to your accounts or real estate titles may be deemed a gift for gift tax purposes. Finally, if you plan for your joint account to be distributed to or for the benefit of other beneficiaries, there is no way to enforce this wish as the joint account owner will control the account during your incapacity. Also, if a joint owner is sued, your property could be seized as part of a judgment entered against them. Only a comprehensive incapacity plan will protect you and your assets from court-supervised guardianship or conservatorship and the liability or misdeeds of your joint owners. Do not rely on joint ownership as your plan - it’s simply too risky and unreliable.
The Three Must-Have Documents For Healthcare Decision-Making
There are three essential legal documents for making healthcare decisions that must be in place before becoming incapacitated:
Patient Advocate Designation: This legal document, also called a Medical Power of Attorney or Health Care Proxy, gives your agent the authority to make healthcare decisions for you if you cannot communicate your wishes. Not unlike handling financial matters, being a good patient advocate requires a special skillset because patient advocates need to navigate healthcare systems, medical records, hospital staff, and high-stakes medical decision-making.
Without a Patient Advocate Designation, your loved ones may be denied access to medical information during a crisis and end up in court fighting over what medical treatment you should or should not receive. (Remember the Terri Schiavo case?) Without this document, your family will need to go to probate court to obtain a guardianship over you, adding the further expense and hassle of a court-supervised guardianship.
Living Will: This legal document memorializes your medical decisions about end-of-life care. The goal is to keep you as comfortable as possible but not prolong your death with invasive interventions. Even though these will not control if your Patient Advocate chooses otherwise, they are meaningful to help guide your decision-makers.
HIPAA authorization: Federal and state laws dictate who can receive medical information without the patient's written consent. This legal document gives your doctor or other health care provider the authority to disclose your medical information to the agent you selected.
How To Choose The Right Agents For Your Incapacity Plan
Clients must make two crucial decisions when putting together their incapacity plan: who will be in charge of managing their finances during incapacity, and who will be in charge of making their medical decisions during incapacity. Factors you should consider when deciding who to name as your financial agent and health care agent include:
Where does the agent live? Modern technology makes the distance between the client and the agent almost irrelevant. Nonetheless, someone close by may be a better choice than someone in another state or country to minimize inconvenience and speed up decision-making.
How busy is the agent? If the agent has a demanding job or frequently travels, they may not have time to take care of the client’s finances or medical needs.
Does the agent have relevant expertise? An agent with work experience in finance or medicine may be better than one without it. To choose the people best suited to serve in these capacities, you have to really think about their experiences, personalities and expertise. Some family members may be excellent in a medical crisis but completely overwhelmed by financial matters, or vice versa.
Is Your Incapacity Plan Up To Date?
Your incapacity plan is part of your comprehensive estate plan. Like any estate plan, it will become outdated as time passes and your life changes. You must have your incapacity plan reviewed as part of the review of your comprehensive plan every three to five years—sooner if you experience a significant life event (such as a divorce or a death) — to ensure that the plan will work the way you intend it to work if needed.
Please contact our office to discuss your incapacity planning questions and schedule your plan review. Our goal is to protect you and your family.
Treetown Law is here to help you every step of the way. Please contact us today to get started!
