Proper arrangements for someone to assist with your financial and legal affairs during a period of incapacity can mitigate burden to you and your loved ones as well as mismanagement of your assets. You will also likely have piece of mind knowing that your affairs are in good hands, out of the public eye, and being handled without the expense of lawyers, courts, and unnecessary complications.
What Is Incapacity?
Before we discuss how to plan for incapacity, it is important to clarify what it means to be incapacitated. The Uniform Probate Code defines an incapacitated person as follows:
“Incapacitated person” means an individual who, for reasons other than being a minor, is unable to receive and evaluate information or make or communicate decisions to such an extent that the individual lacks the ability to meet essential requirements for physical health, safety, or self-care, even with appropriate technological assistance.
This definition can vary from state to state, but from a purely practical perspective, incapacity can be described as an ongoing condition where you simply do not have the mental ability to take care of routine tasks for yourself without assistance from someone else. Such tasks might include paying your bills, cooking your meals, bathing, grooming or dressing yourself, taking your own medications, or being unable to protect yourself from financial or physical exploitation.
Why a Will Alone May Not Be Enough
Almost all estate plans created in this country include a will, a legal document that allows you to memorialize your wishes for what you would like to happen after you have died. For example, a will allows you to:
- authorize someone to handle your final affairs after your death (an executor or personal representative);
- name who will receive your accounts and property and in what shares, including successor or backup beneficiaries; and
- designate guardians of your minor children.
While all of these are important, they are all things that must be handled only after you have died. An important point to remember is that a will only becomes effective once you are dead. To provide some level of incapacity planning in your will-based estate plan, you must obtain additional legal documents, including at least a financial power of attorney and an advance directive.
Financial Power of Attorney
A financial power of attorney (POA) allows you to appoint a trusted individual to act as your agent to act on your behalf. In this document, you spell out what an agent may do: a general POA allows an agent to handle most of your financial affairs whereas a limited POA restricts an agent’s actions to certain things or for a limited amount of time. Legally, your agent must act in your best interests when handling your property and legal affairs. A POA can, and in many cases should, grant the power to take the following actions:
- handle your deposit and banking accounts
- withdraw funds from your retirement accounts
- enter into contracts
- collect your mail
- deal with your various insurance companies
- make investment decisions on your behalf
- sell, mortgage, lease, and manage real property
You may restrict when an agent’s permission to act on your behalf only after you have become incapacitated (a springing POA) or take effect as soon as you sign the document (an immediate POA). When planning for your incapacity, it is important that your POA be durable, which means that your incapacity will not affect the validity or effectiveness of the document.
If you have a will-based estate plan and no financial POA (or an invalid one), your loved ones will have to go to court to have someone appointed to take care of these matters for you through a process known as guardianship or conservatorship. This can be a very costly, public, and time-consuming process for your loved ones during a stressful and emotional time.
An advance directive is a document or set of documents in which you can appoint an individual to act on your behalf regarding medical decisions and, if authorized under your state law, also memorialize some of your medical and end-of-life wishes. Similar to a financial POA, a medical durable POA is one kind of advance directive that allows you to appoint an agent, often referred to as a medical or healthcare agent or proxy, who has the ability to make medical decisions on your behalf when you are unable to communicate your wishes yourself (i.e., if you are unconscious, even temporarily).
Another kind of advance directive is a living will, which is a legal document in which you can specify the kinds of end-of-life decisions that you want your doctors or healthcare agent to make on your behalf. In some states, an advance healthcare directive will contain both a power of attorney and end-of-life instructions; other states require separate legal documents. By naming someone you trust to make healthcare decisions for you, similar to the decisions you would have made if not incapacitated, you can ensure that you receive the most appropriate care and medical treatment. If you do not have an advance healthcare directive, your loved ones will be forced to go to the court and have a judge decide who can make medical decisions for you if you are not able to make or communicate your wishes.
Trust-Based Estate Planning and Incapacity
For those who want to make their estate plans truly incapacity proof, a revocable living trust (RLT) can be a powerful legal tool. This type of trust has become the foundation of many well-constructed estate plans in this country. A living trust is a legal agreement between a grantor (a person with the money and property) and a trustee (the person charged with managing, investing, and handing out the money and property). For most RLTs, the grantor changes the ownership of the grantor’s accounts and property from the grantor as an individual to the trustee of the revocable living trust, who is often initially the grantor himself or herself. The trustee agrees to manage and protect the money and property for the benefit of beneficiaries. In an RLT, the grantor is also the beneficiary during the grantor’s lifetime. Holding the property in this type of legal structure creates a great deal of flexibility to deal with incapacity issues as they arise.
For example, if you created an RLT, named yourself as trustee, and transferred most of your property into the trust, you could use and enjoy your property just as you do today. But if you suddenly became incapacitated, a successor trustee (named by you beforehand in your trust document) could quickly and seamlessly step into your shoes as trustee to continue managing the trust property for your benefit throughout any period you were incapacitated. This type of planning limits both cost and delay and the invasion of your and your loved ones’ privacy.
Incapacity planning is only as good as the individuals you choose to serve in these roles. You should think carefully about who you would choose to serve, and if an individual(s) you’ve already chosen is unable or unwilling to continue serving in that role, you will need to update your documents as soon as possible to name another individual(s) to serve.
It is also important to remember that a trust-based plan should still include a will, financial POA, and advance healthcare directive. Each of these documents has important legal functions designed to address circumstances that a trust alone cannot.
We Are Here to Help
By carefully crafting each of these legal documents with our help, you can feel confident that your loved ones and the property that you have worked your whole life to obtain will be in good hands if incapacity strikes.