There’s no one-size-fits-all estate plan, but any robust one will protect your privacy, free you from court interference, help you protect and manage your assets, save you money on taxes, and enable you to name the people you trust the most to act on your behalf.
While plenty of estate planning deals with the distribution of assets after death, it is also about having a plan in place to deal with what happens if you become incapacitated. An incapacity plan covers many of those same estate planning benefits like privacy, freedom, and control, but they apply while you’re still living — and no estate plan is truly comprehensive without one.
Things to consider are:
- What happens without an incapacity plan
- The essential documents for managing finances during incapacity
- The necessary documents for making healthcare decisions during incapacity
- How to choose the right person for managing finances and making health care decisions
- The importance of keeping your incapacity plan up to date
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 can appoint someone 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
There are two foundational legal documents for managing finances that 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 come in two forms: “durable” and “springing.” A durable power of attorney goes into effect as soon as it is signed, while a springing power of attorney only goes into effect after you have been determined to be mentally incapacitated.
- Revocable living trust: This legal document has three parties to it: the person who creates the trust (you might see this written as “trustmaker,” “grantor,” or “settlor” — they all mean the same thing); the person who legally owns and manages the assets transferred into the trust (the “trustee”); and 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 revocable living trust. But if you ever become incapacitated, your designated successor trustee will step in to manage the trust assets for your benefit.
Planning Tip: 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. 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 a court-supervised guardianship or conservatorship and the 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:
- Medical power of attorney: This legal document, also called a Medical or Health Care Proxy, gives your agent the authority to make healthcare decisions for you if you cannot do so because you have become incapacitated.
- 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 extend your life with useless medical heroics. Even though these may not be legally enforceable in some states, they can provide a meaningful sharing of your wishes to help guide your decision makers.
- HIPAA authorization: Federal and state laws dictate who can receive medical information without the written consent of the patient. This legal document gives your doctor or other health care provider the authority to disclose your medical information to the agent selected by you.
Planning Tip: 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 (like Terri Schiavo’s husband and parents did, for 15 years). Without these three documents, a judge may also appoint a guardian or conservator of the person to oversee your health care, thereby adding further expense and hassle to your court-supervised guardianship or conservatorship. You should have these three documents examined and frequently updated to ensure they accurately reflect their wishes.
How to choose the right agents for your incapacity plan
There are two crucial decisions clients must make 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? With modern technology, the distance between the client and the agent is almost irrelevant. Nonetheless, someone who lives closeby may be a better choice than someone who lives 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 for work, then they may not have time to take care of the client’s finances and medical needs.
- Does the agent have relevant expertise? An agent with work experience in finances or medicine may be a better choice than one without it.
Planning Tip: Choosing the wrong person to serve as financial or health care agent will result in an ineffective incapacity plan. You can pick different people to fill each role — that is, one person in charge of health care decisions and someone else in charge of financial matters. To create an effective plan, you need to carefully consider who to choose as your agent and then discuss your decision with that person to confirm that they will, in fact, be willing and able to serve.
Is your incapacity plan up to date?
As time passes by and your life changes, your incapacity plan will become outdated. It is important for you to have your incapacity plan reviewed every few years or after a major life event (such as a divorce or a death) to insure that the plan will work the way you intend it to work if it is ever needed.
Please contact our office at (951) 246-2370 to discuss questions about incapacity planning and to schedule your plan review. Our goal is to make sure you and your family are protected.
