Many of our clients are initially focused on wealth transfer and are not concerned about planning for their incapacity. However, incapacity planning is a vital part of estate planning. And it is not just an issue for the elderly. Even those who are young and healthy can suddenly become disabled from an accident or illness.
The primary objectives of incapacity planning are to maintain control, prevent the need for court-controlled guardianship, and ensure that all asset planning options are still available upon your incapacity.
Most people are familiar with the probate process at death. Guardianship is similar in that it is controlled by the Court, inventories and accounts must be filed, and it involves significant costs. If you do not plan for incapacity, a Court will determine when you can no longer handle important decisions and who will make those decisions for you. Most people would prefer to be the one to choose their substitute decision-maker and determine how and when that person takes control.
Some of the tools we use for incapacity planning include financial powers of attorney, health care powers of attorney, HIPAA authorizations, living wills and revocable living trusts. It is important to understand that how those particular documents are drafted and who you choose to help make decisions will determine how they work.
If you are incapacitated, someone must step in to make medical decisions for you. Your health care power of attorney, living will and HIPAA release give instructions on your wishes and identify those who will make decisions when you are no longer able.
You should also appoint someone to handle your finances during periods of your incapacity. A durable financial power of attorney is a must-have tool for that purpose. Keep in mind, however, that all powers of attorney are not created equally. While the statutory short-form power of attorney may cover many areas, a more comprehensive financial power of attorney enables your attorney in fact to do more in the event of incapacity. For instance, we often grant the agent the power to make certain gifts, create and fund trusts, deal with qualified retirement accounts, authorize changes in insurance policies, or collect government benefits.
Even powers of attorney have limitations. Occasionally, banks and other third parties refuse to recognize powers of attorney for a variety of reasons. A durable financial power of attorney combined with a revocable living trust is the most effective way to handle your financial affairs during your incapacity. If you have a living trust and are unable to transact business, the person you have selected as your successor trustee will be able to step in and manage your trust for as long as needed, without court interference. Title of the property does not change. A new trustee simply steps in.
You should keep in mind that the most carefully worded trust or power of attorney will be ineffective without the right trustee and attorney in fact. Choosing an attorney in fact or trustee is one of the most important decisions in making your estate plan.