By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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As we continue on with Estate Planning Awareness Week, we need to address one of the most important, most overlooked and often most dreaded part of estate planning, planning for your incapacity. Most people think estate planning only concerns passing assets at their death to their beneficiaries. However, incapacity is more common than you may think.
One study states, “By the time you reach the age of 65, your chances of becoming incapacitated rise to over 50 percent. If you live to be over 80 years of age, this statistic reaches nearly 75 percent. Although age is often a disability factor, even those under retirement age have a 20 percent chance of becoming incapacitated.”[1]
For estate planning purposes, incapacity is generally defined as the inability to make financial or medical decisions. This could be for a short period of time, say due to a car accident, etc., or on a more permanent scale, like Alzheimer’s disease. In either event, your legal, financial and health care decisions will continue to arise, and if you’re unable to make those decisions, someone will make them for you. The question is who?
There are several common ways to deal with incapacity. Perhaps the most common is failing to prepare at all. Should you fail to create your own plan, your state has default provisions to handle your affairs. In most states, this is referred to as a custodianship.
Custodianships typically require someone to petition the local court on behalf of an incapacitated person so that the person’s affairs can be handled. If approved, the court assumes oversight of the personal affairs and appoints a custodian to manage day-to-day activities on behalf of the incapacitated person. This is often a slow and expensive process, is a matter of public record, and the court controls allowable spending and possible investment strategies. This isn’t what most people want.
Taking a proactive stance on incapacity protection can be much simpler and more efficient. The most common technique for financial affairs is to create a financial power of attorney, which is a legal document granting enumerated financial powers to another person, known as your “agent” or “attorney-in-fact.” The powers granted can be very narrow or extremely broad depending on the need. Powers of attorney are usually either “immediate” (meaning the power is granted to the agent immediately and the agent’s authority survives any eventual incapacity of the grantor) or “springing” (meaning some action, typically a doctor declaring the grantor to be incapacitated, must occur before the agent has authority to act). Most planners use immediate powers of attorney to allow swift transitions of responsibilities when necessary.
Living trusts are another way to plan for incapacity. These trusts are created during your lifetime and are sometimes called revocable trusts or grantor trusts. These trusts usually have provisions for the care of the grantor of the trust should the grantor become incapacitated. The trust also names the successor trustee that will be responsible for this care. The assets held in the trust would become the responsibility of the successor trustee who could then care for the financial needs of the incapacitated grantor, per the trust terms.
For health care decisions, a health care/medical power of attorney can be employed. Simply, these are similar to a financial power of attorney, only for health care decisions. These legal documents grant enumerated health care decision making powers to your agent. As with financial powers of attorney, these powers can be broad or narrow and may be immediate or springing, again with immediate powers more common.
For end-of-life decisions, a living will/health care directive may be utilized. These documents generally stipulate your wishes for the use or denial of certain medical treatments should you be terminally ill or permanently unconscious. These documents typically only become controlling after mental incapacity. Usually, an agent isn’t named; rather, your desires are documented for the medical professionals to follow.
Incapacity can be a scary thing. For your loved ones to not be able to care for you without going to court can be even scarier. Consider implementing an incapacity plan for yourself. If you have these documents in place already, review them to make sure they still represent whom you would like to care for you should the time come, and that you have properly documented your wishes. Moreover, make sure the person you’ve designated to serve on your behalf is aware of their appointment and is aware of the documentation appointing them. Doing so can eliminate the hassle of determining who should be making decisions for you and allow your affairs to be handled in the manner you’ve chosen.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.
[1] Stephen M. Walter, Smart Estate Planning in Washington