Scary Financial Mistakes: Ignoring Incapacity Planning

Oct 27, 2021

By Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning Strategies

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As we continue our financial mistakes series, one of the scariest topics we can cover is incapacity. While preparing for incapacity is extremely important, it’s often overlooked or ignored.

Many feel their incapacity is as likely as a real ghost in the attic, but that’s just not true. 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]  Couple these statistics with the recent fears of possible COVID intubation and you realize incapacity is a reality.

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 or a COVID hospital stay – or on a more permanent scale, like having dementia. 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 have to make them for you. The question is, who?

Unfortunately, many people fail to name a “who” in planning for incapacity. 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 activates on behalf of the incapacitated person. This is often a slow and expensive process, it’s a matter of public record, and the court controls allowable spending and possible investment strategies. This isn’t what most people want, and while the court action is pending, bills and decisions will continue to pile up. Boo!

Taking a proactive stance on incapacity protection can be much simpler and more efficient. The most common technique for addressing financial affairs is to create a financial power of attorney. This legal document grants certain 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 “durable” (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 durable powers of attorney to allow swift transitions of responsibilities when necessary. In fact, with COVID clogging up the medical system in general, it’s getting harder and harder to secure a doctor for such a diagnosis.

Trusts are another way to plan for incapacity. These trusts are created during your lifetime, and are sometimes called revocable trusts, living trusts or grantor trusts. These arrangements 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 terms of the trust.

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 certain health care decision making powers to your agent. As with financial powers of attorney, these powers can be broad or narrow, and may be durable or springing, again with durable 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. The inability of your loved ones to care for you without going through a lengthy court procedure can be even scarier. Consider implementing an incapacity plan for yourself. If you have these documents in place already, review them again, especially in light of COVID. You should 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. Doing so can eliminate the hassle of courts making decisions for you and allow your affairs to be handled in the manner you’ve chosen. As for that ghost in the attic, you’re on your own!


Benjamin F. Edwards does not provide tax advice; therefore, it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.


[1] Stephen M. Waltar, Smart Estate Planning in Washington