For most people, it is perfectly natural to think about estate planning only in terms of planning for death. While it is certainly important for clients to make a plan for their eventual death, if that is all they plan for, their planning will be woefully inadequate. As medical knowledge and technology have improved over the decades, so too has modern medicine's ability to keep people alive for much longer. It is no accident that in many areas of the country, long-term care facilities such as assisted living centers and nursing homes are being built at record pace.1
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MEREDITH | PC
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At first blush, staying alive longer would seem to be a good thing. And for many people, it is. However, simply living longer does not necessarily result in ideal circumstances. Longevity coupled with incapacity can be extremely challenging if a client has failed to make arrangements for someone to assist the client with financial and legal affairs during that period. On the other hand, with proper incapacity planning, your clients can rest assured knowing that their financial 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, let me clarify what it means to be incapacitated. Each state has its own method for determining legal incapacity, and most states have enacted laws that define incapacity. For example, in states that have adopted the Uniform Probate Code, an incapacitated person is typically defined 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.2
Although some states have defined incapacity more broadly or more narrowly, in most states, this is a common definition of legal incapacity. From a purely practical perspective, however, 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 medications, or being able to protect yourself from financial or physical exploitation.
Why a Will Alone Will Not Cut It
Almost all estate plans created in this country include a will. A will is a legal document that allows a person to memorialize the person's wishes for what he or she would like to happen after his or her death. For example, among other things, a will allows a client to
Did you notice a theme in the list above? They are all things that must be handled only after a client has died. That is an important point. A will only becomes effective once the will maker is dead.
- authorize someone to handle the client's final affairs after the client's death (an executor or personal representative),
- name who will receive the client's accounts and property and how much, and
- name the guardians of the client's minor children.
So does a will help a client if the client becomes incapacitated? The short answer is no. A will is not any help if the client becomes incapacitated. To provide some level of incapacity protection in a will-based estate plan, the client 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) is a legal document that the client signs well before the client becomes incapacitated that allows the client to appoint a trusted individual to act as the client's agent (meaning the appointed individual can act on the client's behalf). In this document, the client spells out what an agent may do: a general POA allows an agent to handle most of the client's financial affairs, whereas a limited POA restricts an agent's actions to certain things or for a limited amount of time. Legally, an agent must act in the client's best interests when handling the client's property and legal affairs. A POA can, and in many cases should, grant the power to take the following actions:
The client can also determine when the agent is allowed to act. It can be restricted to only after the client has been deemed incapacitated (a springing POA) or take effect as soon as the client signs the document (an immediate POA). When planning for the client's incapacity, it is important that the POA be durable, which means that the client's incapacity will not affect the validity or effectiveness of the document.
- handle deposit, investment, and banking accounts
- withdraw funds from, and contribute funds to, retirement accounts
- enter into legal contracts for goods or services on behalf of the client
- collect a client's mail
- apply for and collect certain government benefits
- deal with various insurance companies, pay premiums, and collect benefits
- make investment decisions
- sell, mortgage, lease, and manage real property or personal property
If the client has a will-based estate plan and no financial POA (or an invalid one), the client's loved ones will have to go to court to have someone appointed to take care of these matters for the client through the process known as guardianship or conservatorship. This can be a very costly, public, and time-consuming process for the client's loved ones during a stressful and emotional time.
An advance directive is a document or set of documents in which a client can appoint an individual to act on the client's behalf regarding medical decisions and, if authorized under state law, also memorialize some of the client's medical and end-of-life wishes. Similar to a financial POA, a medical durable POA is one kind of advance directive that allows a client to appoint an agent, often referred to as a medical or healthcare agent or proxy, who has the ability to make medical decisions on the client's behalf when the client is unable to communicate the client's wishes (i.e., if the client is unconscious, even temporarily).
Another kind of advance directive is a living will, which is a legal document in which the client can specify the kinds of end-of-life decisions that the client wants doctors or the client's healthcare agent to make on the client's 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. Regardless of the format, these documents are a critical component of making a client's estate plan incapacity proof. By naming someone the client trusts to make healthcare decisions for the client, similar to the decisions the client would have made if the client could still communicate his or her wishes, a client can ensure that he or she receives the care and medical treatment that is most appropriate.
If a client does not have an advance healthcare directive, a client's loved ones will be forced to go to the court and have a judge decide who can make medical decisions for the client if the client is not able to make or communicate his or her wishes.
Trust-Based Estate Planning and Incapacity
For those who want to make their estate plans truly incapacity proof, a revocable living trust 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 trustmaker (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 revocable living trusts, the trustmaker changes the ownership of the trustmaker's accounts and property from the trustmaker as an individual to the trustmaker as the trustee of the revocable living trust. The trustee agrees to manage and protect the money and property for the benefit of beneficiaries. In a revocable living trust, the trustmaker is also the beneficiary during the trustmaker'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 your client created a trust, named the client as the trustee, and transferred most of the client's property into the trust, the client could continue to use and enjoy the client's property just as the client does today. But if the client suddenly became incapacitated, a successor trustee (named by the client beforehand, in the trust document) could quickly and seamlessly step into the client's shoes as the trustee to continue to manage the trust property for the client's benefit throughout any period of time that the client remained incapacitated. All of this could be accomplished outside of the courtroom, maintaining the client's privacy and eliminating burdensome court and attorney fees in the process. Then, upon the client's death, the successor trustee would have the authority to continue to manage the trust property or distribute it for the benefit of the client's successor beneficiaries (typically, the client's loved ones or charitable organizations named in the client's estate planning documents). Again, this can be done completely outside of the court system, thereby eliminating significant cost, delay, and invasion of the client's privacy.
This incapacity planning is only as good as the individuals chosen by the client to serve in these roles. If the person or people named can no longer fulfill their responsibilities, your client will need to change the client's legal documents as soon as possible to ensure that the best possible people are serving in these crucial roles.
Finally, it is important to remember that a trust-based plan should still include a will, financial POA, and an advance directive. Each of these documents has important legal functions designed to address circumstances that a trust alone cannot.
By encouraging your clients to carefully craft each of these legal documents with the help of an estate planning attorney, your clients can feel confident that their loved ones and the property that they have worked their whole lives to obtain will be in good hands if incapacity strikes. We are here to help you and your clients think through and implement each decision that goes into making their estate planning truly incapacity proof. Give us a call today.
1Ronda Kaysen, Some Builders Are Ready for the Wave of Seniors, N.Y. Times, Aug. 23, 2011, https://www.nytimes.com/2011/08/24/realestate/commercial/builders-of-senior-housing-respond-to-growing-need.html?auth=login-google.
2Unif. Prob. Code § 5-102(4) (2019).
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.