Why Your Clients Need to Worry About Incapacity Planning
Death is the elephant in the room when it comes to talking about estate planning with clients. To
avoid causing undue distress, we often edge around it, referring to heirs and beneficiaries or
using terms like pass away or pass on.
This is something of a professional courtesy. Clients do not need to be reminded of death's
inevitability. It is why they engage in estate planning in the first place. They know they will not be
around forever and need to plan for the future of their families, businesses, and legacies.
Advisors get clients to face hard facts head-on and come up with solutions for them, albeit using
a gentle touch at times. This duty extends to discussing another sensitive but important topic -
what clients want to happen if they are alive but no longer able to manage their own affairs
(sometimes referred to as being incapacitated).
Everyone dies. Not everyone becomes incapacitated. But the odds - and consequences - of
suffering incapacity are higher than people might think.
What It Means to Be Incapacitated
Incapacity is the inability to manage one's affairs. It can arise from various causes, including
illness, injury, and cognitive decline.
Although often conflated with disability, incapacity and disability are not the same. A disabled
person can be incapacitated, but disability does not necessarily involve incapacity.
Someone who is in a serious car crash, for example, may have injuries that affect their mobility
but not their cognition and communication. They might not be able to get around without
assistance, but they can still make important decisions about their financial, property, legal, and
healthcare affairs.
Most states, which have laws for determining incapacity in the context of adult guardianship
proceedings or conservatorship proceedings (the term used may vary by state), statutorily
define what it means to be incapacitated. These definitions typically include several
components, including medical, functional, and cognitive elements.
Defining Incapacity in an Estate Plan
The legal standard for declaring someone incapacitated varies by state, but for the purposes of
estate planning, it comes down to whether a person has a mental or physical impairment that
renders them unable to make decisions for themselves and requires someone else to make
decisions for them about their medical care and their finances.
Clients do not have to rely on their state's legal definition of incapacity to dictate when decision-making authority should be transferred to another person. Instead, they have the flexibility to define in their estate planning documents how incapacity is determined. Some clients want their
loved ones, physicians, or a combination of the two to make the determination, while others
prefer to require a disability panel or court to decide.
Some clients want to remain in control as long as possible, or have concerns about other people
making decisions for them, and prefer a conservative standard. Others are more confident in
their decision-makers and comfortable with a less rigorous process. The goal of an estate plan
should be to strike the right balance between convenience, objectivity, and timeliness.
The crucial point to keep in mind during client discussions is that, without an estate plan,
the determination of incapacity and the selection of a decision-maker could be left up to
the court.
Incapacity Is a Real Risk
Financial advisors are accustomed to discussing disability with clients in the context of creating
a plan for what happens if they are too sick or injured to work.
Around one in four 20-year-olds will become disabled before retirement,1 and there is a roughly
70 percent chance that an adult age 65 and older will need long-term care in their remaining
years.2 Unfortunately, nearly three-quarters of Americans live paycheck to paycheck and are not
financially prepared for disability.3
Here are some facts about incapacity that you and your clients may not know:
- One in nine adults age 65 and older has Alzheimer's disease, the leading cause of dementia
and a common cause of incapacity.4
- Around 13 percent of all adults and 66 percent of adults age 70 and older are living with a
cognitive disability, such as dementia, autism, or traumatic brain injury that may render them
unable to make an emergency medical decision.5
- Incapacity can be permanent (e.g., due to dementia or a stroke) or temporary (e.g., because
someone is unconscious or under anesthesia).
- Capacity is not all or nothing. A client could retain the capacity to handle their financial
affairs but not to make healthcare decisions.
- Capacity can also fluctuate over time. Specific capacities may initially be lost and then
recovered.
- Many different conditions can result in incapacity, such as substance abuse disorder, mental
illness, postsurgical complications, and grief and bereavement.
A client can not only name a decision-maker for a period of incapacity in their estate plan but
also make provisions in their plan to compensate someone like an agent under a power of
attorney.
In many cases, the agent is a family member who may not expect to be paid. However, by
providing compensation or reimbursement to the agent for expenses incurred while managing
their affairs, such as legal fees or accounting costs, as well as for their time, a client can provide
incentives and resources to ensure that all of the necessary legwork (and paperwork) is
performed during their incapacity.
Planning for Incapacity
If death is the elephant in the room in estate planning discussions - the obvious issue nobody
wants to name - then incapacity is the issue that a client may never see coming.
Incapacity can happen at any age and have many causes. An estate plan that addresses only
what happens to a client's assets after death without addressing who can make decisions about
their personal affairs in the event they become temporarily or permanently incapacitated is
missing a core piece.
The purpose of discussing incapacity should not be to scare clients but to point out its very real
possibility and the need to be prepared through comprehensive estate planning.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
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.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
