Why You Need to Worry About Incapacity Planning
Death is the elephant in the room when we talk about estate planning. We often use phrases
like pass away and pass on to make our meetings feel more comfortable and avoid being overly
macabre, but the not-so-subtle subtext of an estate plan is death's inevitability.
If death is the elephant in the room in estate planning discussions - the obvious issue nobody
names out loud - then incapacity is what is obscured behind the elephant, sometimes so
obscured that you do not even know it is there.
Incapacity can happen at any age and can have many causes. An estate plan that addresses
only what happens to your assets (such as your money, property, life insurance policies, and
retirement accounts) after death - and does not address who can make decisions about your
personal affairs if you become temporarily or permanently incapacitated - is fundamentally
flawed.
What It Means to Be Incapacitated
Incapacity means that you lack the ability to handle your affairs due to illness, injury, cognitive
decline, or some other cause. You are, to take the literal meaning of the word, in a state of
being incapable.
Legally, incapacity means something similar to incompetency. In the context of estate planning,
incapacity refers to an impairment that renders you unable to make or communicate important
decisions or to manage your affairs, including financial and healthcare matters.
Although often conflated with disability, incapacity and disability are technically 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 may not be able to get around without
assistance, but they can still make important decisions about their financial, property, legal, and
healthcare affairs.
Incapacity and Your Estate Plan
When you become incapacitated, somebody else must step in and handle your affairs for you.
Your bills and taxes still need to be paid, your investments must be managed, and healthcare
must be provided, especially if you have suffered a medical emergency that renders you
incapacitated and requires immediate treatment.
If you want to take a proactive approach to incapacity planning, then you should create an
estate plan in which you name and appoint your trusted decision-makers to act on your behalf
when you are incapacitated using documents such as financial and medical powers of attorney
and a living trust.
Without an estate plan that names financial and medical decision-makers for you in the
event of your permanent or temporary incapacity, these choices could be left up to the
court.
States have laws that provide guidelines for determining incapacity when the court must appoint
a guardian or conservator (the term used may vary by state) for an incapacitated person. These
legal definitions typically include medical, functional, and cognitive components.
However, you are not bound by state law standards when specifying in your estate plan how to
determine when you are incapacitated - and when decision-making authority should be
transferred to another person. Typically, loved ones, physicians, or a combination of the two can
make the determination, but you could choose to specify in your estate plan that a disability
panel or - in rare cases - court oversight should be involved if you prefer.
You may wish to remain in charge of your affairs as long as possible, or have concerns about
others making decisions for you, and prefer a conservative standard. If you are highly confident
in your chosen decision-makers (e.g., it is your spouse of 40 years), you may be comfortable
with a less rigorous process.
The goal of an estate plan should be to strike the right balance between convenience,
objectivity, and timeliness.
In addition, you can create provisions in your estate plan to compensate those you name to act
on your behalf while you are incapacitated.
The people you name to make decisions for you may not expect to be paid. But reimbursing
them for expenses they pay while managing your affairs, such as legal fees and accounting
costs, and compensating them for time spent not working can help ensure that all of the
necessary legwork (and paperwork) is performed during your incapacity.
Incapacity Is an Ever-Present Risk
The following statistics should be a sobering reminder that incapacity is a very real threat to you,
your family, and your legacy that can strike at any time and any age:
- One in four 20-year-olds will become disabled before retirement.1 A disability does not
always lead to functional incapacity, but it often does.
- There is an approximately 70 percent chance that an adult age 65 and older will need long-term care in their remaining years.2
- One in nine adults age 65 and older has Alzheimer's disease, the leading cause of dementia
and a common cause of incapacity.3
- 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.4
- As we live longer, our chances of becoming incapacitated rise. Fewer than 10 percent of
Alzheimer's cases occur before age 65.5 At age 85, the risk increases to one in three.6
- Incapacity can be permanent (e.g., due to dementia or a stroke) or temporary (e.g., because
someone is unconscious or under anesthesia).
- Many different conditions can result in incapacity, such as substance abuse disorder, mental
illness, post-surgical complications, and grief and bereavement.
Plan for Incapacity to Avoid Estate Planning Gaps
Like death, incapacity looms large, especially as you get older. Acknowledging the very real risk
of incapacity is the first step in addressing it. The next step is meeting with an attorney and
taking action to build incapacity contingencies into your estate plan.
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 Counselors 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.
