Without a plan, your health and finances can become public record
A plan for incapacity is your contingency plan for the possibility that, at some point in your life, you may become mentally or physically unable to communicate for yourself or handle your own day-to-day affairs. Mental incapacity can be caused by an injury or illness. It can be a temporary or permanent disability where you are incapable of making informed decisions about your finances and well-being. Without comprehensive incapacity planning in place, a judge will need to appoint one or more people to take charge of your assets and make all personal and medical decisions for you through a court-supervised conservatorship. You and your loved ones could lose valuable time, money, privacy and control until you either regain capacity or pass away.
When you have planned for incapacity, you will have formal written documents describing your wishes in case you become unable to speak for yourself. You will have designated a proxy to make healthcare decisions for you and an agent to take care of your finances. You can designate two different people or the same person, plus you should include alternates in case your first choice is not available or is unable to help. To ensure an effective plan, you should carefully consider who you choose as your healthcare proxy and financial agent plus discuss your decisions with them to confirm that they will, in fact, be willing and able to serve.
You may believe you are protected if you become mentally incapacitated because you hold your assets in joint names with your spouse, a child, or another family member. While a joint account holder may be able to access your bank account to pay bills or access your brokerage account to manage investments, a joint owner of real estate will not be able to mortgage or sell the property without the consent of all other owners. Aside from this, adding names to your accounts or real estate titles may be deemed a gift for gift tax purposes. Moreover, if a joint owner is sued, your property could be seized as part of a judgment entered against the joint owner and if s/he files bankruptcy, it is highly probable that the bankruptcy trustee will take your property to pay off the creditors. Plus, it is a sad fact that a considerable amount elder financial abuse is committed by a family member who was placed on a deed or account as a “joint owner.” Only a comprehensive incapacity plan will protect you and your assets from a court-supervised conservatorship and the possible financial problems or misdeeds of your joint owners. Do not rely on joint ownership as your plan - it's simply too risky and unreliable.
Your plans must be prepared and signed by you prior to your becoming incapacitated, otherwise your loved ones will have to go to court to have a conservator appointed, which might lead to a battle between your loved ones. Therefore, these four documents are crucial to have in place so that your loved ones can avoid court, be prepared, and can most effectively help you.
The must-have documents for healthcare decision-making during incapacity
- Advance Healthcare Directive: This legal document is also referred to as a medical power of attorney (or sometimes a living will). In the Advance Healthcare Directive, you will designate an agent (a proxy) to speak for you. The document gives your agent the authority to make healthcare decisions for you if you are unable due to your incapacity. The healthcare decisions include consent to medical treatment, selection of healthcare providers, as well as medical decisions about end of life care. You control how much authority you give your agent plus the Advanced Healthcare Directive can be revised or revoked at any time that you are not incapacitated.
- HIPAA authorization: Federal and state laws dictate who can receive medical information without the written consent of the patient. This legal document gives your doctor or other healthcare providers the authority to disclose your medical information to the agent selected by you.
You should regularly review these documents to ensure they accurately reflect your wishes and examined to ensure they are legally sufficient. To create an effective plan of incapacity, you need to carefully consider who you choose as your agent and then discuss your decision with that person to confirm that they will be willing and able to serve.
The two essential documents for financial management during incapacity
- Financial power of attorney: This legal document can give your agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are described in the document. Financial Powers of Attorney come in two forms: “durable” and “springing.” A durable power of attorney goes into effect as soon as it is signed, while a springing power of attorney only goes into effect after you have been determined to be mentally incapacitated.
- Revocable living trust: This legal document has three parties to it: (1) the person who creates the trust (you might see this written as “grantor” or “settlor” — they mean the same thing); (2) the person who legally owns and manages the assets transferred into the trust (the “trustee”); and (3) the individual who benefits from the property transferred into the trust (the “beneficiary”). In the typical situation, you will be the settlor, the trustee, and the beneficiary of your revocable living trust. But if you ever become incapacitated, your designated successor trustee will step in to manage the trust assets for your benefit.
To be part of an effective incapacity plan, your revocable living trust should contain provisions to determine your mental status through a private process (such as a disability panel, an attending physician, the opinion of two doctors, or some other method) rather than a public court process. Also, the trust agreement should contain specific instructions about how to take care of you if you are declared mentally incapacitated.
How to choose the right agents for your incapacity plan
What you should consider when deciding who to name as your financial agent and health care agents include:
- Where does the agent live? With modern technology, the distance between the client and the agent is almost irrelevant. Still, someone who lives close by may be a better choice than someone who lives in another state or country to minimize inconvenience and speed up decision making.
- How busy is the agent? If the agent has a demanding job, young children, or frequently travels for work, then they may not have time to take care of your finances and/or medical needs.
- Does the agent have relevant expertise? An agent with work experience in finances or the medical field may be a better choice than one without it.
Is your incapacity planning up to date?
As time passes by and your life changes, your incapacity plan will become outdated. It is important for you to have your incapacity plan reviewed every few years or after a major life event (such as a divorce or a death) to ensure that the plan will work the way you intend it to work if it is ever needed.
You are welcome to contact me to discuss your questions about incapacity planning and to schedule your plan review. It is my goal to make sure you and your loved ones are protected.