Estate planning is not only about having a plan in place to deal with what happens after you or your loved one’s death; it’s also about having a plan in place to deal with what happens if you become mentally incapacitated.
Mental incapacity can be caused by an accident, injury, or illness that results in you or your loved one not being able to make informed decisions about your finances and well-being.
If you don’t have the essential documents for managing finances during incapacity, a judge can appoint someone to take control of your assets and make all personal and medical decisions on your behalf under a court-supervised guardianship or conservatorship. People often lose valuable time, money, and control until you or your loved one either regains capacity or dies.
Many people think they’ll be protected if they become mentally incapacitated because they hold their assets in joint names with a spouse, a child, or another family member, but this isn’t the case. While a joint account holder may be able to access a bank account to pay bills or access a 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 accounts or real estate titles may be deemed a gift for gift tax purposes. In addition, if a joint owner is sued, the property could be seized as part of a judgment entered against them. Only a comprehensive incapacity plan will protect you and your assets from a court-supervised guardianship or conservatorship and the misdeeds of a joint owner.
Here are some quick planning tips for managing finances and making healthcare decisions during incapacity:
Have the right documents for financial management. There are two essential legal documents for managing finances that must be in place prior to becoming incapacitated:
• Financial Power of Attorney. This legal document gives an 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 the person who has made the document is determined to be mentally incapacitated.
• Revocable Living Trust. This legal document has three parties to it: The person who creates the trust (the “Trustmaker” or “Grantor” or “Settlor” – they all mean the same thing); the person who manages the assets transferred into the trust (the “Trustee”); and the person who benefits from the assets transferred into the trust (the “Beneficiary”). In the typical revocable living trust situation, the Trustmaker is also the Trustee and Beneficiary of their own trust, but if the Trustmaker/Trustee/Beneficiary becomes incapacitated, then someone else is named to step in as the Successor Trustee and manage the trust assets for the benefit of the incapacitated Trustmaker/Beneficiary
Have these three essential legal documents for health care decision-making.
• Medical Power of Attorney. This legal document also called an Advance Directive or Medical or Health Care Proxy gives you (the agent) the authority to make health care decisions if the person signing the document becomes incapacitated.
• Living Will. This legal document gives an agent the authority to make life-sustaining or life-ending decisions if the person signing the document becomes incapacitated.
• HIPAA Authorization. Federal and state laws dictate who can receive medical information without the written consent of the patient. This legal document gives a doctor or other health care provider authority to disclose medical information to the agent selected by the patient.
Your loved ones may be denied access to medical information during a crisis situation and end up in court fighting over what medical treatment the client should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years). Without these three documents, a judge may also appoint a Guardian or Conservator of the Person to oversee the client’s health care, thereby adding further expense and hassle to the court-supervised guardianship or conservatorship. Clients should have these three documents examined and updated frequently to ensure they accurately reflect their wishes. You can learn more about incapacity planning, such as how to choose the right agents, at our next free event on February 24th.