Many people (maybe even you?) think that estate planning is simply planning for death. While that’s important, it’s not enough. The average life span has increased, and long-term care facilities such as assisted living centers and nursing homes are being built at record pace.[1]
Staying alive longer would seem to be a good thing. And for many people, it is! But living longer can lead to challenging circumstances that come with age. Should you become incapacitated or unable to take care of yourself in any way, for example with a dementia diagnosis, you may be unable to manage your financial or legal affairs.
What if you fail to make arrangements when that happens? With proper planning, you can get peace of mind, knowing that your affairs are in good hands, out of the public eye, and handled without the expense of lawyers, courts, and unnecessary complications.
What Is Incapacity?
Part of the “unknown” is to plan for incapacity. Before we discuss how to plan for that, it is important to clarify what it means to be incapacitated. Each state has its own method for determining legal incapacity, and most have enacted laws that define what incapacity is. For example, in Illinois, 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]
From a practical perspective,, 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 help from someone else. Such tasks might include paying your bills, cooking your meals, bathing, grooming or dressing yourself, taking your own medications, or being unable to protect yourself from financial or physical exploitation.
Why a Will Alone Will Not Cut It
Almost all estate plans here in the U.S. include a Will. A Will is a legal document that allows you to document your wishes for what you would like to happen after you have died. For example, a Will allows you to:
- authorize someone to handle your final affairs after your death (an executor or personal representative);
- name who will receive your accounts and property and in what shares, including successor or backup beneficiaries; and
- designate guardians of your minor children.
Did you note a theme in the list above? They are handled only after you have died. A Will only becomes effective once you are dead.
So, does a Will help you if you become incapacitated? The short answer is no.To provide some level of incapacity planning in your Will-based estate plan, you need 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 you sign before you become incapacitated that allows you to appoint a trusted individual to act as your agent (meaning the appointed individual can act on your behalf). In the financial POA, you spell out what an agent may do: a general POA allows an agent to handle most of your financial affairs whereas a limited POA restricts an agent’s actions to certain things or for a limited amount of time. Legally, your agent must act in your best interests when handling your property and legal affairs. A POA can, grant the power to take the following actions:
- handle your deposit and banking accounts
- withdraw funds from your retirement accounts
- enter into contracts
- collect your mail
- deal with your various insurance companies
- make investment decisions on your behalf
- sell, mortgage, lease, and manage real property
You can also determine when your agent is allowed to act on your behalf. It can be restricted to only after you have become incapacitated (a springing POA) or take effect as soon as you sign the document (an immediate POA). It’s important that your POA be durable, so that your incapacity will not affect the validity or effectiveness of the document.
Avoid court! If you have a Will-based estate plan and no financial POA (or an invalid one), your loved ones will have to go to court to have someone appointed to take care of these matters for you through a process known as guardianship or conservatorship. This can be a very costly, public, and time-consuming process for your loved ones during a stressful and emotional time.
Advance Directives
An advance directive is a document or set of documents in which you can appoint an individual to act on your behalf regarding medical decisions and, if authorized under your state law, also document your medical and end-of-life wishes. Similar to a financial POA, a medical durable POA is an advance directive that allows you to appoint an agent, often referred to as a medical or healthcare agent or proxy, who has the ability to make medical decisions on your behalf when you are unable to communicate your wishes yourself (i.e., if you are unconscious, even temporarily).
Another kind of advance directive is a living will, which is a legal document in which you can specify the kinds of end-of-life decisions that you want your doctors or healthcare agent to make on your behalf. In Illinois, an advance healthcare directive will contain both a power of attorney and end-of-life instructions. Regardless of the format, these documents are vital in making your estate plan incapacity proof. When you name someone you trust to make healthcare decisions for you, similar to decisions you would make if you could still communicate your wishes, you ensure that you receive the appropriate care and medical treatment.
If you do not have an advance healthcare directive, your loved ones will be forced to go to court and have a judge decide who can make medical decisions for you if you are not able to make or communicate your wishes.
Trust-Based Estate Planning and Incapacity
For those who want to make their estate plans truly incapacity proof, a revocable living trust is a powerful legal tool, the foundation of many well-constructed estate plans. A living trust is a legal agreement between a trustor (a person with the money and property, sometimes called a settlor, or grantor) and a trustee (the person charged with managing, investing, and handing out the money and property). For most revocable living trusts, the trustor changes the ownership of the trustor’s accounts and property from the trustor as an individual to the trustee of the revocable living trust, who is often initially the trustor himself or herself. 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 you created a revocable living trust, named yourself as trustee, and transferred most of your property into the trust, you could use and enjoy your property just as you do today. But if you suddenly became incapacitated, a successor trustee (named by you beforehand in your trust document) could quickly and seamlessly step into your shoes as trustee to continue managing the trust property for your benefit throughout any time you were incapacitated. All of this could be accomplished outside of the courtroom, maintaining privacy and eliminating burdensome court and attorney fees. Then, when you die, your successor trustee would have the authority to continue to manage the trust property or give it to remaining living beneficiaries (typically, your loved ones that you leave behind). Again, this can be done completely outside of the court system, and eliminates significant cost, delay, and invasion of your and your loved ones’ privacy.
Note that this incapacity planning is only as good as the individuals you choose to serve in these roles. If the person or people you named can no longer fulfill their responsibilities, you’ll need to change your 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 advance healthcare directive. Each of these documents has important legal functions designed to address circumstances that a trust alone cannot.
By carefully crafting each of these legal documents with our help, you will have peace of mind that your loved ones and the property that you have worked your whole life to obtain will be in good hands if incapacity strikes. We are here to help you think through and implement each decision that goes into making your estate planning truly incapacity proof. Give us a call today.
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[1] Ronda 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.
[2] Unif. Prob. Code § 5-102(4) (2019).
