Volume 10, Issue 2
The Wealth Counselor
It’s Not Just Death and Taxes: Clients Need an Incapacity Plan that Works When It’s Needed
Estate planning is not only about having a plan in place to deal with what happens after a client’s death, it is also about having a plan in place to deal with what happens if a client becomes mentally incapacitated. In this issue you will learn:
If you have any questions about incapacity planning or have a client who needs to make or update their incapacity documents, please call our office now.
Court-Supervised Guardianship or Conservatorship: How to Lose Time, Money, and Control During Incapacity
Planning Tip: Many clients may believe they are protected if they become mentally incapacitated because they hold their assets in joint names with a spouse, a child, or another family member. 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 the client and the client’s assets from a court-supervised guardianship or conservatorship and the misdeeds of a joint owner.
The Essential Documents for Financial Management During Incapacity
1. 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.
2. 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.
Planning Tip: To be part of an effective incapacity plan, a Revocable Living Trust should contain provisions to determine the mental status of the Trustmaker/Trustee/Beneficiary through a private process (i.e., a disability panel, an attending physician, the opinion of two physicians, or some other method) instead of a public court process. In addition, the trust agreement should contain specific instructions about how to take care of an incapacitated Trustmaker/Beneficiary.
The Three Must-Have Documents for Health Care Decision-Making
1. Medical Power of Attorney. This legal document, also called an Advance Directive or Medical or Health Care Proxy, gives an agent the authority to make health care decisions if the person signing the document becomes incapacitated.
2. 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.
3. 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.
Planning Tip: A client’s 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.
How to Choose the Right Agents for an Incapacity Plan
Factors clients should consider when deciding who to name as their financial agent and health care agent include:
Planning Tip: Choosing the wrong person to serve as financial or health care agent will result in an ineffective incapacity plan. In order to create an effective plan, clients need to carefully consider who to choose as their agent and then discuss their decision with that person to confirm that they will in fact be willing and able to serve.
Are the Incapacity Plans of Your Clients Up to Date?
Please contact our office to discuss your questions about incapacity planning and to schedule plan reviews for your clients.
Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692