By SHELLY WIEMANN, CFP®
Founder, Wiemann Wealth Strategies, LLC
Financial Advisor, Raymond James
Alzheimer’s disease is the sixth leading cause of death in the United States, killing more than breast cancer and prostate cancer combined – in fact, one in three seniors dies with Alzheimer’s or another form of dementia1.
These statistics, combined with the fact that Americans are living longer and are having smaller families, mean that planning for incapacity has become just as important as (or even more important than) end-of-life planning.
In the absence of planning, losing the ability to make decisions can create a difficult dilemma for your family members. Court proceedings to establish incapacity vary from state to state, but they can often be complex and costly. They usually involve, at a minimum, presenting medical and psychological evidence in court; the court then designates a person to act on your behalf for the proceedings. Courts are understandably reluctant to deprive people of their legal rights by declaring incapacity, but the process can be painful for family members and demeaning for the incapacitated person. On the other hand, executing planning documents to avoid these burdensome court proceedings can present equally challenging problems, especially if there are different views within a family about who should make decisions for the person.
What Tools Are Available?
One of the most effective tools in planning for incapacity may already be a key part of your estate plan – the revocable trust. Revocable trusts have become a popular option for affluent families. They offer advantages in terms of privacy and flexibility while allowing you to avoid probate proceedings in local courts at death. But revocable trusts offer another advantage over wills: they can address not only what is to occur at death, but also what happens in the event of incapacity. In a revocable trust, you can define the following:
- At what point should you be considered to be incapacitated? What is the standard for incapacity?
- Who is responsible for making the decision about your incapacity? Is this one person (such as a personal physician), or is more than one opinion required?
- Who can benefit from the trust once a determination of incapacity has been made? Only you, or your family as well?
- What happens if your incapacity resolves, and who makes this determination?
- In the event of a determination of incapacity, who will control the trust assets?
A well-crafted revocable trust will create a customized contract that addresses all of these points. But drafting the document is only part of the solution – assets must be transferred to the revocable trust prior to any incapacitation. Since (prior to incapacity) you’re are usually the initial trustee of the revocable trust, your assets should be retitled from your individual name to the trust’s name. It may be impossible or impracticable to retitle some assets (such as assets in qualified plans or real estate subject to a mortgage), but the goal is usually to retitle as much of your wealth as possible into the trust’s name.
Durable Power of Attorney
Another key document in planning for incapacity is the durable power of attorney. Revocable trusts only have application to the assets held within them. A durable power of attorney, in contrast, enables you to designate one or more persons (referred to as “agents” or “attorneys-in-fact”) to act on your behalf in a broad range of business, financial and personal matters. The “durability” of a power of attorney refers to the fact that it remains in effect even if you later become incapacitated. Powers of attorney are usually structured with a long list of powers that can be potentially be granted to the agent, covering matters like bill paying, preparation and filing of tax returns, and dealing with insurers. You can include specific powers and exclude others, or can simply choose “all of the above.”
Many powers of attorney are “presently exercisable,” meaning that authority is granted to the agent as soon as the power of attorney is signed. Some states, such as New York, also permit a principal to execute a “springing” power of attorney that only becomes effective in the event of incapacity. This type of power of attorney is intended for clients who are not comfortable giving their agent immediate authority over their assets. However, many planners feel that the conditions required to trigger a springing power can make them cumbersome in actual use. What many choose to do instead is sign powers of attorney that are presently exercisable but keep the signed documents with their attorney so they are only used when needed (and not before then).
Protect Your Best Interests
Both a successor trustee of a revocable trust and an agent acting under a power of attorney are fiduciaries. Therefore, they owe you a strict fiduciary duty and are required to act in your best interest. Although breaching this duty can result in severe civil and criminal penalties, law digests are full of examples of trustees and agents using an individual’s incapacity as an opportunity to enrich themselves. How can you protect yourself from the wrongdoing of trustees and agents? What are the best practices in choosing a trustee or agent to act for you in the event of incapacity? Three thoughts come to mind:
Checks and balances. Although it may be easier to name a single individual to act for you in the event of incapacity, naming several persons to act as co-trustees or co-agents may provide a check against any individual fiduciary’s wrongdoing or negligence. For example, a parent could name two children to act as co-trustees, or could name an attorney or trust company to act as co-trustee with a child.
Open discussion. Families rarely discuss in advance what would take place in the event of a parent’s incapacity. These discussions can feel more uncomfortable than even talking about a parent’s death, especially if the parent has been largely responsible for creating the family wealth. Thought it may be difficult, talking openly with your family about what would happen in the event of incapacity can set expectations and avoid unpleasant surprises.
The importance of your planning attorney. Many people don’t understand that their planning attorney is more just than the drafter of planning documents – he or she can be the champion of your intent and best interests. Including your planning attorney in the discussion of incapacity can reduce the risk of overreaching by fiduciaries and family members.
Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.