Incapacity – what, when, how?

What happens with no incapacity plan in place

Mental incapacity caused by injury or illness may render people incapable of making informed decisions about their finances and well-being. Court-supervised guardianship and joint ownership problems are two ways things can go wrong without proper incapacity planning.

• Guardianship: Without a plan in place, 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. This person may be a stranger or your most despised relative and you and your loved ones often lose valuable time, money, and control.
• Joint ownership issues: Many people may believe they are protected 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 a brokerage account to manage investments, a joint owner of real estate will not be able to mortgage or sell property without the consent of all other owners. If a joint owner is sued, the property could be seized as part of a judgment entered against them.

Planning tip: Adding names to accounts or real estate titles may be deemed a gift for gift tax purposes. Using joint ownership is a risky proposition for everyone involved. Only a comprehensive incapacity plan will protect you and your assets from these and other pitfalls.

Essential documents for financial management during incapacity

There are at least two essential legal documents for managing finances that must be in place before a client becoming incapacitated:

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. 
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 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.

Healthcare decision-making

Medical power of attorney: This legal document, also called a medical or health care proxy, gives an agent the authority to make healthcare decisions if the person signing the document becomes incapacitated. Without this document, a judge may also appoint a guardian to oversee your health care, thereby adding further expense and hassle. 

Are your incapacity plans  up to date?

As time passes by and your lives change, your incapacity plans will become outdated. It is important to have your incapacity plan reviewed every three to five years or after a major life event (such as a divorce or death) to best ensure that the plan will work the way you intend it to work if it is ever needed.