Planning for Incapacity

Planning for Incapacity What can we do to insure that our intentions will be carried out if we are incapacitated by injury or illness? I am often asked by my clients if planning for incapacity is really necessary? "Can't my family take care of my wishes?" Why plan for incapacity? If you don't prepare for the future, plan on having you and your family suffer the consequences. A failure to plan is a plan to fail. An hour of time spent planning and putting the appropriate directions in place can save hundreds of hours and thousands of dollars in the future. Planning today spares your family the emotional toll that is imposed when they have to resort to the court system to address issues that should have been taken care of before incapacity strikes. The primary objective when planning for incapacity is the avoidance of the court controlled guardianship system and its incumbent costs in time and money. The goal is to keep control within the family. This control is broken down into two areas, control of your finances and property and; control of your health care decisions. If you are not able to express your desires and direct your financial institutions with regard to your assets, then you are powerless to control your life. If you do not appoint someone to step in and act on your behalf, if you do nothing, then there will be a vacuum of control. This vacuum will be filled by the method of last resort, a guardianship overseen by the court system. If you plan today your children won't be forced into court to have a guardian appointed. The legal system provides you several options which, acting together, allow you to retain control over your assets including who will manage the assets when you no longer have the ability, or legally speaking, the "capacity", to make financial decisions. The law also allows you to nominate a person to make your health care decisions for you if you cannot. In Most states, granting authority to someone else is accomplished by executing one or more legal documents; usually a trust, power of attorney and health care surrogate. Each document addresses different aspects of the problem of incapacity and may in the case of the living trust solve several problems at the same time. Documents which can be drafted and executed now to keep control over the client's life and out of the court system include: Durable Power of Attorney Creation of Joint Tenancies The Living Trust Pre-Need Nomination of Guardian Living Will/Health Care Surrogate Let's talk about Durable Power of Attorney First. Durable Power of Attorney The purpose of a Durable Power of Attorney (DPOA) is to give authority to someone else to act on your behalf as if they were you. The person who holds a DPOA "stands in" for you and acts as your agent. For example, a person holding a DPOA can write a check and sign his name to draw funds from your bank account. This same person can also sell or purchase property on your behalf, including your home. Simply, this person can legally do anything you can do. This ability to act on your behalf is critical in any number of situations, including but not limited to, the ability to apply for benefits to pay for long term care. A durable power of attorney should not be confused with a general power of attorney. These are two very different documents with different functions despite their similar names. The general power of attorney has a serious flaw which prohibits it from functioning as a method of planning for incapacity. The law considers a general power of attorney to be automatically withdrawn when you lose capacity. This means that if you have a stroke or other incapacitating event, the power of attorney is no longer effective. The DURABLE power of attorney differs significantly in that it continues to function despite the incapacity of the person who granted it. There are some variations to the DPOA, first you may limit the powers of the person holding the DPOA, often referred to as the attorney in fact. You can restrict the powers to only one specific purpose, for example, to sell real property. The second common variation is to make the power of attorney effective only upon your incapacity. This "springing" power is used when you want to have the DPOA come into effect only upon your incapacity, for example, when you want to keep control until the need arises or when you are concerned about the attorney in fact acting prematurely or against your wishes. A springing DPOA, however, presents some pragmatic problems of proving your incapacity to the third parties relying on the DPOA. This proof requirement may ultimately render your planning ineffective. Caution is advised when creating a power of attorney that "springs" to life only when you lose capacity. Your durable power of attorney should specifically describe what the attorney in fact may or may not do when acting under the DPOA. DPOA's are strictly construed, meaning that the person relying on the document will only act if the document specifically describes those things the holder is allowed to do. For example, the son who holds the DPOA for his incapacitated mother goes to the bank to retrieve items in the safety deposit box. If the particular DPOA he is using does not say that he can open his mother's safety deposit box, the bank will refuse to allow him to open the box. There is no mechanism available, other than compelling the bank through a civil action in court, to open the box. Even then, such action may not meet with success because of the court's strict adherence to the language of the DPOA document. Can you cancel or revoke a DPOA? Absolutely. However, since it is so easily revoked a problem may arise in this regard. Occasionally, due to the age of the document or other reasons, the DPOA may not be accepted. Careful drafting of the document can alleviate this problem to a great extent, including limiting the time that a DPOA is effective or providing for a detailed mechanism for revocation of the power. When choosing the person who is going to hold the power granted in a DPOA the first criterion is: who do you trust? A close family member is usually the first choice. The second criterion is usually geographic location. Close proximity to the grantor is an important consideration. The ability to determine first hand the client's wishes, and easy access to documents and institutions makes for a more effective, practical, utilization of the grant of authority. A client at one of my seminars once asked, "I have a Power of Attorney that I bought at the office supply store. Isn't this good enough?" Remember, if it is only a "power of attorney" it will not function should you lose your capacity. Indeed, a power of attorney often lulls a client into a false sense of protection when in fact a "power of attorney" loses any effect when the principal loses capacity. A power of attorney to be effective in planning for incapacity must have language which creates a durable power of attorney. Not all powers of attorney are durable. The specific language required must say that the grant of authority shall survive the subsequent incapacity of the principal. Without such language the power of attorney is useless if the principal loses capacity. Again, caution is advised in the use of "store bought" legal forms. Terminology Advanced Directive - A general term for all methods of planning for incapacity including Durable Power of Attorney and Health Care Surrogate. Attorney in fact - The person whom you grant the authority to act in your place, also referred to as a proxy. Springing power - Authority which springs into existence on the occurrence of a specified event e.g. incapacity. Durable - Means that the grant of authority (the DPOA) survives your incapacity. Must be expressly indicated within the document. DPOA - Durable Power Of Attorney. Principal- Person executing the power of attorney. Capacity- Refers to an individual's ability to understand who they are, who their heirs are, the status of their assets, and the impact of the documents being executed on those assets. Drawbacks of a DPOA. The major drawback of a DPOA is the potential for abuse. While there are laws in place to impose criminal as well as civil penalties for the wrongful use of a DPOA, difficulty with proving such wrongdoings place a great importance on selection of a trusted individual to serve as your attorney in fact. If you don't feel totally secure with giving any one person total control, you might consider naming co-attorneys in fact. This would require that all actions taken under your grant of authority be made only with the consent of all the co-attorneys. This allows the left hand to watch over the right. Obviously, this does not completely solve the problem in that both the proxies may get together and agree to abuse the grant of authority. The use of co-attorneys in fact should not be used in every case as it creates another set of logistical complications by requiring two signatures on every document. The second major drawback of DPOA's is the reluctance of some financial institutions and other third parties to rely on the document as a valid grant of authority. You may find yourself in a predicament when your attorney in fact makes a request of, for instance, a bank and the banker refuses to respond to his demands. In such a case, a letter from the attorney who drafted the DPOA may reassure the bank; but not always. Careful drafting of the DPOA is often the best way to increase the effectiveness of the DPOA. The powers that I include in my DPOA's also contain a provision that requires the affirmative action of the principal to record in the county of their residence any revocation of the DPOA. Therefore, should anyone question if the power has been revoked they simply have to look to the public record. I also include an indemnification clause which means that you are assuring the third party you won't sue them if they do what your power of attorney requests. An additional problem, easily overcome, is a possibly "stale" DPOA. In every power of attorney there is the possibility the grant of authority has been revoked or the client has died. An old power of attorney may cause problems. As a general rule, you should re-execute the document at least once every three years. Health Care Surrogate Designation. A DPOA does not solve all the potential legal problems which an individual client would experience if he became incapacitated. A DPOA will only solve half of the problems associated with incapacity. The other side of the coin deals with who will make decisions regarding health care choices and alternatives should you be unable to express your desires. Most state have created a law which sets forth a suggested hierarchy of individuals who may make health care decisions in place of the incapacitated client. This list, however, may be deviated from in the case of a perceived conflict of interest, and ignored by the court system unless there is a clear expression of intent by the client. Such a clear expression may be made in a Health Care Surrogate Designation. A Health Care Surrogate Designation is very similar to a Durable Power of Attorney, but instead of focusing on your financial life it authorizes someone to make medical decisions on your behalf. You direct what kind of choices are to be made, including decisions to withhold or end medical treatment when death is imminent . Such inclusion acts like a living will. Another difference between a DPOA and a Health Care Surrogate Designation; a standard DPOA will become effective immediately upon signing, a Health Care Surrogate Designation only becomes effective if you can not express your desires regarding medical treatment. In court proceedings to establish a guardianship, the court will appoint a guardian for the property of the ward (the incapacitated individual) and a guardian for the personal affairs of the individual. Often, this is the same person. Similarly, the holder of your DPOA, who is primarily concerned with property issues, and the Health Care Surrogate, responsible for medical decisions, can be the same person. The best way to plan for incapacity While a DPOA is often effective in managing the affairs of the incapacitated client, often the best approach, with the most security, safeguards and reliability is the use of a Revocable Living Trust in combination with a DPOA. The DPOA is still part of the overall plan, but in this case, it only functions to control assets that are inadvertently left out of the trust estate. With a Living Trust, you retain control over the assets as trustee of the trust without granting authority to anyone else until an incapacitating event happens. When you can no longer serve as trustee because you have lost the capacity to do so, then the successor trustee who you have named steps in to manage the assets. Financial institutions cannot refuse the successor trustee's directions. There is no issue of revocation or staleness as in the case of a DPOA. Beneficiaries of the trust usually have the right to monitor the management of the trust and require the successor trustee to account for his actions, further providing protection against potential abuse. Lastly, the Living Trust has the major advantage of solving two problems simultaneously; one, the problem of managing your assets while you are alive but unable due to some incapacity and two, manages your assets and disposes of them pursuant to your direction after your death, thus avoiding probate. The Living Trust The functioning of a trust is quite simple and can be analogized to the concept of a corporation. Like a corporation, a trust is an entity that exist as a fictitious person. It is brought into existence in much the same way as a corporation, but instead of articles of incorporation describing the creation and operation of the entity, a trust is created by executing an agreement between the person who creates the trust and the person responsible for the administration of the trust. This document is called a trust agreement and contains the directions to the trustee as to how he is to act under certain conditions. The two conditions which we are concerned with are; incapacity of the initial trustee/grantor and the distribution of the estate after death of the initial beneficiary. In the typical situation, the initial trustee and the initial beneficiary is the same person who created the trust. In other words, a trust is an agreement between you and yourself, for the benefit of yourself, with the purpose of managing the property in the trust while you are alive and after you die. The trust agreement document contains directions outlining who steps into the shoes of the initial trustee in the event of incapacity and what that "successor" trustee should do, thus avoiding appointment of a guardian. THE IMPORTANT THING to remember is that the successor trustee only can control the assets that have been transferred to the trust's ownership. The successor trustee has no ability to manage that property which is still owned in the individual's name. In other words, simply having a trust does not avoid the probate system or plan for incapacity. You must fund the trust with your property before you loose capacity or die. The living trust is a simple, elegant solution for the majority of clients to dispose of their estate, and to set in place a plan in case of incapacity