Why Your Clients Need to Worry About Incapacity Planning
Death is the elephant in the room when it comes to talking about estate planning with clients. To avoid causing undue distress, we often edge around it, referring to heirs and beneficiaries or using terms like pass away or pass on.
This is something of a professional courtesy. Clients do not need to be reminded of death’s inevitability. It is why they engage in estate planning in the first place. They know they will not be around forever and need to plan for the future of their families, businesses, and legacies.
Advisors get clients to face hard facts head-on and come up with solutions for them, albeit using a gentle touch at times. This duty extends to discussing another sensitive but important topic—what clients want to happen if they are alive but no longer able to manage their own affairs (sometimes referred to as being incapacitated).
Everyone dies. Not everyone becomes incapacitated. But the odds—and consequences—of suffering incapacity are higher than people might think.
What It Means to Be Incapacitated
Incapacity is the inability to manage one’s affairs. It can arise from various causes, including illness, injury, and cognitive decline.
Although often conflated with disability, incapacity and disability are not the same. A disabled person can be incapacitated, but disability does not necessarily involve incapacity.
Someone who is in a serious car crash, for example, may have injuries that affect their mobility but not their cognition and communication. They might not be able to get around without assistance, but they can still make important decisions about their financial, property, legal, and healthcare affairs.
Most states, which have laws for determining incapacity in the context of adult guardianship proceedings or conservatorship proceedings (the term used may vary by state), statutorily define what it means to be incapacitated. These definitions typically include several components, including medical, functional, and cognitive elements.
Defining Incapacity in an Estate Plan
The legal standard for declaring someone incapacitated varies by state, but for the purposes of estate planning, it comes down to whether a person has a mental or physical impairment that renders them unable to make decisions for themselves and requires someone else to make decisions for them about their medical care and their finances.
Clients do not have to rely on their state’s legal definition of incapacity to dictate when decision-making authority should be transferred to another person. Instead, they have the flexibility to define in their estate planning documents how incapacity is determined. Some clients want their loved ones, physicians, or a combination of the two to make the determination, while others prefer to require a disability panel or court to decide.
Some clients want to remain in control as long as possible, or have concerns about other people making decisions for them, and prefer a conservative standard. Others are more confident in their decision-makers and comfortable with a less rigorous process. The goal of an estate plan should be to strike the right balance between convenience, objectivity, and timeliness.
The crucial point to keep in mind during client discussions is that, without an estate plan, the determination of incapacity and the selection of a decision-maker could be left up to the court.
Incapacity Is a Real Risk
Financial advisors are accustomed to discussing disability with clients in the context of creating a plan for what happens if they are too sick or injured to work.
Around one in four 20-year-olds will become disabled before retirement, and there is a roughly 70 percent chance that an adult age 65 and older will need long-term care in their remaining years. Unfortunately, nearly three-quarters of Americans live paycheck to paycheck and are not financially prepared for disability.
Here are some facts about incapacity that you and your clients may not know:
- One in nine adults age 65 and older has Alzheimer’s disease, the leading cause of dementia and a common cause of incapacity.
- Around 13 percent of all adults and 66 percent of adults age 70 and older are living with a cognitive disability, such as dementia, autism, or traumatic brain injury that may render them unable to make an emergency medical decision.
- Incapacity can be permanent (e.g., due to dementia or a stroke) or temporary (e.g., because someone is unconscious or under anesthesia).
- Capacity is not all or nothing. A client could retain the capacity to handle their financial affairs but not to make healthcare decisions.
- Capacity can also fluctuate over time. Specific capacities may initially be lost and then recovered.
- Many different conditions can result in incapacity, such as substance abuse disorder, mental illness, postsurgical complications, and grief and bereavement.
A client can not only name a decision-maker for a period of incapacity in their estate plan but also make provisions in their plan to compensate someone like an agent under a power of attorney.
In many cases, the agent is a family member who may not expect to be paid. However, by providing compensation or reimbursement to the agent for expenses incurred while managing their affairs, such as legal fees or accounting costs, as well as for their time, a client can provide incentives and resources to ensure that all of the necessary legwork (and paperwork) is performed during their incapacity.
Planning for Incapacity
If death is the elephant in the room in estate planning discussions—the obvious issue nobody wants to name—then incapacity is the issue that a client may never see coming.
Incapacity can happen at any age and have many causes. An estate plan that addresses only what happens to a client’s assets after death without addressing who can make decisions about their personal affairs in the event they become temporarily or permanently incapacitated is missing a core piece.
The purpose of discussing incapacity should not be to scare clients but to point out its very real possibility and the need to be prepared through comprehensive estate planning.
Helping Clients with Their Financial Decisions
Although we may not always recognize it, financial decisions and tasks are a part of our everyday lives. They range from daily spending habits to more complex financial planning and include everything from checking account balances and paying bills to updating insurance and signing contracts to making investments and retirement planning.
Most adults are capable of making their own financial decisions. However, what if they are alive but are no longer able to manage their own affairs (sometimes referred to as being incapacitated)? At that point, someone else will have to step in and act for them.
If a client has an updated estate plan that names a trusted financial decision-maker for periods of incapacity, they have control over who that someone is. Otherwise, the court will appoint someone, and it may not be the person the client would want—or who has their best interests in mind.
Guardianship or Conservatorship versus an Estate Plan
An estimated two-thirds of US adults do not have an estate plan. This effectively means that they also lack an incapacity plan, leaving them without documented, legally enforceable instructions regarding who should manage their affairs if they are unable to do so themselves.
The two main estate planning documents that a client can use to name a financial decision-maker for themselves during a period of incapacity are a revocable living trust and a financial power of attorney.
- A revocable living trust allows the client (also known as the trustmaker) to serve as trustee of their trust as long as they are alive and have the capacity to manage it. The client also names a successor trustee who will take over trust management when the client passes away or is alive but incapacitated.
One of the main purposes of a revocable living trust is to avoid probate, but it can also be used to avoid another type of court intervention: the appointment of a legal guardian (referred to as a conservator in some states) to manage an incapacitated person’s legal and financial affairs. The trust document can also specify who determines whether the client is incapacitated and contain detailed instructions about how the successor trustee must manage the trust during periods of the trustmaker’s incapacity.
- A financial power of attorney is another estate planning tool that can help avoid court intervention if incapacity strikes. It gives one or more people (the agent or attorney-in-fact) the authority to act on behalf of another person (the principal) regarding their financial matters.
A financial power of attorney is highly flexible. It can include a statement describing how incapacity will be determined and who determines it; it can allow the agent to act only when the principal’s incapacitation is confirmed (in some states), rather than allow the agent to act as soon as the client signs it; it can specify the powers granted to the agent; and it can be limited or long-lasting in duration. Like a revocable living trust, a financial power of attorney eliminates the need for court-appointed guardianship or conservatorship.
Why should guardianship or conservatorship be avoided? Ultimately, it is about allowing the client to be in control. An estate plan lets a client choose who will handle their finances and property if they are unable to do so themselves. Leaving this choice up to the court makes it a matter of state law and judicial discretion. Another reason to try to avoid court-ordered guardianship or conservatorship is that the majority of the details of the case will be public, so details about someone’s personal life, health, and finances could be shared openly. By planning ahead with legal documents such as a power of attorney or a trust, families can often keep these matters private and handle them without going through the court system. It is a way to protect both privacy and control over important decisions.
Factors When Choosing a Financial Decision-Maker
When choosing a financial decision-maker, clients should consider factors such as trustworthiness, financial knowledge, and the ability to handle responsibilities under pressure. The person they select should have a strong understanding of the client’s values and priorities, be organized, and communicate effectively with other key parties, such as family members or advisors. Additionally, they should be available and willing to serve in the role, as it may require significant time and effort, particularly during complex situations.
Naming co-trustees and co-agents can grant joint fiduciary powers that may provide checks and balances. However, the benefits of these checks and balances should be weighed against the growing trend of banks not readily accepting documents authorizing co-decision-makers.
If nobody in the client’s immediate circle of friends and family seems like a good candidate, a professional trustee or agent, such as an attorney or financial advisor, can be chosen. However, many professionals are hesitant about serving in the role of an agent under a durable power of attorney, so the client may want to consider other professionals, such as professional caregivers or fiduciaries.
The bottom line is that estate planning lets clients manage their incapacity in advance, in the manner that is best for them, their finances, and their family.
Having the ability to make their own financial decisions is something they may have taken for granted, and naming financial decision-makers is an area of their estate plan they may have overlooked. However, advisors can offer guidance that gives them peace of mind that the right people and provisions are in place—just in case they are needed.
What Does an Agent Under a Medical Power of Attorney Do?
Informed consent in medicine is an ethical and legal requirement for treatment. It is one of the core principles of the American Medical Association and ensures that patients can ask questions and obtain information about a treatment or procedure and explicitly consent to it.
There are recognized exceptions to the explicit patient consent requirement, including when the patient is in a medical emergency but unable to make or communicate their own decisions (for example, the client is under anesthesia during surgery or is unconscious). In such cases, a stand-in decision-maker (usually the next of kin) may step in and authorize treatment on the patient’s behalf.
For nonmedical emergency situations, clients with a comprehensive estate plan can control their future medical treatment by naming a person or people to act and provide consent for them when they are unable to do so (e.g., because of dementia, stroke, a closed head injury, or various other medical conditions and situations). People who lack key estate planning documents could be at the mercy of the courts or medical professionals (who are subject to facility policies and procedures) if they become unable to make or communicate their medical wishes, possibly resulting in care that is different from what they would have chosen.
The Role of Medical Directives
Medical directives are a series of legal documents that name a medical decision-maker and outline a person’s medical wishes if they become incapacitated and therefore unable to make or communicate their own healthcare decisions.
Two medical directives crucial for every estate plan are a medical power of attorney and a living will.
- A medical power of attorney is a legal document that gives a designated person (referred to as an agent or healthcare proxy) the authority to make or communicate healthcare decisions for another individual (the principal) if the principal is unable to do so. These decisions include consent to or refusal of treatments, surgeries, medication, and other interventions. The agent can also access the principal’s medical records and information for decision-making purposes.
- A living will (also referred to as an advance directive) is a document that details an individual’s wishes to receive—or not receive—specific medical treatments and interventions at a future time when the person is incapacitated and unable to consent or refuse. It often addresses life-sustaining measures in terminal situations. However, living wills are not legally recognized in all states.
The medical power of attorney and living will should be written to complement each other. Generally, an agent’s power is limited by any instructions that the principal outlines in their living will, and the agent cannot make decisions that contradict those instructions. Depending on state law, the medical power of attorney may contain healthcare instructions usually contained in a living will as well.
A living will should clearly state someone’s preferences for a number of end-of-life care decisions, including CPR, ventilation, dialysis, medications, tube feeding, pain management, and organ donation.
If these decisions are not addressed in the living will or the directives are unclear, the agent can use their judgment to make a decision they believe is in the principal’s best interests and aligns with their values.
Most people choose an agent under a medical power of attorney who knows them well and understands their values and preferences, but clients are advised to thoroughly discuss intervention and treatment choices with the agent before their services are needed. It is also important to choose someone who can be available in case of an emergency.
What Can Happen When There Are No Medical Directives
When there are no medical directives and the patient’s decision-making capacity is impaired, the court will appoint someone to serve as a stand-in decision-maker for the incapacitated patient. This appointment is made through a guardianship proceeding (sometimes called a conservatorship proceeding depending on the state) that is usually initiated by a family member. When there is no family involved, a hospital or a nursing home may reach out to the appropriate state agency to pursue guardianship or conservatorship.
When choosing a guardian for an incapacitated adult, the court considers a combination of the individuals set forth under state law and the person’s best interests, prioritizing close family members such as a spouse, parent, or adult child. Once the patient is deemed incapacitated, the guardian has full authority to make most or all decisions for the patient unless the patient retains the capacity to make their own decisions.
While guardianship might seem like a reasonable solution to the issue of not having advance directives and a legally authorized representative, it presents problems as well. Namely, the process is slow. It may take months or more to establish a guardianship. During this time, the incapacitated person’s necessary medical treatment may be put on hold or delayed.
However, what if a patient suffers a medical emergency and needs immediate care? This could happen from something as routine as a fall or a car crash that results in a traumatic brain injury, a leading cause of incapacitation. Stroke, organ failure, and sepsis can also come on suddenly and cause incapacity.
In these situations, the court may grant emergency guardianship on a temporary basis when someone’s health is at risk, they lack capacity, or a crucial decision must be made and they do not have a validly appointed decision-maker available. This arrangement lasts for a limited period or until a hearing can be held to appoint a permanent guardian. Emergency guardianship proceedings are still not instantaneous, however, unlike a medical power of appointment.
Another drawback of guardianship proceedings is that they are usually expensive: there will be court fees and potentially attorney’s fees if one is used, and most states require that an attorney represent the guardian or conservator in the court proceedings and throughout the duration of the case.
Lastly, a significant drawback of guardianship proceedings is lack of privacy. Since these proceedings take place in court, much of the information shared becomes part of the public record. This includes sensitive details about the individual’s health, finances, and personal circumstances, which can feel invasive and could lead to embarrassment or stigma. Additionally, public disclosure may strain family relationships or invite unwanted attention, making the process emotionally challenging for everyone involved.
For these reasons, medical professionals and attorneys widely consider guardianship an inadequate solution that should be used only as a last resort.
If you have clients without friends or family to act as stand-in decision-makers, they can name a professional, such as a physician or social worker, to make important medical decisions for them and avoid needing a guardianship proceeding to be initiated.
Estate Planning Avoids Unintended Medical Consequences
The upshot of not having medical directives is that a client loses control over decisions that may be not only medically necessary but also highly personal. To ensure that their medical wishes are honored, they should have a medical power of attorney and a living will as part of their estate plan and regularly check to ensure that the stand-in decision-makers they name are still available, willing, and able to fulfill their duties.
