Why You Need to Worry About Incapacity Planning
Death is the elephant in the room when we talk about estate planning. We often use phrases like pass away and pass on to make our meetings feel more comfortable and avoid being overly macabre, but the not-so-subtle subtext of an estate plan is death’s inevitability.
If death is the elephant in the room in estate planning discussions—the obvious issue nobody names out loud—then incapacity is what is obscured behind the elephant, sometimes so obscured that you do not even know it is there.
Incapacity can happen at any age and can have many causes. An estate plan that addresses only what happens to your assets (such as your money, property, life insurance policies, and retirement accounts) after death—and does not address who can make decisions about your personal affairs if you become temporarily or permanently incapacitated—is fundamentally flawed.
What It Means to Be Incapacitated
Incapacity means that you lack the ability to handle your affairs due to illness, injury, cognitive decline, or some other cause. You are, to take the literal meaning of the word, in a state of being incapable.
Legally, incapacity means something similar to incompetency. In the context of estate planning, incapacity refers to an impairment that renders you unable to make or communicate important decisions or to manage your affairs, including financial and healthcare matters.
Although often conflated with disability, incapacity and disability are technically 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 may not be able to get around without assistance, but they can still make important decisions about their financial, property, legal, and healthcare affairs.
Incapacity and Your Estate Plan
When you become incapacitated, somebody else must step in and handle your affairs for you. Your bills and taxes still need to be paid, your investments must be managed, and healthcare must be provided, especially if you have suffered a medical emergency that renders you incapacitated and requires immediate treatment.
If you want to take a proactive approach to incapacity planning, then you should create an estate plan in which you name and appoint your trusted decision-makers to act on your behalf when you are incapacitated using documents such as financial and medical powers of attorney and a living trust.
Without an estate plan that names financial and medical decision-makers for you in the event of your permanent or temporary incapacity, these choices could be left up to the court.
States have laws that provide guidelines for determining incapacity when the court must appoint a guardian or conservator (the term used may vary by state) for an incapacitated person. These legal definitions typically include medical, functional, and cognitive components.
However, you are not bound by state law standards when specifying in your estate plan how to determine when you are incapacitated—and when decision-making authority should be transferred to another person. Typically, loved ones, physicians, or a combination of the two can make the determination, but you could choose to specify in your estate plan that a disability panel or—in rare cases—court oversight should be involved if you prefer.
You may wish to remain in charge of your affairs as long as possible, or have concerns about others making decisions for you, and prefer a conservative standard. If you are highly confident in your chosen decision-makers (e.g., it is your spouse of 40 years), you may be comfortable with a less rigorous process.
The goal of an estate plan should be to strike the right balance between convenience, objectivity, and timeliness.
In addition, you can create provisions in your estate plan to compensate those you name to act on your behalf while you are incapacitated.
The people you name to make decisions for you may not expect to be paid. But reimbursing them for expenses they pay while managing your affairs, such as legal fees and accounting costs, and compensating them for time spent not working can help ensure that all of the necessary legwork (and paperwork) is performed during your incapacity.
Incapacity Is an Ever-Present Risk
The following statistics should be a sobering reminder that incapacity is a very real threat to you, your family, and your legacy that can strike at any time and any age:
- One in four 20-year-olds will become disabled before retirement. A disability does not always lead to functional incapacity, but it often does.
- There is an approximately 70 percent chance that an adult age 65 and older will need long-term care in their remaining years.
- 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.
- As we live longer, our chances of becoming incapacitated rise. Fewer than 10 percent of Alzheimer’s cases occur before age 65. At age 85, the risk increases to one in three.
- Incapacity can be permanent (e.g., due to dementia or a stroke) or temporary (e.g., because someone is unconscious or under anesthesia).
- Many different conditions can result in incapacity, such as substance abuse disorder, mental illness, post-surgical complications, and grief and bereavement.
Plan for Incapacity to Avoid Estate Planning Gaps
Like death, incapacity looms large, especially as you get older. Acknowledging the very real risk of incapacity is the first step in addressing it. The next step is meeting with an attorney and taking action to build incapacity contingencies into your estate plan.
Whom Do You Trust to Make Your Financial Decisions?
You wake up and check your investments over a cup of coffee. That tech stock you have been eyeing continues to trend upward, so you log in to your online brokerage account and buy some shares.
Later in the day, you get a notice that your mortgage payment has been withdrawn. Sticking to your budget, you review your monthly spending and see that you have enough saved for an extra payment that month. That afternoon, you redeem some credit card cash back points to pay for a work lunch.
That evening, you schedule an estimated payment to the IRS and update your spreadsheet to reflect recent client transactions. Before bed, while watching the news, you make a note to email your financial advisor about possibly changing investment strategies in response to an expected interest rate cut.
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 retirement planning.
You may take for granted that you are able to manage your finances. However, what if you become incapacitated (meaning that you lack the ability to handle your own affairs due to illness, injury, cognitive decline, or some other cause)? Someone else will have to manage your finances for you if you cannot.
If you have an updated estate plan that names a substitute decision-maker to act in your stead, you have control over who that someone is. Otherwise, the court will appoint a financial decision-maker, and it may not be who you would want—or who has your best interests in mind.
Guardianship or Conservatorship versus an Estate Plan
Two-thirds of US adults do not have an estate plan, which effectively means that they lack an incapacity plan (a plan for how their affairs will be managed if they cannot do it for themselves).
You may have created a will and completed other estate planning tasks, such as purchasing life insurance and making beneficiary designations. However, you still need a documented, legally enforceable process and plan for determining who will manage your affairs if you become incapacitated.
To proactively grant the necessary powers to a financial decision-maker, consider a revocable living trust and a financial power of attorney.
- A revocable living trust allows you to serve as trustee of the trust (in charge of managing the money and property owned by the trust) while you are still able. You can also name a successor trustee to take over trust management if you pass away or become incapacitated. The trust agreement can specify who determines whether you are incapacitated and can also contain detailed instructions about how the successor trustee should manage the trust.
One of the main purposes and benefits of a revocable living trust is to avoid the court-supervised probate process, but it can also be used to help avoid a different form of court intervention: the appointment of a legal guardian or conservator (the term may vary by state), which is the person appointed by the court to make financial and other decisions for you.
- A financial power of attorney is another estate planning tool that can help avoid court intervention if incapacity strikes you. It gives one person (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 come into effect only when the principal’s incapacitation is confirmed (in some states); 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 helps eliminate the need for court-appointed guardianship or conservatorship.
Factors When Choosing a Financial Decision-Maker
When choosing a financial decision-maker, you should consider factors such as trustworthiness, financial knowledge, and the ability to handle responsibilities under pressure. The person selected should have a strong understanding of your 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 this role, as it may require significant time and effort, particularly during complex situations.
If nobody in your immediate circle of friends and family seems like a good candidate, a professional, 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 you may want to consider other professionals, such as professional caregivers or fiduciaries. A professional trustee or agent is different from a professional guardian or conservator because it is a person of your choosing rather than the court’s.
The bottom line is that estate planning lets you manage incapacity in advance, in the manner that is best for you, your finances, and your family. You are free to name whomever you want to serve as a successor trustee or an agent under your financial power of attorney and to provide whatever instructions you want for them in your estate plan.
You may never need to rely on an incapacity plan. However, having the right people and provisions in place gives you added protection and peace of mind just in case something happens and you lose financial capacity. For guidance on this front, call us today to set up an appointment.
Whom Do You Trust to Make Your Medical Decisions?
It might be a stretch to say that if you have your health, you have everything. However, to some people, decisions about their health are arguably more personal in nature and more important to their overall well-being than financial decisions.
This leads to the question of who will step in and make healthcare decisions for you if you are incapacitated (unable to make or communicate your medical wishes). You may have estate planning documents that allow someone else to manage your finances during a period of incapacity. But have you also appointed someone to step in and manage your medical care when you cannot make decisions or communicate your preferences on your own?
Without certain documents that allow you to control your future medical treatment in the event that you become incapacitated, you could be at the mercy of the courts or medical professionals who are bound by facility policies and procedures and end up receiving care that is different from what you would have wanted.
Medical Directives and Estate Planning
Maybe you have created a will that names your beneficiaries or set up a trust to hold your money and property for your loved ones. You have even thought of the little things, like property appraisals, life insurance, digital assets, and pet provisions.
Your loved ones will be well taken care of when you are gone. But a comprehensive estate plan is about more than that. It also involves ensuring that your loved ones can take care of your medical decision-making as you would like them to while you are still alive but incapacitated. This aspect of your estate plan is addressed with documents known as medical directives.
Medical directives are a series of legal documents that name a medical decision-maker and describe how your medical care should be handled if an injury or illness prevents you from making decisions or expressing your wishes. This could happen, for example, if you are under anesthesia, suffer from dementia, or experience a medical emergency.
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 as needed for decision-making.
- A living will (also known as an advance directive) is a document in which you specify the medical treatments you wish to receive—or not receive—at a future time when you are incapacitated and unable to consent to treatment or refuse it. A living will often addresses life-sustaining measures in terminal situations. However, living wills are not legally recognized in all states.
A medical power of attorney and living will should be written to complement each other. It is important to understand the interplay between these two documents. In some situations, the power of the agent under a medical power of attorney may be limited by any instructions the principal outlines in their living will, and the agent may be unable to make decisions that contradict those instructions. A medical power of attorney may contain healthcare instructions as well.
A living will should clearly state someone’s preferences for a number of end-of-life care decisions that include CPR, ventilation, dialysis, medications, tube feeding, pain management, and organ donation.
If these decisions are not addressed in the documents or the directives are unclear, the agent can use their judgment to decide what they think 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 you should discuss intervention and treatment choices with your trusted decision-maker(s) before their services are needed. Choosing someone who will be available in case of an emergency is also important.
What Can Happen When There Are No Medical Directives
Your medical power of attorney allows you to choose a person or people to make decisions for you if you cannot make them yourself. In other words, you are preauthorizing a stand-in to provide informed consent on your behalf in the future when the need arises.
Without a valid medical power of attorney, the alternative—appointment of a court-ordered guardian for someone lacking capacity—can be very problematic.
When choosing a guardian or conservator (the term may vary by state) for an incapacitated adult who lacks a substitute decision-maker, 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 or conservator has full authority to make most or all decisions for the patient unless the patient retains the capacity to make decisions.
While guardianship might seem like a reasonable solution to the issue of not having medical directives, it is often too slow and cumbersome to respond proactively to a patient’s immediate medical needs. Also, guardianship proceedings are usually expensive: there will be court fees and potentially attorney’s fees if one is used (most states require that an attorney represent the guardian or conservator throughout the case). Further, another drawback of guardianship proceedings is the lack of privacy. Since these proceedings take place in court, much of the information shared becomes part of the public record.
The bottom line is that relying on the appointment of a court-appointed guardian or conservator is often considered by medical professionals and attorneys to be a last-resort option.
Take Control of Your Medical Future
When you do not have a medical power of attorney and a living will, someone else will still need to make decisions about your healthcare. But who that person is—and what they decide—may not accurately reflect your wishes.
Naming a stand-in decision-maker and stating your treatment preferences gives you some control over medical circumstances that may otherwise be outside of your control. If you have not yet named a medical agent or are having trouble identifying someone who is available, willing, and able to serve in this role, an attorney can help. To take control of your medical future today, reach out to us to schedule an appointment.
