Estate planning is often seen as a tool to manage wealth and assets after death. However, a key but overlooked aspect of estate planning is preparing for the possibility of incapacity. Incapacity is when an individual cannot make decisions about their own affairs due to physical or mental health issues, which can happen due to accidents, illnesses, or aging. Without proper estate planning, a person’s financial and healthcare decisions are in the hands of courts or unprepared family members.
In this comprehensive blog, we will see why estate planning for incapacity is crucial, the tools involved, and how estate planning protects the individual and their loved ones.
1. What is Incapacity?
Incapacity is the legal term used to describe a person’s inability to manage their own affairs due to mental or physical decline, which can be due to cognitive impairments like Alzheimer’s disease, a coma following an accident, or even a severe stroke. The affected person can no longer make crucial decisions about their own financial or healthcare matters.
The Two Types of Incapacity:
Temporary Incapacity: which may be caused by a coma or hospitalization, after which the person might regain their abilities.
Permanent Incapacity: which may be caused by conditions like advanced dementia or brain injury where recovery is unlikely.
Whether the incapacity is temporary or permanent, being unprepared can lead to serious legal, financial, and emotional challenges for the individual and their family.
2. Why Estate Planning for Incapacity is Essential
Estate planning isn’t just about distributing your assets when you pass away. It’s also about ensuring that if you become incapacitated, your affairs will be managed according to your wishes.
A. Prevention of Legal Battles
Without clear instructions on how to manage your assets and healthcare decisions, families are often pitted in heated legal battles. This is not uncommon, as family members may have competing beliefs on what is the right course of action. This can lead to a court stepping in to appoint a guardian or conservator, potentially bypassing your preferences. Estate planning ensures the person you trust is responsible for your affairs instead.
B. Protection of Your Financial Interests
Your finances may be frozen or mismanaged if your estate plan does not consider incapacity. Essential bills such as mortgage payments, utility bills, or medical expenses may go unpaid. By having an estate plan, you can instead designate a trusted individual (often referred to as a financial power of attorney) to manage your financial accounts, pay bills, and even make investment decisions on your behalf.
C. Ensuring Proper Healthcare Decisions
An estate plan allows you to appoint a healthcare proxy (also known as a medical power of attorney), ensuring the person you trust is responsible for decisions regarding your medical care. Without this, doctors may follow default medical procedures, or family members could face difficult choices in emotionally charged situations.
D. Avoiding Public Guardianship
Without a proper plan in place, the court may appoint a public guardian or conservator. These individuals are usually unknown to the incapacitated person, and their decisions are typically based on legal standards rather than the personal desires of the affected person. Estate planning allows you to retain control over who will manage your affairs if you become incapacitated.
Three Key Tools for Estate Planning for Incapacity:
A. Durable Power of Attorney (DPOA)
A Durable Power of Attorney is a legal document allowing you to appoint someone (an agent or attorney-in-fact) to manage your financial affairs if you are incapacitated. The term “durable” refers to the document remaining in effect if you lose mental capacity. Without a DPOA, no one will have the legal authority to manage your finances unless appointed by the court.
Benefits of a DPOA:
Flexibility: You can define what powers your agent will have, from handling bank accounts to managing real estate.
Avoidance of Court: Your loved ones won’t need to go through the court process to gain authority over your financial affairs.
B. Healthcare Proxy (Medical Power of Attorney)
A healthcare proxy allows you to designate someone to make medical decisions on your behalf if you are unable to do so. This document ensures your chosen individual, not the hospital or a court, oversees critical healthcare decisions.
Benefits of a Healthcare Proxy (Medical Power of Attorney):
Personalized Medical Care: You can provide instructions on the types of medical interventions you want or do not want.
Quick Decision Making: In emergency situations, someone is authorized to streamline treatment.
Clarity: Your family is relieved from the burden of making difficult healthcare decisions.
Control: You have control over your healthcare preferences even when incapacitated.
D. Revocable Living Trust
A revocable living trust allows you to transfer ownership of your assets into a trust, which you can manage during your lifetime. In the event of incapacity, a successor trustee, who you appoint, takes over managing the trust for your benefit, and in the event of your passing, this person would continue to manage the trust according to your express wishes.
Benefits of a Revocable Living Trust:
Asset Management: Ensures a smooth transition in managing your assets without court intervention.
Flexibility: You can change or revoke the trust during your lifetime as long as you’re competent.
E. HIPAA Authorization
The Health Insurance Portability and Accountability Act (HIPAA) restricts access to your medical information. Without a HIPAA authorization, even close family members may not have access to your medical records. By including a HIPAA authorization in your estate plan, your designated agent has ensured access to critical healthcare information when it is needed most.
4. How to Create an Estate Plan for Incapacity
Creating an estate plan to address the possibility of incapacity involves several steps. It’s important to work with a qualified estate planning attorney to ensure all documents are properly drafted and legally binding. Here’s an overview of the process:
A. Assess Your Needs
Start by considering your specific needs and wishes. This includes who you trust to make decisions on your behalf, what kinds of medical treatment you want or don’t want, and how you want your assets managed if you’re unable to do so.
B. Choose Trusted Individuals
Identify the people you want to act as your financial power of attorney, healthcare proxy, and successor trustee (if applicable). It’s essential to choose individuals who are trustworthy, responsible, and capable of making difficult decisions in line with your wishes.
C. Draft Legal Documents
Work with an attorney to draft the necessary legal documents, including:
Durable Power of Attorney
Healthcare Proxy
Living Will
Revocable Living Trust (if needed)
HIPAA Authorization
D. Communicate Your Wishes
Discuss your estate plan with the individuals you’ve chosen to act on your behalf. Make sure they understand your wishes, the responsibilities they’ll assume, and where to find the necessary documents in case of an emergency.
E. Review and Update Your Plan
Estate planning isn’t a one-time event. As your life circumstances change (for example, a marriage, a divorce, the birth of child, or a change in health) you’ll need to revisit and update your plan to ensure it remains aligned with your current wishes and needs.