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Not Just Death and Taxes: 5 Essential Legal Documents You Need for Incapacity Planning

Comprehensive estate planning is more than your legacy after death, avoiding probate, and saving on taxes.  Good estate planning includes a plan in place to manage your affairs if you become incapacitated during your life and can no longer make decisions for yourself.

What happens without an incapacity plan?

Without a comprehensive incapacity plan in place, your family will have to go to court to get a judge to appoint a guardian or conservator to take control of your assets and health care decisions.  This guardian or conservator will make all personal and medical decisions on your behalf as part of a court-supervised guardianship or conservatorship.  Until you regain capacity or die, you and your loved ones will be faced with an expensive and time-consuming guardianship or conservatorship proceeding.  There are two dimensions to decision making that need to be considered: financial decisions and healthcare decisions.

Finances during incapacity

If you are incapacitated, you are legally unable to make financial, investment, or tax decisions for yourself.  Of course, bills still need to be paid, tax returns still need to be filed, and investments still need to be managed.

Healthcare during incapacity

If you become legally incapacitated, you won’t be able to make healthcare decisions for yourself.  Because of patient privacy laws, your loved ones may even be denied access to medical information during a crisis and end up in court fighting over what medical treatment you should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years).

You must have these five essential legal documents in place before becoming incapacitated so that your family is empowered to make decisions for you:

  1. Financial power of attorney: This legal document gives your 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.

    Financial Powers of Attorney come in two forms: “durable” and “springing.”  A durable power of attorney goes into effect as soon as it is signed, while a springing power of attorney only goes into effect after you have been declared mentally incapacitated.  There are advantages and disadvantages to each type, and we can help you decide which is best for your situation.

  2. Revocable living trust: This legal document has three parties to it: the person who creates the trust (you might see this written as “trustmaker,” “grantor,” or “settlor” — they all mean the same thing); the person who legally owns and 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 situation, you will be the trustmaker, the trustee, and the beneficiary of your own revocable living trust.  But if you ever become incapacitated, your designated successor trustee will step in to manage the trust assets for your benefit.  Since the trust controls how your property is used, you can specify how your assets are to be used if you become incapacitated (for example, you can authorize the trustee to continue to make gifts or pay tuition for your grandchildren).
  3. Medical power of attorney: This legal document, also called a medical or health care proxy, gives your agent the authority to make healthcare decisions if you become incapacitated.
  4. Living will: This legal document shares your wishes regarding end of life care if you become incapacitated.  Although a living will isn’t necessarily enforceable in all states, it can provide meaningful information about your desires even if it isn’t strictly enforceable.
  5. HIPAA authorization: This legal document gives your doctor authority to disclose medical information to an agent selected by you.  This is important because health privacy laws may make it very difficult for your agents or family to learn about your condition without this release.

Is your incapacity plan up to date?

Once you get all of these legal documents for your incapacity plan in place, you cannot simply stick them in a drawer and forget about them.  Instead, your incapacity plan must be reviewed and updated periodically and when certain life events occur such as moving to a new state or going through a divorce.  If you keep your incapacity plan up to date and make the documents available to your loved ones and trusted helpers, it should work the way you expect it to if needed.

Year End Estate Planning Tip #3 – Check Your Mental Disability Plan

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season.  One area of planning that many people overlook is making sure their mental disability plan is up to date.

Three Areas of Your Mental Disability Plan That Are Likely Out of Date

If your estate plan is more than a few years old, then your mental disability plan is likely out of date for the following reasons:

  1. Are your health care directives compliant with HIPAA? While the federal Health Insurance Portability and Accountability Act (known as “HIPAA” for short) was enacted in 1996, the rules governing it were not effective until April 14, 2003.  Thus, if your estate plan was created before then and you have not updated it since, then you will definitely need to sign new health care directives (an Advance Medical Directive and a Living Will – insert the names of these documents in your state) so that they are in compliance with the HIPAA rules.  With that said, it’s possible that health care directives signed in later years lack HIPAA language, so check with your estate planning attorney just to make sure that your estate plan documents reference and take into consideration the HIPAA rules.
  1. Is your Power of Attorney stale? How old is your Power of Attorney?  Banks and other financial institutions are often wary of accepting Powers of Attorney that are more than a couple of years old.  This means that if you become incapacitated, your agent could have to jump through hoops to get your stale Power of Attorney honored, if it can be done at all. This could cost your family valuable time and money.  Aside from this, in the past few years several states (including Florida and Ohio) have enacted new laws governing Powers of Attorney.  If you want to increase the likelihood that your Power of Attorney will work without any hitches if you lose your mental capacity, update and redo your Power of Attorney every few years so that it doesn’t end up becoming a stale and useless piece of paper.
  1. Does your estate plan adequately address mental disability? A will is something that only becomes effective when you die.  With today’s longer life expectancies come increased probabilities that you will be mentally incapacitated before you die.  A fully funded Revocable Living Trust is the best way to provide adequately for mental incapacity, but some older trusts do not.  If you signed your Revocable Living Trust more than 8 to 10 years ago and haven’t updated it since or have assets that are outside your Revocable Living Trust, then it may well lack modern and appropriate provisions for what to do with you and your property if you become mentally incapacitated.  Have your estate plan checked to ensure that it will work effectively and efficiently if you lose your mental capacity.  Otherwise you and your loved ones may end up in front of a judge who will have to sort out your financial matters – at horrendous cost.

What Should You Do?

Estate planning is about much more than having a plan for who gets your stuff after you die – it should also include having a plan for what happens in case you lose your mental capacity.  If your plan is more than a few years old or does not include a fully funded Revocable Living Trust, then chances are it lacks a good mental disability plan.  Now is the time to meet with an experienced estate planning attorney to ensure that you have a mental disability plan that will work the way you expect it to work if it’s ever needed. Call or contact our office now to set up an estate planning consultation appointment. We make tough topics manageable to discuss and talk about.