One of the most important aspects of Estate Planning is to provide a mechanism to deal with incapacity. In the event that you are mentally or physically unable to effectively manage your personal or financial affairs, who will fill this important role? Just as important, how will that trusted person be able to take control of your assets and manage them for your benefit with the least amount of expense and bureaucratic hoops?
Without proper planning, your loved ones will most likely have to petition for a Conservatorship, a court-supervised process that can be time-consuming, costly, and embarrassing. If you have proper Estate Planning, your Revocable Living Trust gives your trustee the authority to manage your trust assets during your incapacity and your Durable General Power of Attorney gives your “Attorney-in-Fact” the authority to manage assets that are titled in your individual name as well as authority over other personal affairs such as access to mail, the ability to deal with the IRS, the ability to enter into contracts, etc. (For purposes of this article, “trustee” and “attorney-in-fact” shall both be referred to as “agent.”)
It is important to understand how your Trust and Power or Attorney give your agent the authority to manage your assets in the event of incapacity. Most clients who are currently of sound mind and health prefer to only allow their agents to have power over their assets in the event that they are incapacitated. This is often referred to as a “springing power,” a power that only “springs” into effect upon your incapacity: your agent has no power over your assets unless that power is triggered by your subsequent incapacity.
With a springing power, your Trust and Power of Attorney should (1) clearly define “incapacity” and (2) articulate how “incapacity” is determined.
Regarding the definition, it is important that it be clearly stated so that a title company or a bank officer will easily understand it. I often use the following definition: “I will be considered incapacitated during any time that I am unable to effectively manage my property or financial affairs because of age, illness, mental disorder, dependence on prescription medication or other substances, or any other cause.”
As far as determining whether the definition has been met, you have a number of options. The most common option is to require that two licensed physicians sign a statement stating that you have met the threshold of the definition. The thinking behind having two physicians sign a statement is to provide a check and a balance: taking away your ability to manage your affairs and giving them to someone else is significant and you want to be protected from a whim or fraud. A further protection would be to require that the two physicians be independent of each other, i.e., not in the same practice.
The downside to this check and balance is that it will require more effort, time, and complexity to obtain the necessary documentation. As a result, some Trusts and Power of Attorney documents only require one doctor to make the determination.
Another approach is to create a “disability panel,” where a number of persons – either doctors, laypersons, or some combination thereof – will vote to determine whether or not you have met the definition of “incapacity.” This is especially helpful if due to personal or religious values you prefer not to have a medical doctor involved in the determination of your mental health.
In addition to your Trust and Power of Attorney having a clear procedure for determining your incapacity, it is also critical to authorize your agent to have access to your medical records by executing a “HIPAA Waiver.”