Often estate planning focuses upon the settlement of one’s estate upon death and the subsequent transfer of assets to the beneficiaries. However, an often overlooked – and perhaps more important – aspect of estate planning centers upon incapacity. In the event that you have a medical emergency that makes it impossible for you to make financial or personal decisions, does your estate plan provide an effective system for allowing a trusted individual to manage your assets? Below is a summary of the options for addressing incapacity planning.
Choosing an Agent
The first consideration is choosing an agent to make decisions for you in the event of incapacity. Choosing carefully is key to ensuring that your assets are managed for your benefit in an prudent and efficient manner. Factors to consider in choosing your agent include the proposed agent’s trustworthiness, age, health, financial literacy, and availability. As difficult as it is to find an agent with all of the qualities, it is important to think of two or three alternate agents in case the first person is for any reason unable or unwilling to accept the appointment when needed.
Immediate v. Springing
Another important consideration is whether or not you want your agent to have immediate authority to manage your finances or whether your agent’s ability to manage your assets only “springs” into action upon your incapacity.
Advantages to immediate authority include the ability of your agent to help you with your finances while you still have capacity if such aid would be helpful and the immediate ability of your agent to take over in the event of your incapacity.
A significant disadvantage of immediate authority is that your agent has direct access to all of your finances when it might not be necessary. Often, if you are currently capable of managing your own assets, you likely will prefer to only grant authority to your agent in the event of your incapacity.
Determination of Incapacity
If you choose to condition the grant of authority to your agent upon your incapacity, the method for determining your incapacity should be articulated with precision. First, there should be an explicit definition of “incapacity” in your trust and power of attorney. For example, a definition of incapacity might be expressed as follows: “I will be determined to be incapacitated if I am unable to make financial or personal decisions due to age, illness, dependence on substances, or some other cause.”
Second, there are several options for demonstrating that your current condition meets your definition of “incapacity.” The two most common methods are (1) a physician’s test; and (2) a disability panel.
With regard to a physician’s test, your estate planning documents would state that your incapacity shall be determined by a letter written by a licensed physician. Because the prospect of taking away your basic civil right of managing your assets and giving that right to a third party is a significant action, you might prefer to stipulate that letters from two physicians should be required to demonstrate your incapacity to make certain that you are really unable to make financial decisions.
A disability panel is an alternate approach to a physician’s test. The concept of a disability panel is to appoint a group of individuals who will collectively determine whether or not you have lost the mental capacity to make financial or personal decisions. Your disability panel may consist of friends and relatives as well as a physician or other professional.
If you decide to use a disability panel, you will need to decide whether the entire disability panel must act unanimously or whether a majority of the members may determine whether you have lost your capacity.
Because disability is not necessarily a permanent condition, a comprehensive estate plan should also include provisions for subsequently determining that you have regained your capacity and are able to resume your management of your assets.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before acting upon any of the information contained within this article, you should consult a competent attorney who is licensed to practice law in your community.