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Incapacity Planning

Part of our review process with clients involves discussing their estate plans and helping them become acquainted with the various aspects of planning that should take place with regard to this. We often think of our estate plan solely as an arrangement for the distribution of our assets following our death, but planning for periods of incapacity while living is also an important part of this process.

Simply stated, incapacity means that you are either mentally or physically unable to take care of yourself or your day-to-day affairs. More accurately though, incapacity means the inability to properly care for one's property or person or to make or communicate rational decisions concerning one's person. Generally, incapacity can result from serious physical injury, mental or physical illness, mental retardation, advancing age, and alcohol or drug abuse. The following examples should help illustrate incapacity:

  • Sue, age 40, has been in a car accident. Having received serious head injuries, she will likely be in a coma for the rest of her life.
  • Ken, age 58, was diagnosed with cancer a year ago. His chemotherapy and radiation treatments worked for awhile, but now his cancer is slowly spreading; he's unable to get out of his hospital bed. The pain medicine he's taking keeps him asleep most of the time, but even when he's awake, he doesn't know what day it is.
  • Jane just turned 91 years old. She is in a nursing home and can only get around in a wheelchair. Diagnosed with Alzheimer's, she does not recognize any family members when they come to visit, and she cannot care for herself.

Why should you care?

You need to be concerned about incapacity because in today's modern age of medical miracles, it is a very real possibility that incapacity may strike you or your spouse. A devastating illness or serious accident can happen suddenly at any age. In addition, medical science has increased your life expectancy and consequently increased your chances of becoming physically or mentally incapable of managing your medical or financial affairs. The effect of this is that, at any age, you may not be able to make decisions about your health, pay your bills, write checks, make deposits, sell assets, or otherwise conduct your business.

Unless you have authorized someone to carry on your affairs, a relative or friend will have to resort to a drastic measure—asking the court to appoint a guardian. This public procedure can be embarrassing, emotionally draining, time-consuming, and expensive. By planning for incapacity, you are able to select the person you trust to make decisions for you and to keep the courts out of it.

Incapacity is determined in one of the following ways:

Physician certification - By including a provision in a durable power of attorney, you can designate a physician (or physicians) who will determine whether you are incapacitated or not. You may also state that your attending physician will determine your incapacity at the relevant time, whenever that may be.

Judicial finding - The court may be petitioned for a determination as to whether you are incapacitated or not. The proper court in which to file varies from state to state, but it is generally the probate court. The individual with the standing to petition the court also varies from state to state. Generally, any interested person may file a petition (an interested person is defined by state law and, in practice, is usually your spouse, parent, or child). After a legal proceeding, called a hearing, where medical and other testimony is heard, a judge will decide whether you are incapacitated according to standards determined by your state's laws.

Why do you need to plan for incapacity?

Managing medical decisions – Let’s say that you become very ill and incapacitated and are unable to make your own medical care decisions: What happens? Without someone authorized to make those decisions for you, your medical care providers are obligated to prolong your life, using artificial means if necessary. With today's modern technology, this means that physicians can sustain you and prolong your dying for days and weeks (if not months or even years!). Rather than experiencing a sudden death, you may die slowly over an extended period of time. If you were to fall into a coma, you could be kept alive for years.

If you want to avoid the possibility of this happening to you, you must plan in advance. You need to understand and implement one of the devices that may be available to help you if you become unable to help yourself.

Managing your property - Who will manage your property if you become incapacitated and can no longer handle these responsibilities for yourself? If you have not planned ahead, the answer is either no one or a court-appointed guardian. If no one looks after your financial affairs when you are unable, your property may be wasted, abused, or lost; and your family may suffer. A court-appointed guardian may offer some help, but this procedure is very difficult on you and your family. If you want to protect your property and avoid guardianship, you need to understand and implement at least one of the options you may have to protect your property against incapacity.

What can you do to protect yourself?

Living trust - You can transfer ownership of your property to a living trust. By naming yourself as trustee, you maintain complete control over your affairs as long as you retain capacity. If you become incapacitated, your successor trustee (the person you name to run the trust if you cannot) automatically steps in and takes over the management of your property.

Durable power of attorney - A durable power of attorney (DPOA) allows you to authorize someone else to act on your behalf. There are two types of DPOA: a standby DPOA, which becomes effective immediately, and a springing DPOA, which does not become effective until you have become incapacitated. A DPOA should be fairly simple and inexpensive to implement and it avoids court intervention. It also terminates at your death.

Joint ownership - You can hold your property in concert with others. This arrangement may allow someone else to have immediate access to the property and to use it to meet your needs. Joint ownership is simple and inexpensive to implement and avoids court intervention. There are, however, some disadvantages to the joint ownership arrangement, including:

  1. your co-owner and creditors have immediate access to your property
  2. you lack the ability to direct the co-owner to spend the property for your benefit
  3. if you die before the other joint owner(s), your property interests will pass to the other owner(s) without regard to your own intentions, which may be different.

How do you decide what you should do?

There are some differences in the options listed above. Your circumstances and goals will determine which alternative(s) may be right for you. After thinking through your situation, make sure to discuss these issues with your attorney, planner or other advisor.

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