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It’s Not Just About Death and Taxes: The Essential Legal Documents You Need for Incapacity Planning

Two weeks ago Jane (not her real name) called my office trying to find out if I had prepared an estate plan for her dad. She had found among his belongings my contact information but no documents. She was desperate and hopeful. After asking the routine ethical questions and giving legal disclaimer — we do not provide information about our clients to third parties, etc. She explained that her dad was in the hospital and had suffered an stroke. I remembered him and our conversations but, unfortunately, he never came back to my office to start his plan.

Her dad had his savings and retirement plan and a bit of money to cover his own expenses; however, no one had any access to his bank accounts or any of his assets. The daughter was very distressed. The hospital wanted to send him to a rehabilitation center she did not agree with, but she had no access to money to pay for a better one or to decision making without any documentation.

It is not the end of the world, I said. It would have been a lot easier and cost-effective to have the right documents in place, but now you can certainly start an Emergency Guardianship.

Guardianship is a legal action for a court to designate a guardian for an incapacitated adult. The only problem is that Jane’s brother wanted to be in control and did not want Jane making all the decisions for her dad.  The court battle has just began.

Where do I want to get with this? This is a real life example that shows that comprehensive estate planning is about more than your legacy after death, avoiding probate, and saving on taxes. It must also be about having a plan in place to manage your affairs if you become mentally incapacitated during your life.

What Happens Without an Incapacity Plan?

Without a comprehensive incapacity plan in place, a judge can appoint a guardian to take control of your assets and health care decisions.  This guardian will make all personal and medical decisions on your behalf as part of a court-supervised guardianship.  Until you regain capacity or die, you and your loved ones will be faced with an expensive and time-consuming guardianship proceeding. It is possible for the judge to appoint a family member to make these decisions, but upon conflict, the court may decide to appoint a total stranger to make your personal (financial and medical) decisions.

What Happens to Your Finances During Incapacity?

If you are legally 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 an investment strategy still needs to be managed.

So, you must have these two essential legal documents for managing finances in place prior to becoming incapacitated (remember, once you become incapacitated you can no longer appoint anyone):

  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, rent, and sell real estate, and address other financial matters that are described in the document.
  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” or “Grantor” or “Settlor” – they all mean the same thing); the person who 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 while you are alive and well, but if you ever become incapacitated, then your designated Successor Trustee will step in to manage the trustls assets (your assets) for your benefit.

Health Care Decisions Must Be Made Too

If you become legally incapacitated, you won’t be able to make health care decisions for yourself. Because of patient privacy laws, your loved ones may even be denied access to medical information during a crisis situation 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).

So, you should have these three essential legal documents for making health care decisions in place prior to becoming incapacitated:

  1. Medical Power of Attorney. This legal document, also called an Advance Directive or Medical or Health Care Proxy, gives your agent the authority to make health care decisions if you become incapacitated.
  1. Living Will. This legal document gives your agent the authority to make life sustaining or life ending decisions if you become incapacitated. You can specifically decide in this document if you want or not life sustaining or life ending procedures.
  1. HIPAA Authorization. Federal and state laws dictate who can receive medical information without the written consent of the patient. This legal document gives your doctor authority to disclose medical information to an agent or agents selected by you.

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 if certain life events occur – such as you or your agent moves to a new state or you marriage or go through a divorce. If you keep your incapacity plan up to date, it should work the way you want it to work if it is ever needed.

Fee free to leave your comments below or email me at ysuarez@yslawyers.com.

Yahima Suarez, PA

This post is for information purposes only and shall  not be construed to constitute legal advise.

Yahima Suarez
Yahima Suarez, J.D. Estate Planning for your Family


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