Preparing for Incapacity with Estate Planning
By Mallory Kallabat
When preparing or updating your estate plan, your main goal is likely to protect and provide for your family upon your death. Most of us want to be sure our assets are smoothly transitioned to our spouses or children who survive us. While planning for death is a major component of estate planning, you should also address what happens if you become incapacitated. With the life expectancy of our population continuing to increase, it is more important than ever to consider about what will happen if we can no longer care for ourselves.
What Happens Next?
Ideally, a plan regarding incapacity is prepared well before it is needed. Sadly, whether due to sudden illness or accident, many families find themselves struggling to decide how to manage a loved one’s health and financial decisions because of an unexpected incapacity.
Even without a sudden incapacitating event, as we age, we continue to lose cognitive abilities that may one day render us unable to manage our own affairs. Without planning for incapacity, we run the risk of guardianship and conservatorship proceedings in probate court, and the time, financial, and emotional expense of the same. In addition, without a plan, interfamily disputes often erupt during such proceedings when deciding who will be the decision maker.
Even if the family members are all on the same page as to decision-making for the incapacitated individual, the probate court involvement is not insubstantial. First, the court will need to determine whether the individual is in fact incapacitated and in need of a guardian for personal decision-making, and a conservator for financial decision-making.
Once the court has established this, oftentimes following intensive medical examinations, the court will then determine who is best suited to serve as the fiduciary. Finally, the court will monitor the fiduciary at a minimum of once a year.
As it pertains to a conservatorship, the conservator will need to file an inventory of assets with the court, and thereafter file an account annually to reflect the income and expenses of the conservatorship. It is important to note that these sensitive documents are all open to the public.
Protecting Your Assets
While you may never be entirely prepared for incapacity, there are certain things you can do now to help make the transition easier for your family. The following are key considerations to provide clarity in an otherwise difficult stage in life.
Durable Power of Attorney for Finances
A Durable Power of Attorney allows you to name a trusted person to manage your personal financial affairs when you are unable to do so on your own. The execution of a valid Durable Power of Attorney grants powers to the named “Attorney in Fact” that can either take effect immediately or upon incapacity. If you have a valid Durable Power of Attorney in place, the need for a court-appointed conservator, and the costs associated with the same, can be eliminated.
Patient Advocate Designations
A Designation of Patient Advocate allows you to name a trusted individual to make decisions concerning your care, custody, and medical treatment in the event you cannot make such decisions alone. You may also include wishes as to life support and long-term care. By executing a valid Designation of Patient Advocate, you can avoid the need for a court-appointed guardian.
Revocable Living Trusts
While Trusts are often used to manage property after one’s death, a Trust agreement should also address the management of property upon incapacity. Your Trust agreement should, among other matters, explicitly provide a mechanism for determining whether you are incapacitated and, if so, name a successor trustee who will serve upon your incapacity. The Trust should also state whether trust property may be used to support your spouse and/or dependents during your incapacity.
Enhanced Life Estate Deed
If you do not have a Revocable Living Trust, an Enhanced Life Estate Deed, also known as a “Ladybird” deed, may be an easy planning tool to help avoid probate on your real estate. This type of deed allows you to retain your real property during your lifetime, with full power to sell, transfer, or mortgage the property. If you still own the property at death, it will automatically transfer to the individual(s) you designate on the deed, without probate court interference. In connection with your Durable Power of Attorney, this deed will allow your real estate to be managed by your Durable Power of Attorney if you become incapacitated and will transfer to your beneficiaries upon your death.
Choosing the Right Fiduciary
Your incapacity plan is only as effective as the individuals you select to act on your behalf. These individuals will be fiduciaries and must be thoughtfully selected for the specific acts they are entrusted to perform. The successor Trustee of your Trust and attorney-in-fact under a Durable Power of Attorney should be someone you trust with your financial decision making, including accessing your bank accounts and other assets.
Your patient advocate under your Designation of Patient Advocate will oversee all your medical decisions. You want to choose someone who will honor end of life wishes and make medical decisions in a way that you would for yourself. You will also want to choose someone who can handle this type of emotional decision-making.
Of course, we all hope that we will never have to face the emotional and financial hardship of incapacity. While we hope to live long and healthy lives, if incapacity does happen, having the right documents and fiduciaries in place can ensure that decisions related to your financial and personal welfare are made in your best interests and in accordance with your wishes.
Mallory A. Kallabat is an attorney with Clark Hill PLC, in Birmingham, Michigan. She provides personal legal services to individual and corporate clients in the areas of estate planning, business planning, and probate and trust administration.