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What Estate Planning Documents are Used to Plan for Incapacity?

What Estate Planning Documents are Used to Plan for Incapacity
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One of the most important estate planning documents for all persons over the age of 18 to consider is a durable power of attorney.

The chief reason for a Power of Attorney (POA) is to appoint an agent who can make decisions about business and financial matters if you become incapacitated, according to the article “Estate planning in case of incapacity” from The Sentinel-Record. For most people, the POA becomes effective later, when the person signs a written authorization to act under the document or when the person is determined to be incapacitated. This determination often involves having the person’s treating physician sign a notarized statement declaring the person to be incapacitated. This type of POA is referred to as a “Springing POA” since it springs from a future event.

The challenge with a springing POA is that it requires reaching a point in the person’s life where it is clinically evident they are incapacitated. If the person has not yet been diagnosed with Alzheimer’s disease or another form of dementia but is making poor decisions or cannot care for themselves becomes necessary to go through the process of documenting their incapacity and going through the state’s process to activate the POA.

Your estate planning attorney may recommend creating and signing a Durable Power of Attorney for a more immediate POA. This  POA allows you to appoint someone to manage personal and business affairs immediately. For this reason, it is essential that the person you name be 100% trustworthy since they will have instant legal access to all of your property.

You can customize a Power of Attorney to include broad powers or limited to a specific transaction, like selling your home.

A POA is not the only way to allow another person to take over your affairs in the event of incapacity.  However, it is easier than seeking guardianship or conservatorship. Another method is to place assets in a revocable trust, which allows you to maintain control of the assets while alive and of legal capacity. The trust includes a successor trustee, who takes over if you become incapacitated or die.

The successor trustee only has control of the assets owned by the trust, so if the purpose of the trust is planning for incapacity, many, if not all, of your assets will need to be retitled and put into the trust.

When preparing for incapacity, a properly created estate plan will often use both the Durable Power of Attorney and a Revocable Living Trust.

Sadly, many people fail to have these legal tools created. As a result, the family must go to court to have a person appointed to manage their affairs when they are incapacitated. This process is usually referred to as “legal guardianship.” The proceeding to obtain guardianship is lengthy and complicated. Once the guardianship is established, the guardian must file annual accountings with the court documenting how all of the funds are used. In many cases, the guardian must also post a surety bond, designed to protect assets in case of improper use.

Guardianship and its costs and time-consuming tasks can all be avoided with a properly prepared estate plan, including planning for incapacity.

Reference: The Sentinel-Record (March 27, 2022) “Estate planning in case of incapacity.”