Planning For Disability Part I
© 2005 Justin Dituri
There is more to estate planning than deciding what happens to your money when you die. Another important issue is deciding what happens if you are not able to make decisions about your assets or your physical well-being.
What if you are mentally incapacitated, such as being in a coma or having Alzheimer’s disease? Who can make decisions for you, who would you want to make decisions for you?
If you do not make a decision
about this nothing before becoming mentally incapacitated someone will need to
be appointed your guardian or conservator.
Married folks expect that their
spouse will make decisions for them, and generally this is the case.
Most married couples own their assets in a form known as “joint tenancy”. Banks generally allow one joint tenant to deal with an account without needing the permission of the other joint tenant. In this situation, if one spouse becomes mentally incapacitated the well spouse can deal with the checking account. But, just because banks are willing to do this, it does not mean any business working with an asset owned in joint tenancy must also do so. Many married couples own their homes, or other real estate, as joint tenants. It takes the signature of both joint tenants to sell the real estate.
So, in a case such as this, or if there is no spouse, businesses that handle financial assets will want to see a letter from a court appointing someone as the incapacitated person’s custodian. In order to get such a letter, a family member will need to bring a lawsuit in order to be appointed as conservator; they will need to prove that the incapacitated person cannot handle their property, and that they are the proper person to take charge. As you might imagine, the process of being appointed a conservator can be expensive, time consuming, and public. There are alternatives to this, if a person takes action before the time that the incapacity occurs.
If you are saying, “I don’t want to put my loved ones through the hassle of a lawsuit if I am incapacitated,” then it is important to understand what the alternatives are, and determine which one is the best for you, and how to best implement that alternative.
There are two alternatives for having someone else handle your property if you are mentally incapacitated. One is the power of attorney, the other is the revocable living trust. In this installment of the article I will address powers of attorney, and in next months I will address revocable living trusts.
Many people have heard of powers of attorney. With a power of attorney you can give someone else the power to conduct business for you. That Someone could be a family member, a trusted advisor, or a trust company. The person who gives the power of attorney is known as the “principal,” the person who the principal gives the authority to is known as the “agent.” My sense is that many people believe that all powers of attorney say the same thing. They do not. And you can be a better consumer of legal services if you understand what is available (and not available) in having a power of attorney prepared for you.
A problem with powers of attorney is that the power ends if the principal becomes mentally incapacitated. However, you can get around this if the power of attorney is a “durable” power of attorney. A durable power of attorney contains a statement that the power continues if the principal is mentally incapacitated.
A durable power of attorney can be effective now; that is, the agent can go out and conduct business as soon as it is signed. A power of attorney could also become effective when the principal becomes mentally incapacitated; that is, the agent cannot conduct business until the principal is mentally incapacitated. This type of power of attorney is often known as a “springing” power. This is because the power “springs to life” when the principal becomes mentally incapacitated.
What Can Someone Do With a Power of Attorney?
You may have noticed that there is a lot of concern these days about identity theft, and people getting into another’s accounts without their permission. This is why many companies that control your assets (such as banks or brokerage houses) want to be sure that someone who is trying to get information about your accounts, or trying to access your accounts, actually has your permission. A power of attorney must be specific in stating what things the principal has authorized the agent to do, or not do. But there is no way to know when you sign a power of attorney what accounts you will have, and what companies or banks those accounts will be with.
This is why many people sign a “general durable” power of attorney as part of their estate planning. A general power of attorney is one that gives the agent authority to do many different transactions. This could include the authority to close savings accounts, cash-in savings bonds, sell stock, or sell real estate. You can see from this list that someone with a general durable power of attorney, essentially, has a “blank check” to deal with your property.
Questions To Ask About Powers Of Attorney
Now that you know that a general durable power of attorney allows an agent to conduct many different kinds of transactions, and that the power of attorney can be effective now or “spring” into authority at a time in the future, you can consider some other issues.
Why would you give someone broad control of your property that they can use right now? It might make sense to give that to your husband or wife, but would you give that to one of your children? If you would not hand over your check book to your children, why would you give them a general, durable, power of attorney that is effective right now?
If any of these questions are “red lights” for you, you might consider having a “springing” power of attorney.
If you have a “springing” general durable power of attorney, who makes the determination that you are mentally incapacitated? Very often these powers of attorney do not provide any instructions or direction for making that determination.
Another issue is that, even though you have a general durable power of attorney, there are some assets that your agent may have difficulty dealing with. This is because the general power of attorney is not “specific” enough with regard to certain assets. Real estate is one of these assets; some title companies are hesitant to allow an agent to sell real estate using a general durable power of attorney without specific language in the power of attorney that allows for the selling of real estate. You might consider asking your attorney what experience he or she has had with an agent selling real estate using the power of attorney that they generally provide to their clients.
Other property that might have similar problems are retirement plans at your work. It is not a bad idea to have the administrator of your retirement plans from work (401(k), 403(b) plans, etc.) review the general, durable power of attorney. You should find out if the plan administrator will take instructions from your agent regarding your retirement plan if you are mentally incapacitated.
Finally, many financial institutions are hesitant to deal with an agent named in a power of attorney. This is because of the issues I have raised above, and because there have been situations where a child has talked a parent into signing a power of attorney, and then the child has taken the parent’s money. It is prudent to find out how the financial companies you work with deal with powers of attorney. You should also find out if they have a time limit on the power of attorney. That is, if it has been more than some period of time since the power was originally signed, will they refuse to honor it. For this reason (and others), it is wise to review your estate planning documents on a regular basis.
Mr. Dituri is a Colorado licensed attorney who, for the past ten years, has focused his practice on estate planning, business planning, and asset protection issues. This article is meant to provide helpful information of a general nature, it should not be considered specific legal advice for any individual reader, and it does not create the author as the reader’s attorney. Anyone reading this article is strongly encouraged to seek out individual advice and counsel to address their own unique issues.