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PLANNING FOR INCAPACITY IS PART OF YOUR ESTATE PLAN
Estate planning usually begins with a will. A will can help mitigate the effects of death taxes, ensure the efficient winding up of your affairs, and direct that your property go to the right people, among other things. Therefore, it is usually the central document in your estate plan. However, thorough estate planning requires more than just a will. It must provide for ways your health care decisions, business and financial affairs, and personal intentions may be carried out in the event you become unable to do so because of disability or incapacity. To accomplish this, there are "advance directives" - durable powers of attorney, living wills, and health care proxies - and some combination of these documents ought to be part of every estate plan.
A durable power of attorney is a document whereby a person (called the "principal") grants to another the power to handle his or her business and financial duties. The trusted person, known as an agent or "attorney-in-fact" may manage the principal's affairs in nearly every area which the principal would legally be able to do, so long as authority to act in a given area is granted by the document.
The standard power of attorney grants broad and comprehensive powers, so that the attorney-in-fact may handle the principal's day to day affairs, important one-time transactions, and everything in between. These powers include the ability to handle matters relating to real estate, banking, making gifts, taxes, retirement benefits, and more, so that your financial obligations and interests are properly managed if you become unable to manage them on your own.
As the principal, you may limit, or enhance the powers listed in the standard form. Additional powers can be crucial, especially if you are trying to spend down your estate for Medicaid or estate tax planning purposes. The short form only allows gifts up to $10,000 per donee per year, and the donees can only be members of the your family. These restrictions can pose problems. For example, in order to qualify you for Medicaid and preserve the maximum amount of assets, the attorney-in-fact may need to transfer a larger sum of money all at once. Similarly, if annual gifting is part of your plan to mitigate death taxes, the dollar cap and limited pool of donees may prevent the full use of this planning technique because you may now gift up to $11,000 per donee per year, gift tax free. Also, if your plan involves lifetime gifts to charity, the donee restrictions may prevent your charitable intentions from being carried out. Without a specifically designed power of attorney, incapacity may prevent the full implementation of some of your estate planning strategies.
A durable power of attorney is effective immediately upon execution and survives your incapacity, so the attorney-in-fact can exercise the powers until your death. This is crucial since, just like the power of attorney, your bills will also survive your incapacity or disability.
If you become incapacitated and have no power of attorney in place, a court may need to appoint a guardian to manage your affairs. The proceeding involves formalities, costs, delays, and possibly nasty litigation. During the months it may take the court to make the appointment, there may be no one to manage your affairs, and the appointed guardian may be someone of whom you would disapprove. One must also consider the privacy aspect. In this court proceeding, your alleged diminished mental state becomes a matter of public record and open discussion. You can avoid these problems with a thoughtfully drafted durable power of attorney.
The power of attorney takes care of your money, but what about health care decisions? For that, you should have either a living will, a health care proxy, or both.
A living will is not actually a will, nor is it a living trust, nor does it involve your property in any way. Rather, it is a written statement of your intent with respect to medical treatment that you do or do not wish to receive. Your doctor can refer to these instructions if incapacity prevents you from making your wishes known at the time of treatment, and the doctor must comply as long as the document provides clear and convincing evidence of your intentions. This document is useful since it is your own statement, but it has shortcomings. For instance, the doctor may not be able to discern your intent under the circumstances, or the treatment proposed may not be contemplated in the living will. Also, you may change your mind about a treatment, but then not change the living will before the need for it arises. The most significant flaw is the one found in a recent California study, which concluded that, in many cases, living wills are ignore by the treating physicians. For these reasons, a health care proxy may be advisable instead of, or to supplement, the living will.
A health care proxy is a document whereby you appoint one individual to make health care decisions for you after you become unable to make the decisions yourself. This is much more flexible than a living will, since the health care agent can use his or her own judgment (informed by any wishes you made known to them) with respect to any medical treatment proposed, including artificial life support and resuscitation. It is important that you make your wishes known to your agent, so that his or her decisions will reflect what you would have chosen. You may also state your wishes or instructions about organ and tissue donation on the health care proxy.
These three documents - the power of attorney, living will, and health care proxy - are powerful and important estate planning tools. Even if incapacity or disability seems a remote possibility, coping with them will be far easier if you have made adequate provision beforehand. Once the documents have been signed, it is also important to revisit them occasionally, making sure that they still reflect your needs and intentions. Planning for incapacity is just as important to your estate plan as a will, and any plan is incomplete if these documents are not included.
By Lawrence A. DeAngelus