America’s favorite tough guy, Bruce Willis, recently received a diagnosis of Frontotemporal Dementia or FTD which destroys the brain’s frontal or temporal lobes. The condition strikes individuals between ages 45 and 64 and is the most common form of dementia for those under 60. His diagnosis brings into sharp focus the importance of planning for incapacity. Unfortunately, incapacity planning often takes a backseat to planning for what happens upon death because death is certain, but incapacity is not. Its uncertain nature, however, makes planning for that possibility all the more important.
Incapacity, much like death, doesn’t care about your age, your health, or your family. It strikes without rhyme or reason and often, without warning. When incapacity occurs unexpectedly, it leaves loved ones scrambling for solutions. If the incapacitated individual failed to plan properly for incapacity, the family may be forced to undertake a guardianship proceeding to have the individual declared incompetent and a guardian appointed. Guardianship proceedings are sometimes referred to as “living probate” because the proceeding involves many of the same issues of probate only with incapacity the loved one is alive, not dead.
Let’s look at an example. John decided that he wanted to move closer to his elderly parents. He listed his home for sale and on his way back from a meeting with the realtor, was involved in an automobile accident and rendered unable to manage his affairs. One of John’s neighbors knew of John’s desire to sell his home and thought it would be a perfect place for his sister who was looking to relocate. The neighbor’s sister made an offer over asking price; however, because John was incapacitated and had not created a plan to deal with incapacity, no one had the legal authority to accept the offer. His family petitioned the court to have him declared incapacitated and someone appointed as his legal guardian. The process was difficult because John’s family disagreed about who should be appointed guardian. The disagreement played out in the courtroom and unflattering information about John and his family emerged. Unfortunately, by the time a guardian was appointed, the neighbor’s sister withdrew her offer. Shortly thereafter, home values began falling and John’s family waited several months before another buyer made an offer for significantly less than the previous offer and even less than the asking price.
While the example above seems extreme, it isn’t. Situations like this occur every day. What are some of the things that John should have done to prevent this result?
First, John should have created a Property Power of Attorney. A Property Power of Attorney allows the principal (John) to designate an “Agent” and one or more successors to make decisions inherent to the Principal on their behalf during life. The Property Power of Attorney may give the Agent immediate power to make these decisions, even if the Principal is not incapacitated when the Agent is making the decision. Most states also give the Principal the option to make the Property Power of Attorney “springing,” meaning that the Agent’s powers “spring” into action only upon incapacity of the Principal. If anyone refers to the Property Power of Attorney as “durable” that means the Property Power of Attorney continues to be effective notwithstanding the Principal’s incapacity. Any Property Power of Attorney that is not durable prohibits the Agent from acting during the Principal’s incapacity.
In addition to the Property Power of Attorney, John should have prepared a Healthcare Power of Attorney. The Healthcare Power of Attorney allows the Principal to appoint an Agent to make medical decisions if the Principal is unable to make those decisions; however, the Agent cannot veto any medical decision of the Principal. In conjunction with the Healthcare Power of Attorney, John should have signed a HIPAA Authorization which allows one or more designated individuals to receive information that the Health Insurance Portability and Accountability Act of 1996 mandates be kept confidential. While it’s important to keep healthcare information confidential, people acting on behalf of others need access to this information and the HIPAA Authorization provides that.
Finally, John should have created a Revocable Trust. A Revocable Trust serves as a Will substitute, maintains the Trustor’s privacy, requires little or no court oversight, and provides significant flexibility. If John had transferred his home to a Revocable Trust, then upon his incapacity, the successor Trustee would have stepped into John’s shoes to manage the property. The successor Trustee would have had the legal authority to accept the offer on John’s home, conclude the sale, and then use the proceeds for John’s continued care. This would have added a layer of protection and smoothed the way for a sale of John’s home. Often, financial institutions hesitate to rely upon a Property Power of Attorney for real estate due to fraud, especially if the Property Power of Attorney was executed more than 2 years prior. The Revocable Trust sidesteps the issue altogether.
Regardless of the duration of incapacity, it’s important to include incapacity planning as part of a comprehensive Estate Plan. Statistics estimate that over 7 million people aged 65 and older have dementia. This statistic alone should scare all of us into undertaking incapacity planning. While planning for disposition of your estate upon your death is important, planning for the management of your assets and health during periods of incapacity is even more critical. As our life expectancies increase, so do the chances that we or someone we love will experience incapacity. Incapacity takes an emotional and physical toll both on the incapacitated individual and their loved ones. A seamless Estate Plan eases those burdens and the resulting emotional strain and allows everyone involved to focus on recovery and the next steps.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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