PROPERLY PLANNING FOR INCAPACITY REQUIRES SPECIFIC ESTATE PLANNING STRATEGIES

 

Most estate plans focus primarily on what happens after you die. However, without arrangements for what will happen in the event you become mentally or physically incapacitated, your plan is incomplete. If an accident, illness or other circumstances render you unable to make financial or health care decisions — and you don’t have documents in place to specify how these decisions will be made, and by whom — it is likely that a court-appointed guardian and/or conservator will have to be appointed to act on your behalf.

CHOOSING THE RIGHT TOOLS

There are several tools you can use to ensure that a person you choose handles your affairs in the event you cannot:

Revocable trust. Sometimes called a “living trust,” it’s designed to hold all or most of your assets. As an initial trustee, you retain control over your own assets, but in the event you become incapacitated, your designed successor can will take over and administer the trust for and on your behalf.

Durable power of attorney. This authorizes your designee to manage your property and finances, subject to limitations you establish. It should be noted that a Durable Power of Attorney is valid during a period of your incapacity or disability. But, following your death, the designee under a Durable Power of Attorney is no longer authorized to act on your behalf

Living will. It expresses your preferences regarding life-sustaining medical treatment in the event you’re unable to communicate your wishes. Certain states have specific statutes recognizing Living Wills, Michigan does not.

Health care power of attorney. Sometimes referred to as a “durable medical power of attorney,”  “health care proxy,” or "designation of patient advocate'" this document authorizes your designee or advocate to make medical decisions for you in the event you can’t make or communicate them yourself.

HIPAA authorization. Even with a valid health care power of attorney, some medical providers may refuse to release medical information — even to a spouse or child — citing privacy restrictions in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). So, it’s a good idea to sign a HIPAA authorization allowing providers to release medical information to your designee.

For these tools to be effective, you must plan ahead. If you wait until they’re needed, a court may find that you lack the requisite capacity to execute them. Also, be sure to check the law in your state. In some states, certain planning tools are not permitted, or go by different names. We can help you address incapacity in your estate plan.

UPDATE YOUR ESTATE PLAN TO REFLECT YOUR SECOND MARRIAGE

If you are in a second marriage or planning another trip down the aisle, it’s vital to review and revise (if necessary) your estate plan. You probably want to provide for your current spouse and not inadvertently benefit your former spouse. And if you have children from each marriage, juggling their interests can be a challenge. Here are a few suggestions.

Pre-Nuptial Agreements

If you have not yet remarried, but intend to, we recommend that you and your proposed spouse enter into a Pre-Nuptial Agreement setting forth your respective understandings regarding the control that each party will have over his or her own assets both during the marriage and in the event of a divorce or death. This process can take several weeks or even months to accomplish and should not be left to address in the week or two weeks before the wedding date.

Take inventory

Have you updated your will, trusts and beneficiary designations to name your current spouse where desired? Remember that the terms of your divorce may require you to retain your former spouse as a beneficiary of certain pension plans, retirement accounts or insurance policies. It is important following your divorce to review all of your beneficiary designations.

Next, assess your financial situation and think about how you want to provide for various family members. For example, do you want to provide for all children equally? Will you favor biological children over stepchildren?

Also, are children from your first marriage significantly older than children from your second marriage? If so, their needs likely will be different. For example, if children from the first marriage are college age, in the short term they may need more financial support than children from your current marriage. On the other hand, if your older children are financially independent adults, they may need less help than your younger children.

Use trusts

Trusts generally avoid probate, so your assets can be distributed efficiently and without probate court involvement. However, if you leave your wealth to your current spouse outright, there’s nothing to prevent him or her from spending it all or leaving it to a new spouse, effectively disinheriting your own children. To avoid this result, you can design a trust that provides income for your current spouse while preserving the principal for your children.

Trusts are particularly valuable if your children from a previous marriage are minors. Generally, if you leave assets to minors outright, those assets must be held in a conservatorship until the children reach the age of majority (i.e., 18 years old in Michigan). It’s likely that your former spouse will be appointed a conservator, gaining control over your wealth. Even though your former spouse will be obligated to act in your children’s best interests and will be supervised by a court, he or she will have considerable discretion over how your assets are invested and used.

To avoid this situation, consider establishing trusts for the benefit of your minor children. That way, a trustee of your choosing will manage the assets and control distributions to or on behalf of your children.

If you’re contemplating a second or third trip down the aisle or have recently wed for the second or third time, contact us for help reviewing and, if necessary, revising your estate plan.

THE WRITE STUFF: A LETTER OF INSTRUCTIONS

When you draft an estate plan, the centerpiece is your will or living trust. Such a document determines who gets what, where, when and how, as well as tying up the loose ends of your estate. A valid will or living trust can be supplemented by other legally binding documents, such as trusts (or additional trusts), powers of attorney and health care directives.

But there’s still a place at the table for a document that has absolutely no legal authority: a “letter of instructions” to your heirs. This informal letter can provide valuable guidance and act as a road map to the rest of your estate.

Taking inventory

Begin your letter of instructions by stating the location of your will or living trust. Then create an inventory of all your assets and include their location, any account numbers, and relevant contact information. This may include, but isn’t necessarily limited to, checking and savings accounts, 401(k) plans and IRAs, health insurance policies, business insurance, life and disability income insurance, stocks, bonds, mutual funds and other investments, and any tangible assets your heirs may not readily find.

The contact information should include the names, phone numbers and addresses (including emails) of the professionals handling your financial accounts and paperwork, such as an attorney, CPA, financial planner, banker, life insurance agent, and stockbroker. Also, list the beneficiaries of retirement plans, IRAs, and insurance policies and their contact information.

Guidance for personal preferences

A letter of instructions is more than just a listing of assets and their locations. Typically, it will include other items of a personal nature, such as funeral, burial or cremation arrangements, accounting of fees paid for cemetery plots or mausoleums, the names, addresses and telephone numbers of people and organizations to be notified upon death, and specific instructions for handling personal and financial affairs after you’re gone.

The letter can also expand on instructions in a living will or other health care directive. For example, it might provide additional details about the decision for being taken off life support systems. It may also cover charitable contributions you wish to have made in your memory following your death.

Some people have various thoughts regarding their own funerals, including the order of the service and the music and readings to be used.  Some also would like certain items included in their eulogies. These matters can be addressed, as well, in the letter.

Putting pen to paper

As you’re writing your letter, bear in mind that there are no legal requirements making the letter enforceable. And just like a will or living trust, the letter should be updated periodically to reflect significant changes in your life. Finally, keep the letter in a safe place where the people whom you want to read it can easily find it. Contact us if you have questions or would like assistance in creating a letter of instructions.