Thursday, August 4, 2011

Legal Planning Tools for Financial Incapacity

As we age, there is a pretty good chance that some day we will temporarily or permanently need help in handling our financial affairs. Have you created a plan for who would make financial decisions and manage your investments for you if you became seriously ill?

If you are ever unable to manage your property and finances, someone else is going to have to act on your behalf. Powers of attorney, living trusts and guardianship are three distinct legal tools that could be used to authorize a substitute to act for you.

The power of attorney and living trust are voluntary tools that you create in advance of your incapacity. You decide who will act on your behalf, when they may act, and what actions will be permitted.

Guardianship is an involuntary legal tool that is created by court order when consensual tools like power of attorney are non-existent or inadequate to meet the needs of an incapacitated person. (Guardianship is referred to as "Conservatorship" in some states). The court decides who will act for you and what types of decisions they can make.

Because power of attorney and living trusts are voluntary, you can terminate them at any time. Guardianship must be terminated by the court.

Some of us try to rely on joint ownership of bank accounts as a means of seeing that our bills will be paid if we become ill. However, joint ownership can only provide for limited financial management and may involve a number of risks. As a result, power of attorney is the most frequently preferred incapacity planning tool.

Power of Attorney

A power of attorney is a legal document in which you authorize someone to act on your behalf on the terms you specify in the document. The powers granted under a power of attorney can be as broad or as narrow as you desire. A properly drafted power of attorney permits your affairs to be managed by the persons you choose in accordance with your wishes if you ever become incapacitated.

One limitation of the power of attorney is that it must be signed while you are competent to understand what you are doing. Lawyers are sometimes requested to prepare a power of attorney for someone who has recently been diagnosed with Alzheimer’s disease or suffered another mentally limiting illness. Can such persons still sign a valid power of attorney?

Despite the fact that you have some mental limitations, you may still be legally competent to sign a power of attorney. You should meet with a lawyer who is experienced in dealing with incapacity issues. Try to set the meeting at the time of day when you are most alert. The lawyer will evaluate whether you have sufficient understanding of what you are doing to consent to the power of attorney.

The level of understanding required may vary depending upon the type of authorization being granted to your agent. Capacity has been compared to a light with a dimmer switch instead of an on‑off switch. More light may be needed for some purposes than for others. For example, a higher level of capacity may be required to authorize gifting by the agent.

A power of attorney may also be used to authorize your agent to act as your representative for purposes of making health and personal care decisions.

Living Trust

A trust is an agreement between a “settlor” and a “trustee” that authorizes the trustee to manage some of the settlor’s assets. While there are many different types of trust, property management is often arranged through a revocable “living” trust.

A living trust starts with a written agreement that creates the trust. You then transfer legal title to the assets which are to be managed for you to the trustee. If you want to manage the assets yourself, you can serve as your own trustee and name a successor to manage the assets in the event you become incapacitated or upon your death. You don't give up control of the assets, though, even if you don't name yourself as trustee, because the trustee has to march to your orders. You can also change or abolish a revocable trust at any time.

The trustee’s authority is limited to the assets transferred to the trust. This means you need a power of attorney even if you have a trust.

Trusts can also serve to direct the distribution of trust property in the event of your death. Clients sometimes ask me whether a living trust will enable their families to avoid the long delays, high legal costs, and public disclosure of information they have heard may occur when an estate goes through probate.

The answer depends in large part upon your personal situation and upon the state in which you reside at the time of your death. Some states, like Pennsylvania, have relatively simple, efficient and inexpensive probate processes. In other states, probate can result in significant added delay and expense.

While living trusts may help you achieve your estate planning objectives, they are complicated and are not right for everyone. You should consult with trusted estate planning professionals to help you determine how best to plan your estate and implement that planning. The plan that is right for you may or may not include the use of living trusts.

Beware of Living Trust Scams

No matter where you reside you need to beware of living trust scams. Con artists frequently solicit seniors by phone or mail to get them to attend seminars or to set up in‑home appointments to discuss tax and estate planning and "probate avoidance."

Living trusts are then marketed through high‑pressure sales pitches, which misrepresent the disadvantages of probate and the advantages of a living trust. Consumers may end up with worthless "kits," or form documents which may cost thousands of dollars. The promoters also use their access to the victim's financial information to try to sell high commission annuities and other inappropriate investments.

The best defense against these scams is to work only with an elder law and estate planning attorney and other professionals who have earned your trust and confidence.



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Jeff Marshall said...

Thanks so much for the positive reinforcement.


Marc Blumenthal said...
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