Address Potential Incapacity with Estate Planning

A durable power of attorney and revocable trust can help you maintain your dignity while providing peace of mind.

The “silver tsunami” was inevitable: Baby boomers – that large and influential generation born following the end of World War II – are aging into senior citizens. The size (73 million!) and longevity of this senior population will have an impact on all areas of American society – including estate planning. With age often comes an increased incidence of incapacity (that is, an inability to manage your own affairs) due to health concerns like dementia. This loss of decision-making capacity could make you a prime target for financial exploitation and scams. Fortunately, there are estate planning tools available to address this problem while preserving seniors’ dignity and safeguarding their property. Two of the most effective ones are a durable power of attorney and a revocable trust.

Durable Power of Attorney

A durable power of attorney is a legal document where one person (“the principal”) voluntarily appoints a third party (“the agent”) to act on their behalf for legal, financial and health-related matters. The document is durable in that it continues to be legally effective in the event of the loss of capacity, which makes it a very powerful tool if you are no longer able to make your own financial decisions. (Note the distinction between a power of attorney and a will: A will addresses the distribution of your property after your death, whereas a durable power of attorney helps manage your property and legal affairs while you are alive.) A durable power-of-attorney is often described as a “guardianship avoidance document,” in that it plans for the event of an individual’s total incapacity and avoids the need for guardianship in most situations (see below).

What You Should Know About a Durable Power of Attorney

• The agent–principal relationship is entirely voluntary. The agent is not allowed to act contrary to your wishes, nor can they impose their will upon you. This is a major advantage over other alternatives, as it allows you to maintain your legal rights and continue to make your own decisions while getting help from your agent as needed.
• A power of attorney document can grant an agent many types of legal, financial and health-related powers. This document can address such important responsibilities as accessing bank accounts, writing checks, paying bills,gifting, selling real estate, creating and funding trusts (including revocable and irrevocable trusts), interacting with such government agencies as Medicaid and the IRS, and making decisions around healthcare (including HIPAA waivers). The power to sell real estate becomes crucial were you to become incapacitated, as individuals lacking legal capacity cannot sign contracts.
• The person you name as your agent under the power of attorney is crucial. Typically, this person should be a close friend or family member, like a spouse or child. The person named should be someone you trust who is well-versed at managing finances. Other important factors in this decision are the agent’s own financial stability and the proximity of the agent to your home.
• You can revoke or modify your power of attorney at any time, so long as you have legal capacity. This often happens for families with young children at the time of executing your power of attorney – years into the future, you might consider designating your children as agents once they reach adulthood. Reviewing a previously drafted power of attorney is paramount to confirm the document still aligns with your wishes.
• The agent’s legal authority under a power of attorney document terminates upon your death. This means by law the agent must cease using the power of attorney to handle your finances and all other related responsibilities.

Revocable Trusts

If you don’t have someone you trust to manage your financial matters should you become incapacitated, consider funding a revocable trust with a corporate trustee. A revocable trust is a document you create that controls how your assets are to be used during your lifetime and also how those assets are to be treated after your death. In the event you are incapacitated, the corporate trustee is under a fiduciary duty to manage, invest and dispense the trust assets exclusively for your benefit, according to the terms of the trust document.

What You Should Know About a Revocable Trust

• A corporate trustee can help navigate a fractious family dynamic. In the event of incapacity, professionals with no conflict of interest would watch over your financial matters. Having a corporate trustee can provide peace of mind if you have children or other family members who are at odds and might question each other’s motivations were they named agent under a power of attorney.
• The duty of the trustee extends to the beneficiaries. Trustees maintain detailed records of trust matters. Upon your death, they owe a continuing fiduciary duty to the trust’s beneficiaries, helping ensure an orderly disposition of trust assets according to your wishes.

A Durable Power of Attorney and Revocable Trust Can Work Together

Even with a funded revocable trust, you might still need a power of attorney to ensure a trusted agent has the authority to conduct other business on your behalf. The trustee of the revocable trust can work closely with your power of attorney to ensure your needs are met, creating a sort of “checks and balance” system between the trustee and agent. It’s important to clarify how an agent interacts with the trustee and if the agent is authorized to direct a trustee’s actions – in most cases the agent does not. The power of attorney and revocable trust are important tools that can avoid some of the worst outcomes in the event of incapacity. These estate planning documents can work in conjunction with one another and can provide maximum financial flexibility while providing you and your family peace of mind.