Planning for Your Incapacity: The Forgotten Part of Your Estate Plan

Incapacitated Woman in Hospital Bed

If you asked people on the street why it's important to have an estate plan, they would give predictable answers: to provide for your family. To distribute your wealth when you're gone. To avoid probate and taxes. To pick a guardian to care for your children if you should die. All of these are very good reasons to have an estate plan, but they overlook one important function: incapacity planning.

It is easy to forget that estate planning does more than help our loved ones after we're gone; it can also provide them with critical guidance about our wishes while we're still alive, but incapable of carrying those wishes out on our own. Legal incapacity often arises due to Alzheimer's or dementia. If you do not have an incapacity plan, your loved ones may have to scramble to get legal permission to take care of your financial affairs, or agonize over medical choices on your behalf.

Don't make the mistake, however, of thinking that just because you're younger, you have decades to worry about an incapacity plan. A sudden accident or illness can render a young person unable to make important financial and medical decisions. All adults need incapacity planning.

Why You Need an Incapacity Plan

There are two primary reasons you need an incapacity plan in place: to make health care decisions, and to take care of your financial matters. If you are seriously ill or injured, or develop dementia, you may not be able to focus on paying your bills, filing your taxes, and managing your assets and investments. Unfortunately, those things still need to be done by someone with the authority to handle them.

If you do not have an incapacity plan, your loved ones may need to go to court to gain conservatorship over your finances. This process is not instant, which means that several weeks or even months may go by with bills piling up and penalties accruing. Having a financial power of attorney in place, by contrast, means that a person chosen by you (not the court) can seamlessly step in the moment they are needed to manage your financial affairs for as long as necessary.

The second reason you need to plan for incapacity is so that someone can make your healthcare decisions for you if you are unable to. Especially in the event of an accident or sudden catastrophic illness, there is no time to lose. Patient privacy laws could result in your loved ones being denied access to your medical information when they need it most. In the worst case scenario, if your incapacity is ongoing (think Sunny von Bulow or Terri Schiavo), family members who disagree about your care could literally be fighting over your hospital bed for years.

In order to make sure that your best interests are served, and to preserve harmony (or at least minimize discord) in your family, you need an incapacity plan in place.

Five Documents You Need for Incapacity Planning

Now that you know you need an incapacity plan, here are the five documents you must have in it:

Living Trust

A revocable living trust is good to have even if you never become incapacitated. Your estate planning attorney draws up a trust document, you place assets, like your house, bank account, and investments in the trust's name instead of your own. You are both trustee and beneficiary during your life, managing and using the assets as you always have. Because the trust is revocable, you can end or amend it easily.

The trust will name a successor trustee to take over if you die or become incapacitated. The beauty of this is that because you established the trust, you got to dictate in the trust document how assets should be managed and distributed, and your successor trustee will be bound by your instructions.

Financial Power of Attorney

Even if you have a very thorough trust, you will still have some financial matters outside its purview. That's why you also need a financial power of attorney (POA). With a POA, you appoint someone you trust (your agent) to pay your bills and manage your finances should you become incapacitated. You can create a POA that is durable (meaning it's not revoked by your incapacity) or springing (meaning that it doesn't take effect until you are incapacitated). Each has advantages; discuss with your estate planning attorney which is best for you.

Medical Power of Attorney

In Michigan, this document is also called a Designation of Patient Advocate (DPA) or a health care proxy. It gives your agent the authority to make healthcare decisions for you in the event you are incapacitated. Of course, you should discuss your wishes with your agent before he or she needs to make those decisions.

HIPAA Authorization

As discussed above, your medical providers may be prevented from sharing your information with your loved ones by the federal law known as HIPAA, which is designed to protect your privacy, among other things. If you sign a HIPAA release or authorization, it is much easier for your medical team to communicate needed information to your family and especially to your medical decision-maker.

Living Will

Many people confuse a medical POA with a living will, but they are not interchangeable, though they do work hand-in-hand. A living will sets forth your wishes regarding end-of-life care in the event you are incapacitated. While a living will may not be enforceable in all states, it offers critical information about your wishes to the person you have authorized to make your medical decisions.

If your estate plan doesn't currently include these five documents, give your estate planning attorney a call. Hopefully, you will never need your incapacity plan; if you do, your loved ones will be boundlessly grateful that you took the time to create it.

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