Creating a plan for incapacity

While old age or disability may seem far away for some, debilitating illnesses and accidents can happen anytime. Do you have a plan if you become incapacitated and can no longer do things for yourself, such as managing your finances and your home, or performing activities of daily living (ADLs), such as eating, dressing and bathing?

The best place to start is to get essential paperwork in order and have a person in mind who can look after you. Jessica Hendrix, senior trust officer at Bank of Oklahoma Private Wealth, shared some tips on what can be an overwhelming topic.

Create an estate plan with a revocable living trust
Nobody likes to think of what will happen when they pass, but an estate plan isn't always just for when you're gone. Should you become incapacitated, a revocable trust allows a trustee of your choosing to step in to manage your financial affairs and to continue to pay your living, caregiving, housing and medical expenses for you. You may include specific instructions to the trustee in your trust agreement to ensure your wishes are carried out. For example, if others depend on you financially, you may direct your trustee to continue providing financial support to those individuals on terms you define.

Be aware that a revocable trust can be helpful in the event of incapacity as long as the trust has a usable provision that details the criteria for an incapacity determination and has been funded (or can be funded after incapacity) with monetary assets that allow the trustee to pay for financial needs. Before including trust language that incapacity will be determined by a physician, it’s prudent to discuss inclusion of this provision with your doctor to ensure they are willing to render an incapacitation diagnosis if/when it occurs.

Further, the type of accounts you have may not make a stand alone, funded, revocable living trust a complete solution, Jessica Hendrix cautions, “Some assets can't be directly titled or assigned to a revocable trust such as IRAs, 401(k)s and ESOPs. In these situations, designating a durable financial power of attorney to work in conjunction with your revocable trust should be considered to give an individual or corporate fiduciary the power to act on your behalf in case of incapacity.”

Have a power of attorney
If you work with a lawyer to create your estate plan, the plan will most likely include a power of attorney (POA) for financial decisions and an advance directive (or sometimes referred to as a living will or medical POA) for medical decisions.

A POA authorizes one or more person(s) to act on another's behalf. The powers granted may be broad and general, or may be limited to a particular action, but typically cover medical, financial or property decisions, either temporarily or permanently. The POA powers may either become effective upon incapacity, or they may become effective immediately (and are not affected by subsequent incapacity). The person(s) granted power of attorney becomes known as the "attorney-in-fact" or "agent." The person granting the power of attorney is the "principal." State laws vary as to the requirements to create a valid POA and can govern the type of powers granted, so it's best to consult a lawyer to draft the paperwork, Hendrix suggests.

A financial POA usually gives the attorney-in-fact access to and management over accounts owned by the principal that are not held in trust, allowing them to apply the funds for the benefit of the principal even when incapacitated. A POA may also grant the attorney-in-fact the power to fund (or transfer assets to) a revocable living trust so that the trustee can use the funds as provided in the trust agreement. Again, much of the powers and authority of a POA are governed by state law and the choice of legal language used in the POA document.

The named trustee and the named attorney-in-fact under a financial POA can often be the same person, which can streamline financial asset decisions to address and pay for any needs of the incapacitated person.

Choose the right person
Before choosing your trustee and/or attorney-in-fact, make sure the person you want to designate is up for the task. You'll want someone who has demonstrated they are available, responsible and trustworthy enough to look out for your best interests. Hendrix said you need to make sure they know the scope of the duties required to fill the role (which can be time-consuming)—and that they have the ability to manage your affairs simultaneously with their own.

A person who struggles to manage their own finances is likely not the ideal candidate for this role. Consider the fact that the best person to serve as your financial POA may not be the same person who would best advocate for your medical care as your healthcare POA, and they need not be the same person.

If you don't have a POA or revocable living trust in place when you become incapacitated, or if there is a dispute over who you appoint, court intervention may become necessary to appoint a conservator (also called a guardian in some states) to handle your finances. This will cost time and money, and may not result in the appointment of a person you prefer to have handling your finances.

Professional fiduciary option

If you find there isn't a family member or trusted friend who can step into the role as your trustee or attorney-in-fact, or if you are worried about creating rifts between any family or friends serving in that role, Hendrix recommends putting a "professional fiduciary" in place to prevent a contested situation.

A fiduciary, by definition, is someone who is required to act in your best interest. "You can find one by searching for 'professional fiduciary' or 'public administrator' or asking for recommendations from elder care service providers, estate attorneys or CPAs. We also offer it at Bank of Oklahoma," said Hendrix.

“The use of a professional fiduciary has the added benefits of creating a more seamless environment for your family dynamics to be unburdened by one or more heirs becoming the decisionmaker for their siblings or other beneficiaries of your plan,” Dick added.

To get started, she recommends interviewing potential fiduciaries with questions such as:

• What is your process as a fiduciary?
• How is your internal organization set up?
• What is the oversight?
• How do I know my funds will not be misused?
• How do you obtain information regarding my finances?

Consider the cost
Be aware that you will be paying for a fiduciary's services at an hourly rate or a small percentage of the value of the assets. This is often just a fraction of the expenses of a court proceeding for a conservatorship or guardianship, which can run into thousands of dollars.

"A conservatorship or guardianship is usually a lot more expensive in both legal and ongoing support costs," Hendrix said, adding if you have a trustee or attorney-in-fact, you might consider specifying payment for their time into your agreement.

Get started
Creating a plan for your finances in the event of incapacity is best to do while you still have the capacity to make decisions for yourself. Consult with a financial advisor or estate planning attorney to help decide the best options for your situation in regard to trustee, conservatorship and/or fiduciary services.

Learn more about Bank of Oklahoma Private Wealth's trust services.

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