An area of estate planning that is often overlooked is making arrangements for the management of your finances and healthcare decisions if you become incapacitated for an extended period of time. Unfortunately, many individuals and families don’t consider the issue until it’s too late. The failure to plan for incapacity can result in unnecessary court procedures, significant added expense and the inability to carry out your wishes. Because planning for incapacity can be very complicated and have lasting consequences, this article is intended only as a discussion starter between you and your qualified professional, and you are encouraged to consult with your attorney or other qualified professional advisor about each of the topics discussed below.
If you become incapacitated and have not appointed an agent to make financial and healthcare decisions for you, many states’ laws require that you be appointed a guardian. The guardianship procedure can be expensive, and may include (among other things) a review of your situation by a court‑appointed Guardian ad Litem (an attorney in the county), the preparation of a physician’s competency report, a review by the county social services department if care outside of the home is required, and/or a court hearing. You may be required to pay court costs, Guardian ad Litem fees, attorney’s fees, and/or other expenses in relation to the appointment of your guardian.
A guardian may be restricted in its ability to make decisions on your behalf. Depending on the applicable law, there may be more restrictions placed on court-appointed guardians than those placed on agents acting under a power of attorney as explained below. For example, in some states a guardian may not be able to sell real estate or make gifts on your behalf without court approval. The guardian may also be required to file a financial report with the court every year regarding your income and expenses (which may then become a public record). The guardian may also be limited in its ability to withhold or withdraw feeding tubes or other life support if there is no clear evidence of your desires in relation to end-of-life decisions.
II. Powers of Attorney
Making arrangements away from guardianship for the management of your finances and healthcare decisions can often be accomplished by executing a document known as a “power of attorney.” Through a power of attorney you generally appoint one or more other persons, known as “agents,” to act on your behalf. The power of attorney specifies the authority and limitations the agent has to act on your behalf.
If you are an adult, generally no one may make financial or medical decisions for you unless you have appointed an agent in writing under a power of attorney or unless a court has appointed a guardian to act on your behalf. As a result, even married couples should talk to their attorney about naming each other as an agent under a power of attorney to ensure they can make financial and medical decisions for each other as applicable to their specific needs and wishes.
In many states there are two distinct types of power of attorney documents: a durable financial power of attorney for financial decisions and a healthcare power of attorney for healthcare and end-of-life decisions. Depending on applicable law, both may be required to avoid guardianship.
A. Durable Financial Power of Attorney:
A durable financial power of attorney generally grants an agent the authority to act on your behalf for financial matters. If you become incapacitated, depending on the specifics of the power of attorney the agent may have the authority to pay bills, sign checks, or make investment or other financial decisions on your behalf. Some states give broad authority to an agent under a financial power of attorney to make gifts of assets, change beneficiary designations on life insurance or retirement benefits, and/or make other significant financial arrangements. Such broad authority can lead to abuse by an agent. As a result, with the help of your attorney you should carefully consider the scope of authority you would want and/or need to grant to your agent.
A person appointed as an agent under a durable financial power of attorney generally has a fiduciary duty to act in your best interests ahead of their own. As a result, an agent is generally not allowed to borrow money from you, sell your assets to him or herself or otherwise use your assets for his or her benefit.
B. Healthcare Power of Attorney:
A healthcare power of attorney (in some states it is known as an advanced healthcare directive) generally grants an agent the authority to act on your behalf to make certain health and medical decisions if you become incapacitated. The healthcare power of attorney often grants the agent to have access to your medical records and the authority to make necessary medical decisions on your behalf, which may include the withholding or withdrawal of feeding tubes and other life support or your wishes regarding organ donation. The healthcare power of attorney may also grant authority to admit you to a nursing home or community-based residential facility if care outside of the home is needed.
Many individuals also have a limited “Declaration to Physicians” (also known as a “Living Will”) which directs the withholding or withdrawal of feeding tubes or other life support. If you have a Declaration to Physicians but no health care power of attorney, you likely have not appointed an agent to make day-to-day medical decisions on your behalf, the absence of which could result in guardianship.
III. Agent Considerations
You should carefully select the person(s) you name under a power of attorney to make financial and medical decisions for you. Naming individuals that can be trusted is obviously a major consideration, but it is also important to discuss your wishes with your prospective agents and confirm they are willing to act as agents before you name in the power(s) of attorney.
Remember, the agent’s authority to act under a power of attorney on your behalf terminates when you die. Therefore, although planning for incapacity can be crucial, it typically is also only a part of a comprehensive estate plan.