When it comes to estate planning, everyone always assumes it’s all about what happens when you die. While planning for death is certainly critical, it’s important not to forget about the “black sheep” of any good estate plan: incapacity planning.
According to Alzheimer’s Disease International, someone develops dementia every 3 seconds. As of 2020, over 55 million people worldwide were living with dementia. With statistics like these, incapacity planning is clearly an important task.
Incapacity is defined by Merriam-Webster Dictionary as “the quality or state of being incapable.” In terms of estate planning, incapacity usually refers to a time when a person can no longer reasonably manage their own financial affairs or health care decision-making.
One benefit of planning with a revocable living trust is that it’s essentially just a book of instructions. A trust allows you to control the narrative regarding management of your financial affairs in the event of your incapacity, which means you get to decide how your finances will be managed if you are incapacitated, rather than relying on Ohio’s default laws. A trust should also define what incapacity means. You can set a standard for the determination of your future incapacity. If that standard is met, you can no longer serve as trustee, and the successor trustee takes over. For example, you might decided that if your spouse and your attending physician both agree you are no longer able to handle your financial affairs, then you are deemed incapacitated for purposes of your trust.
Don’t have a trust as part of your estate plan? No problem! As long as you have a current and comprehensive Durable General Power of Attorney (DGPOA) in place, you should be covered in most situations. We recommend updating your financial power of attorney every 5 years to ensure it has a recent date, because banks are not required to accept a POA–and many automatically refuse a POA that is “too old. It’s also critical that you have a current health care power of attorney. You’ll want to ensure you’ve named the appropriate people as your medical decision-makers, that the document includes current contact information for those decision-makers, and that the document is up to date with current laws.
When a person does not have the appropriate documents covering the event of incapacity (or even if the person did everything right, but a bank rejects their DGPOA), they could find themselves subject to a guardianship proceeding in court, where the court is the ultimate decision-maker about the person’s capacity. Guardianship proceedings are costly and invasive—not something anyone wants to be involved with if they can avoid it!
It’s incredibly important not to forget about incapacity planning. If you have a trust, remember that you must fully and completely fund your trust while you’re alive to benefit from the incapacity provisions. For example, if your primary checking account is still owned jointly with your spouse (rather than owned by you as trustees of your trust), it will avoid probate, but it will not allow your successor trustee to manage the account if you become incapacitated. Trust funding is crucial to the ultimate success of your trust, both for probate avoidance and to fully benefit from the incapacity provisions.