The term “estate planning” encompasses not only planning for your death, but also for your disability.

As we all know, people are living longer and the likelihood that you will experience Alzheimer’s, dementia, diminished capacity, or other cognitive impairment before you die has increased dramatically.

Thus, no estate plan is complete without taking steps to ensure that, if you become incapacitated and can’t make decisions for yourself, someone you trust will be empowered to act on your behalf. This includes the ability to access your financial assets, pay your bills and otherwise manage or deal with your property.  (It also includes specifying who you would want to make medical decisions for you, but this article will only address financial decisions.)

In planning for disability or incapacity, there are a variety of strategies you can utilize, including:

  • Adding someone else’s name as a joint owner
  • Executing a Power of Attorney appointing someone as your agent
  • Creating and funding a Revocable Living Trust

Let’s briefly discuss each of these approaches.

Adding someone you trust to a bank or other investment account will enable that person to exercise complete control over the account.  This will ensure that the person could take action if you couldn’t do so yourself.  But obviously, that poses significant risks unless you are 100% sure they will not abuse that power.  And even if you have that level of confidence, there are the risks that your co-owner will be sued, divorced or go bankrupt and thereby put your assets at risk.  Another risk is that the surviving owner is legally entitled to the account, so there is no obligation for the surviving owner to use the funds for your expenses or pay it to your intended beneficiaries at the time of your death.  For these reasons it is usually not advisable to take this approach, unless it is only for a relatively small checking account.  Also, you should note that, for a number of reasons too numerous to discuss here, it is almost never advisable to add someone’s name to your real estate.

Powers of Attorney are an integral part of a comprehensive estate plan, but it should be recognized that there are limitations to their effectiveness.  Banks and financial institutions are notorious for being reluctant or unwilling to accept powers of attorney.  Often, the institution will insist on sending the document to their legal department for review and approval, which may take weeks.  Some will only accept their own version of a power of attorney.  The use of a Maryland Statutory Form Power of Attorney can provide a level of assurance that it will be accepted, but there is no guarantee.

For most people, the best way by far to provide for the management of your property in the event of your disability is to use a Revocable Living Trust as the centerpiece of your estate plan.

Most discussions of the benefits of Living Trusts focus on the avoidance of probate (i.e., after you die).  However, Living Trusts also offer advantages during your lifetime if you become incapacitated.

Assets held in a trust are controlled by the Trustee.  With a Revocable Living Trust, while you are alive and well, you are the Trustee.  You will specify in the trust the person or persons you want to serve in your place as Trustee if you become unable to fulfill those duties.  If your bank or financial institution has agreed to title your account in the name of the trust (which virtually all will) then they will be bound to follow the terms of the trust and accept and recognize your named “successor Trustee” as having authority to act on behalf of the trust in controlling the account.  Typically, the trust will provide that if a licensed physician states in writing that you are unable to manage your affairs, then the successor Trustee takes over.  Thus, all your successor Trustee will need to do is provide that statement, along with a certification that he or she has accepted the role of Trustee.  Then the successor will have authority over the account and can access the account to provide for your health and support.

The ideal plan for planning for disability will depend on each person’s situation and may include a combination of these steps.  Further, when it comes to a power of attorney or a Revocable Living Trust, there is no “standard” document that will be appropriate for everyone.  A properly designed power of attorney or Living Trust should be specially tailored for you and your situation, and address the following issues:

  • The person or persons you want to be authorized to act on your behalf
  • Alternate choices in case your preferred choice is, or becomes, unable or unwilling to act on your behalf
  • What powers you are comfortable giving to your agent/successor Trustee
  • What limitations you want to include
  • How will your “incapacity” be defined for purposes of establishing your agent/successor trustee’s authority to act
  • What specific guidance, if any, do you want to give to your agent/successor trustee in the exercise of their discretion
  • Whether and how your agent/successor trustee will be compensated

It goes without saying that these important decisions must be made before you lose the ability to do so, and that the necessary legal documents be put in place (and revised or updated when necessary).  These can be difficult decisions, but taking the appropriate steps can avoid considerable difficulties for your family.

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